A new federal tax exemption for employee ownership trusts could spur retiring business owners to sell their companies to workers, says Jon Shell, managing director of Social Capital Partners.
The federal government’s 2023 budget introduced tax rules to facilitate the creation of EOTs, but the legislation was criticized by experts for its lack of incentives in light of the tax implications. In its 2023 fall economic statement, the government announced it would exempt the first $10 million in capital gains realized on the sale of a business to an EOT from taxation, subject to certain conditions. While the new legislation allowing employee ownership trusts is scheduled to come into effect Jan. 1, 2024, it may take longer to see the final rules surrounding the tax incentive.
Under the new exemption, owners that sell their company under an EOT for $10 million or more would save about $2.6 million in capital gains tax, at the highest tax rate, says Shell. While he doesn’t think the exemption goes far enough, he believes it’s a good starting point to drive more interest and excitement in this benefit.
“In the U.K., where owners who sell to their version of an EOT pay no capital gains tax, no matter how big the deal is, [these sales] still only make up five to 10 per cent of transactions. It’s still very attractive to sell to private equity or some of the competitors, so [in Canada], owners will still be making a sacrifice, even with these tax incentives, but it will be enough to push some to choose this path.”
One major benefit of bringing EOTs to Canada is the potential to help generate wealth distribution. Indeed, Shell notes U.S.-based grocery chain Publix Super Markets Inc. has an employee stock ownership plan that has helped many of its frontline workers build wealth.
“Publix is . . . one of the most loved grocery chains in the U.S. [and it’s demonstrating that] incentives really matter. When a company is more than 50 per cent employee-owned, they begin to make different decisions. [These] companies lay off far fewer people in recessions than other companies and are much stronger coming out of recessions than other companies [because] they’re . . . sacrificing short-term profits for the benefit of their workers and communities long term. That’s the shift we need.”
While Shell notes several Canadian companies have reached out to Social Capital Partners for information on EOTs, some of these employers have already sold their businesses to someone else. “Every day that goes by, we are going to miss out on opportunities to ensure that productive companies in this country are sold to employees, keeping [these businesses] in local communities and making [them] more resilient. That’s why we need the whole bill, including incentives, passed as soon as possible.”