One of the less-heralded bits of news in this week’s spring economic update is the announcement that a juicy tax incentive for business owners who want to sell their companies to employees is not going to expire at the end of this year as originally planned.
The federal government is making the incentive permanent, exempting business owners who sell their companies to Employee Ownership Trusts (EOTs) from tax on up to $10 million in capital gains, much to the delight of proponents of the new structure.
With more than 75 per cent of small business owners planning to exit over the next decade and $2 trillion in assets at stake, it’s a change that boosters say could give more employees a stake in their workplace and keep businesses under Canadian ownership.
“The government has made a wise decision that will keep our companies Canadian, keep good jobs in local communities and increase worker wealth,” says Jon Shell, chair of Toronto-based wealth advocacy group Social Capital Partners.
“It’s perfect timing given all the forces we’re facing, and I can’t wait to watch the future of employee ownership develop. One day hundreds of thousands of Canadians will look back at this as the reason that they now own a share of their businesses.”
EOTs are a legal structure that only came into effect in Canada in 2024. They allow company owners to sell their businesses to rank-and-file employees, which keeps them away from consolidation by larger players and private equity firms. At a time when the Canadian economy is generally suffering from a lack of competition and a looming business succession crisis, the arrival of EOTs has been heralded as a partial but welcome answer to both problems.
A handful of Canadian companies have already made the switch, including Vancouver-based engineering consultancy Brightspot Climate and Maple Ridge, B.C.-based Taproot Community Support Services. More than 20 additional companies are in the pipeline to convert to EOT status by the end of this year, according to advocacy group Employee Ownership Canada.
The expiring tax incentive, however, was threatening to slow down or cut off that pipeline. Its permanence now ensures that more business owners will consider going the EOT route.
Josh Golden is a fan and a booster of the structure. Originally from London, Ont., he started his Chicago-based software consultancy TXI more than 20 years ago, and sold it in 2022 through the U.S. equivalent of the EOT, an Employee Stock Ownership Plan (ESOP).
TXI had grown into a mid-sized player in its field, with 65 employees and US$18 million in annual revenue, but Golden had discovered that he enjoyed building new companies more than he did running established, mature ones.
While he was thinking about how to exit and move back to Canada, he came across the ESOP process at an entrepreneurship conference in California.
He learned that, unlike a management-led buyout, an ESOP provides ownership stakes to all employees of a company, not just those who run it. And unlike co-operatives, employees own the company but aren’t involved in day-to-day decisions, which are left to management.
He liked the fact that employee-ownership conversions are often phased in over time, as opposed to one-and-done handovers, and, crucially, that they offer capital gains tax exemptions.
The downside for owners, however, often involves accepting a lower price than a strategic or private equity buyer might offer. And, because of the phased nature of the transaction, it also usually results in a longer payout period.
Ultimately, Golden was convinced by the stats. By 2022, there were more than 6,400 ESOPs in the United States covering nearly 15 million employees in industries ranging from supermarket chains to manufacturing.
ESOP employees quit their jobs at one-third the national average rate, have 92 per cent higher median household net wealth early in their careers and end up with more than double the retirement savings of their non-ESOP peers, according to the U.S. National Center for Employee Ownership.
For conscientious owners who have connections to their employees and who want to continue to see their companies prosper, it’s an easy choice.
“I was probably getting a price that was on the low end of reasonable, which is a factor that others might see as a problem,” says Golden, who now lives with his family in Kelowna, B.C. “But the ability to extricate myself and my equity without destroying the fundamental essence of the company was more than worth taking a lower-end deal.”
The EOT option in Canada comes at a vital time, with the nation facing what the Canadian Federation of Independent Business calls a succession crisis. According to the organization, only one in 10 small business owners have a formal succession plan in place, and more than 70 per cent of businesses that put themselves up for sale fail to attract desirable buyers, which means discounted sales, closures or unfavourable deals.
“You hear all the time how we are in the silver tsunami, as it’s described, the succession crisis, the baby boomer owners who are looking to retire and have nobody to sell to, or who may just sell to concentrating capital and what impact will that have on jobs and communities across the country,” Shell says. “We're probably five years later than we want to be, maybe 10 years later than we want to be, but this [EOTs are] a very useful tool facing the type of succession wave that we have coming.”
There’s also this thing called “sovereignty” that’s all the rage these days. With so many Canadian businesses considering selling to a foreign buyer as their main if not only exit option, EOTs are providing a way for owners to keep companies Canadian, which makes this week’s tax incentive news all the more important.
“When we were talking about first putting this in, there wasn't this sovereignty crisis. It was more about the story of the regionally isolated manufacturing company that gets bought and shut down and it just destroys a small town," says Golden. "Now it's sort of like a national emergency."
Peter Nowak is the publisher of Do Not Pass Go, a weekly podcast and newsletter focusing on competition, business and consumer issues in Canada.
