Details are still coming out. Briefly, the expectations that the forthcoming legislation will:
Provide a clear trust model (similar to the UK’s Employee Ownership Trust, EOT) that can be used for owners who want to transfer their ownership to employees
Address some technical (but critical) issues in the tax code that have made these kinds of deals challenging in the past
To ensure employee ownership benefits are shared broadly, require that all workers of a company get access to benefits of ownership and uses a model where the owner is paid back through company profits over time, so employees don’t have to pay cash out of pocket for their ownership.
Like the US and UK, provide an incentive for owners who sell a majority of their company to workers, so worker-ownership can be more competitive with offers from competitors or from private equity firms.
The introduction of the EOT turbocharged employee ownership in the UK in 2014, with majority worker-owned companies growing from about 150 to over 1,650 since that time. A recent report shows that the U.K.’s thriving employee ownership sector is paying employees more, providing better benefits, is more productive, more profitable and growing faster than the rest of the economy.
While Canada’s incentives are smaller than the UK’s, the belief is that they will be enough to get the attention of the legal and accounting communities, which should in turn educate business owners about this option. In the UK, 5-10% of all business sales go to employees. If that were to happen in Canada, there would be 15-25,000 Canadian workers become owners every single year.
In the Fall Statement, Canadian Finance Minister Chrystia Freeland tabled the government’s Fall Economic Statement Implementation Act, 2023, which includes the creation of a new, standalone Employee Ownership Trust (EOT).
Jon Shell of Social Capital Partners says “Since receiving feedback in August, the Department of Finance has tweaked the bill in positive ways that will result in a broader, more equitable distribution to employees.
One thing that today’s legislation does not contain is the government’s commitment from last week to include a tax incentive to level the playing field and increase uptake of EOTs. The government has told us that, like other consequential tax measures first announced in last week’s Fall Economic Statement, it’s typical for a consultation period to occur in advance of introduction.
Ideally, all these pieces would have been introduced together as a single package, but (as I’ve come to learn) the policy making process is often a messy thing.
We will push the government to consult on a draft of the EOT tax incentive over the winter so it can be introduced it as part of its upcoming Budget Bill and then passed shortly thereafter. We think it’s highly unlikely that many owners will consider selling to an EOT before the tax incentive has been passed.
We’ve been told that the incentive will be retroactive to January 2024, regardless of when it technically crosses the finish line, but both the details of it and its passage will be important to owners and advisors.
In the meantime, it’s definite progress to see today’s legislation and look forward to it passing into law as soon as possible.”
Tiara Letourneau of Rewrite Capital Advisers paid tribute to the support received from the global employee-owned community “Canada couldn't have done this without the amazing support of US and UK experts. It's something I LOVE about the EO community - the spirit of helping everyone!"
Scotland based employee ownership specialists.
