EMPLOYEE OWNERSHIP TRUSTS
Employee ownership trusts ("EOTs") were introduced in the Government of Canada's (the "Federal Government") Budget 2023.1 Generally speaking, an EOT is a Canadian resident trust holding shares of a "qualifying business,"2 which is exclusively for the benefit of the beneficiaries of the EOT, all of whom must be employed by the qualifying business.
The introduction of EOTs provides an opportunity to a business's employees to acquire and hold shares of the business through the EOT, without requiring the employees to pay for the shares directly. The EOT could obtain debt financing to purchase shares in the business, and the loan could be repaid by the EOT over a longer period of time using the profits generated from the acquired business that are distributed to the EOT. For a more detailed review on the technical rules introduced to facilitate the creation of EOTs, see our lengthy discussion of the Federal Budget 2023.
FACILITATING THE SALE OF A BUSINESS THROUGH THE USE OF EOTS
The Federal Government's reason for introducing EOTs appears to have been twofold:
- to allow employees to own shares in a business through an EOT, thereby enabling greater worker participation in business decisions and profits; and
- to provide an additional succession planning tool for retiring Canadian business owners.
According to the Federal Government, it is anticipated that more than 75% of small business owners plan to exit their business throughout the next decade.3
On November 21, 2023, the Federal Government released its Fall Economic Statement 2023 (the "FES 2023").4 As part of the FES 2023, the Federal Government announced that in an effort to further facilitate the creation of EOTs, and to encourage more business owners to sell their shares to EOTs, the Federal Government will provide an exemption from taxation on the first $10 million in capital gains realized on the sale of a business to an EOT, subject to certain conditions. The FES 2023 stated this incentive would be in effect for the 2024, 2025 and 2026 tax years, suggesting this incentive could be a temporary measure.
The Federal Government appears to be doubling-down on its introduction of EOTs as a viable option for business succession planning. Indeed, the Federal Government claims the capital gains exemption on the first $10 million realized on the sale of a business will reduce federal revenues by approximately $52 million between 2023 and 2027.5
The Federal Government advised it will provide further details with respect to the capital gains exemption in the coming months.
A WELCOME CHANGE
The Federal Government's move to provide an exemption on the first $10 million in capital gains realized on the sale of a business to an EOT (subject to certain conditions) is a welcome change for retiring business owners looking to utilize EOTs as part of their business succession plan.
We will continue to monitor any announcements from the Federal Government on this subject. If you are a private business owner looking to retire in the foreseeable future, feel free to connect with one of Miller Thomson's tax lawyers so we can assist you with the succession of your business – a significant milestone for any business owner.
Footnotes
1. Canada, Department of Finance, Budget 2023, A Made-in-Canada Plan (Ottawa: Department of Finance, March 28, 2023).
2. Income Tax Act, (R.S.C., c. 1 (5th Supp.)), subsection 248(1).
3. Canada, Department of Finance, Fall Economic Statement, 2023 (Ottawa: Department of Finance, November 21, 2023) at 62.
4. Ibid.
5. Ibid at 62.
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