Seventy-six per cent! That’s the number of Canadian businessowners who anticipate retiring in the next decade and must now explore what’s next for their company and its legacy.
This usually means one of a few options. Entrepreneurs can sell their company to any interested party, or they can transfer their business to a family member. It could also mean a foreign takeover or merger with some other entity.
In other words, some of Canada’s most successful and vibrant small and medium sized enterprises (SMEs) could be swept up by foreign interests and, even worse, jobs could leave the country.
But another option, which is gaining much traction in many business circles and is becoming increasingly more appealing, is the idea of employee ownership trusts (or EOTs).
Employment ownership, in broad strokes, is when a company’s employees own shares in the company’s stock. EOTs are a form of employee ownership designed for succession, where an owner sells a majority of a company to employees all at once. Company shares are bought through a trustee, using borrowed money to buy these shares at fair market value. These shares can then be distributed to all employees, not just executives, at no cost to workers.
Selling shares to employees through an EOT requires an owner to provide much of the financing themselves. Rather than sell to an outside investor or a competitor and get fully paid upfront, the owner would take on more risk and get paid over a much longer period.
In both the UK and the U.S., politicians of all stripes have decided that the outcomes of employee ownership are so good that they need to be encouraged and facilitated. The Government of Canada has also been watching what’s going on abroad.
In last year’s federal budget, the government proposed to create the Employee Ownership Trust and committed to engaging with stakeholders to finalize the development of rules for EOTs and to assessing barriers to their creation.
With the American and British models, owners who sell a substantial portion of their company to employees have access to capital gains tax incentives. In the UK for example, thanks in part to this waiver, business sales to workers have increased from about ten a year to approximately 300 in 2021.
The federal Budget 2023 is just around the corner, and I understand the government may be finalizing the regulations and amendments needed to enact EOTs. As a supporter of the newly formed Canadian Employee Ownership Coalition, I would urge the government to give serious consideration to include a capital gains tax exemption in the EOT model it will propose. The capital gains tax is simply deferred to when the employees that purchased their shares sell them.
The benefits of legislating EOTs into our Income Tax Act are plentiful. When businesses are sold to their employees, it helps support local economies and protect jobs, and it contributes to employee wealth. In this age of increasing affordability challenges, building wealth for Canadian workers is a great way of mitigating inequality.
I spent over three decades in banking, mostly in commercial banking, prior to my appointment to the Senate. During those years, I worked closely with countless entrepreneurs as they grew their businesses, increased sales and promoted their brands. Businessowners risk everything…every day.
In my experience, one common denominator for these entrepreneurs was the value they attributed to their employees. For many ‘Mom-and-Pop shops,’ employees are the heart and soul of the company. In SMEs, employees become like family for the owners. Many stick around through the highs-and-lows and they are often best positioned to help businesses succeed, grow and remain in Canada.
For many retiring businessowners, who have put their sweat and tears into their company, selling their business is a very difficult decision, heart wrenching even. They want to secure their legacy and, hopefully, ensure the business they’ve built continues to thrive. EOTs are a great option in securing this legacy and, perhaps more importantly, it gives an added incentive to employees, who would now have skin-in-the-game to work harder, innovate and help grow the business.
For employers and employees, EOTs are a win-win situation.
A properly developed EOT, with the appropriate capital gains tax incentive, has the potential of protecting Canadian businesses, securing jobs domestically, increasing the return on labour, creating wealth for workers and, in so doing, taking a long-term view in the overall well-being of our economy and our workforce.
Photo courtesy of DepositPhotos
