There is much economic anxiety in Canada today. The persistent challenges of the pandemic, the rising cost of living, and the threat of a recession combine to make it even more difficult for low- and middle-income Canadians to make financial progress. At a time when wealth inequality and the cost of living are on the rise, we need policies that generate wealth for Canadian workers.
To tackle these issues successfully, Canada needs bold but practical solutions. With the recent announcement that the Canadian government would explore amendments to the Income Tax Act and introduce employee ownership trusts (EOTs) in Canada, we are moving in the right direction.
EOTs are common in the United States and the United Kingdom, but they have not caught on in Canada yet — and it’s time for that to change.
Currently, if a private business owner wants to transition their business, they have three options: transition to family members, sell the business to a third party or sell to management. EOTs present a fourth option that enables owners to transition the business to employees via trust where employees can build their ownership stake over time.
This has transformative potential for owners, for employees and for Canada — keeping more Canadian companies in Canada.
A recent survey from the Canadian Federation of Independent Businesses found that 76 per cent of small business owners in Canada plan to sell their business within the next decade. This represents the largest wave of business sales in Canadian history and risks upending many jobs in communities across the country.
For business owners planning to retire, EOTs provide an innovative form of retirement security, enabling them to sell their business at fair market value while providing benefits to all employees at no cost to the employee.
U.S. data shows that employee ownership has helped reduce racial and gender wealth gaps, increased job security, and lowered turnover among all income levels. A 2017 study from the National Centre for Employee Ownership found that visible minorities participating in employee-owned companies earned wages 30 per cent higher than their peers. Women employee-owners earned 17 per cent more.
Employee-owned businesses are less prone to layoffs and bankruptcies during economic downturns than non-employee-owned firms. Throughout the pandemic, non-employee-owners in the U.S. experienced six times greater job losses or downsizing than employee-owners.
Canada cannot afford to miss the opportunities that EOTs present.
To encourage their adoption, business and other leaders from across the country have launched a Canadian Employee Ownership Coalition. The coalition aims to work with government and all political parties to ensure that they not only understand the urgency of creating EOTs, but that they design them in a way that ensures their success.
The Canadian Employee Ownership Coalition is calling on the federal government to make EOTs a reality in its Budget 2023 and introduce legislation that would build on the lessons learned for a made-in-Canada solution with these foundational steps:
- EOTs need a clear structure written into the federal Income Tax Act, with specific rules and guidelines that are easy to understand. EOTs have been successful in the U.S. because they are governed by clear and unambiguous rules. The committee’s proposal would enable employees to accumulate shares over time at no cost.
- Introduce tax incentives. Canada’s current tax rules make it difficult for businesses to become employee-owned. Tax incentives should encourage owners to sell their business to an EOT and help ensure that the business stays employee-owned.
- Require oversight to protect employee owners and the public interest. For example, there could be rules determining who can take part in an EOT and requiring that the financial value of a business be determined in a fair and independent way before it is sold.
EOTs offer a tremendous opportunity to create a more resilient and inclusive economy. We need to move forward now with a well-thought-out design that allows business owners and employees to make progress, and for Canada to reap the rewards of employee ownership.
Photo courtesy of DepositPhotos
