Employee ownership trusts are structured such that the employees buy the business through a loan against the business, amortized up to 15 years, rather than from their own capital.After 157 years of distinct cultural growth, there are arguably not many British economic models that make their way to Canada nowadays., which the U.K. has been utilizing since 2014, are an exception. If utilized widely, they might represent a meaningful change to Canada’s business landscape.
Even more savings are available via tax deferral as the capital gains reserves period has been extended to 10 years. On a qualifying sale, only 10 per cent of capital gains need to be reported as income each year, spreading the tax cost over a decade. A 2022 study from the Canadian Federation of Independent Business found that 76 per cent of owners of small- and medium-sized businesses were planning to exit their business before 2032. Considering that SMEs employ over 60 per cent of Canada’s labour force, the ramifications could be dramatic. The same study estimates $2-trillion in assets could be changing hands from these exits – almost as much as Canada’s entire 2023 gross domestic product.
The board has a fiduciary responsibility to manage the business on behalf of employees, who become proportionate owners, typically based on title, tenure and salary. As the business earns income, the trust can profit-share by distributing earnings to employees, not dissimilar to how stocks pay dividends.
A qualifying transfer occurs when the CCPC’s shares are sold to an EOT in which the trust beneficiaries are employed by the business. As mentioned, owners relinquish governance rights when they sell.