Bennett Jones Leading the Way in Employee Ownership Trusts

Written By Wade Ritchie, Wes Novotny and Zach Thacker

Effective January 1, 2024, Canada introduced detailed rules into the Income Tax Act (Canada) to facilitate and encourage employee ownership of small and medium sized Canadian businesses through the creation of employee ownership trusts (EOT). Bennett Jones has been advising on EOTs and related matters since the inception of the Canadian EOT movement.

Canada has joined a growing international movement to increase employee ownership of businesses. Jurisdictions such as the United Kingdom and the United States have developed tax rules and incentives to facilitate this type of business ownership and have well-developed markets and a growing number of successfully implemented and managed employee-owned businesses. Canada's new EOT rules present unique tax, succession and growth opportunities for small and medium sized Canadian business owners and their employees.

What is an Employee Ownership Trust?

EOTs are designed to enable employees to share in the success of their work by enabling participation in business decisions and the sharing of profits, while providing current owners an alternative exit and succession planning option with significant tax benefits, including a new $10-million capital gains deduction available on certain sales to an EOT. An EOT is a Canadian-resident trust settled for the benefit of all the employees of a business that is controlled by the EOT, where certain conditions are met.

Why Consider an Employee Ownership Trust Structure? 

Benefits to Employees and Employers:

• employees become indirect owners of their employers and participate in profits, management and growth;
• the profits of the business can fund the EOTs acquisition of the business; and
• employee ownership can lead to stronger employee engagement and increased profitability and growth compared to non-employee-owned competitors.

Benefits for Business Owners:

• a $10-million capital gains deduction is available to certain individual vendors who sell their business to an EOT;
• as an alternative exit option, enabling business owners to sell their business to their employees instead of selling to private investors, competitors or other third-party purchasers;
• for a potentially quicker, simpler and less adversarial exit as compared to selling to a third party, as businesses continue with the same management and employee base. 

Other Tax Benefits:

• Extended Capital Gains Reserve: The capital gains reserve on a transfer of a qualifying business to an EOT is extended from a maximum of five years to a maximum of 10 years.
• Exception to Shareholder Loan Rules: The qualifying business may be able to loan funds to the EOT without certain shareholder benefit provisions applying provided the loan is repaid within a 15-year time period. 
• Exception to 21-Year Deemed Disposition Rule for Trusts: The 21-year deemed disposition rule for trusts does not apply to EOTs meaning an EOT can hold the business in perpetuity without triggering a deemed disposition every 21 years.

Find out more about employee ownership trusts in our blogs Employee Ownership Trusts—A Useful Tool for Employee Business Ownership? and Employee Ownership Trusts—Improved Tax Incentives Announced. 

Shaping Canada’s EOT Landscape

• Grantbook: Bennett Jones advised Grantbook on adopting one of the first EOT structures in Canada. Led by Wade Ritchie with support from Wes Novotny, Jay Winters and Zach Thacker, the team was involved in all aspects of the transaction, including the creation of the EOT and execution of the sale.
• Canadian Employee Ownership Coalition: Wes Novotny was an advisor to this coalition, which advocated for EOTs in Canada prior to the implementation of the EOT legislation.

Your Legal Partner in Employee Ownership Trusts

Bennett Jones has been intimately involved in the background of the EOT rules since before their introduction and is amongst the most experienced Canadian counsel in implementing and advising on EOT structures. We help clients capitalize on the opportunities presented by EOTs and develops strategies for businesses for successful implementation.

To discuss the potential opportunities presented by EOTs, please contact Wes Novotny, Wade Ritchie, Jay Winters, Zach Thacker or Marshall Haughey or any member of the Bennett Jones tax department.

Want to Dive Deeper into Employee Ownership Trusts?

If you'd like to learn more about EOTs our team has authored the following informative articles on the topic for the Tax for the Owner-Manager and Perspectives on Tax Law & Policy publications:

• Wesley Novotny, Employee Ownership Trusts: A New Canadian Succession Option on the Horizon, (2022) 22:3 Tax for the Owner-Manager 4-6.
• Wade Ritchie, Marshall Haughey, and Wesley Novotny, Employee Ownership Trusts: Proposals from Budget 2023, (2023) 23:3 Tax for the Owner-Manager 8-10.
• Marshall Haughey and Wade Ritchie, The Path to Employee Ownership: Overcoming Barriers with Capital and Collaboration, (2024) 5:3 Perspectives on Tax Law & Policy 4-6.
• Jon Shell, Social Capital Partners, and Wesley Novotny, A Good Start: Canada's New EOT Regime, (2024) 5:3 Perspectives on Tax Law & Policy 6-9.

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