Academics from the Canadian Centre for Policy Alternatives and the University of Victoria have released a report calling on the federal government to make permanent its new partial capital gains tax exemption for sales of existing firms to employee ownership trusts and extend it to worker cooperatives.

In its 2024 budget, the federal government released further details on the proposed exemption and conditions that have to be met for any individual to claim a tax exemption for up to $10 million in capital gains from the sale of an EOT.

Canadian employees stand to greatly benefit from making EOTs widely available, says Simon Pek, an associate professor of business and society at the University of Victoria’s Gustavson School of Business, and a co-author of the report.

Read: Feds’ new tax exemption could drive more employers to leverage employee ownership trusts: expert

Among the policies raised in the report, the authors also suggested the feds set a lower corporate income tax rate for democratic employee-owned firms and provide a limited tax break on dividend payouts or share allocations to workers in democratic employee-owned firms. It also suggested the government exempt contributions to worker cooperatives’ indivisible reserves from corporate taxes and adopt personal income tax deductions for capital invested in worker cooperatives.

“We thought that [a] limited tax break on dividend payouts could just be one way of sealing the deal and making it crystal clear how attractive it is to get those funds with that tax break,” Pek says. “And then on the flip side, we thought some solutions like limited corporate tax breaks could also be a solution to incentivize people to want to transition into such a business [model].”

While he acknowledges that some would say employees who reap dividend payouts or share allocations should pay their fair share of taxes on it, he points out with any tax measure, the benefits and the potential costs should be weighed.

“We think there are a lot of benefits of this type of democratic employee ownership. It can be transformational for community, society, workers and businesses. And so to get this off the ground and to enable as many businesses [as possible] to transition, we think it’s worthwhile to have these targeted, well-thought-out tax measures.”

Read: Canadian employee ownership trust model missing incentives for companies: expert

However, Pek agrees any taxation policies should be regularly revisited to make sure that society is getting the value it seeks. “The overall objective we have is to leverage the exciting opportunity we have in Canada, where we’re poised to have this trust, so there’s additional policies we can have in place to really push this movement forward.”

Indeed, he says, with respect to dividend payments, the U.K. and the U.S. both have models the feds could draw from for legislation surrounding these trusts, including their profit-sharing formats being used as a retirement vehicle. “The reason we think it’s important to have the limited tax break is that it just makes it even more attractive for employees to want to have this type of employee ownership. For example, in the UK, it’s tax free up to I believe, €$3,600, which is a nice [regular] incentive for these workers.”

While Pek doesn’t see EOTs overtaking the traditional workplace pension plan, he believes they have a role to play in the retirement savings conversation and could complement traditional savings tools. “This could just be one way of sharing returns on a more regular basis to give more access to immediate capital.”

Read: Coalition seeking to bring employee ownership trusts to Canada