Employee Ownership Trusts Are Not the Only Solution to Succession Planning

By Kenzie Love


Momentum is growing in Canada behind the idea of Employee Ownership Trusts (EOTs), variations of which already exist in the US and UK. The UK model, which is the more similar of the two to the one the federal government has slated to take effect in 2024, promotes employee ownership by giving business owners the opportunity to sell their shares to an employee-owned trust free from capital gains tax. Proponents of EOTs promote it as a solution to the impending wave of small business owners expected to retire over the coming decade, and note that it’s also associated with better company performance, stronger job protections and higher levels of job satisfaction. 

Given these outcomes, it’s understandable that a model which promotes them would attract support. But EOTs are just one possible solution to the issues in question.


What are EOTs?

Under the proposed new rules, an EOT is a Canadian-resident trust that holds shares of qualifying businesses for the benefit of employees to facilitate succession and promote employee ownership of small and medium-sized businesses. The proposed EOT rules will allow employees to borrow from the business to finance a buy-out with an extended repayment period, and also offer a longer capital gains deferral period for the retiring owners.

One of the key players behind the push to allow for EOTs is the Canadian Employee Ownership Coalition, which describes itself as a “diverse, non-partisan network of Canadians from the business, nonprofit, academic and charitable sectors committed to unlocking the potential of employee-ownership for the benefit of Canada’s economy and workers.” The Coalition website argues that “employee-ownership has the potential to scale in Canada, and create a more inclusive, resilient economy while generating billions of dollars in wealth for workers across the country.”


How do they differ from worker co-ops?

Despite the shared emphasis on “employee ownership”, there are in fact significant differences between EOTs and worker co-ops.  As Siôn Whellens of Calverts, a British design and print worker co-op in London, notes: “They both have the purpose of benefiting workers, but they have different modes of ownership and control. Worker co-ops have broader social purposes. They are a global network, with an internationally agreed code.” In contrast, there are no shared principles that formally bind EOTs or ESOPs (Employee Stock Ownership Plans, the most common American version) together.

As Whellens further notes “In EOs, employees usually have individual share accounts. Rights of ownership are exercised indirectly – if at all – by the members of the share scheme, who may be a minority of the workers. Ultimate control in an EO company is often vested in a trust for employee benefit, with minority worker representation on the trustee board.” Thus, while employees would be represented by a trustee who theoretically would act in their best interests, they would have limited insight into or control over the company’s operations. Accordingly, as Angella MacEwen observes, “there are important structural differences between a trust that makes decisions on behalf of employees and shares some of the profits, and models that actually enable employees to own stock in the company, let alone participate in decision making.”


How beneficial are they to workers?

Canadian business law firm Stikeman Elliott argues that “following the creation of a framework for EOTs in Canada, estimates suggest that in the first eight years, 500 to 700 small to medium sized businesses could be sold using an EOT structure, which in turn could create up to $9 billion in wealth for up to 114,000 Canadian workers.” The firm also points to studies showing employee ownership leads to higher wages for employees, and that their companies are more resilient during economic downturns (arguments that have also been made for worker co-ops).


A level playing field

A phenomenon as extensive as the small business succession issue requires a multi-pronged approach, and it’s logical that EOTs should be one of those prongs. But it would be a mistake to focus on them at the expense of the worker co-op conversion alternative. With all the advantages of worker co-operatives such as democratic control, a focus on the well-being of the collective, and strong survival rates, workers should have the right to choose the kind of employee ownership they prefer.  That’s why CWCF is arguing that worker co-ops should receive comparable  treatment in the form of tax and other incentives from the federal government as EOTs.

Budget 2023 proposes to extend the five-year capital gains reserve for the selling owner(s) to a ten-year reserve for qualifying business transfers to an EOT, and this should be extended to worker co-operatives.  To recognize that worker co-operatives do not benefit from capital gains exemptions and structurally cannot benefit from some proposals for EOTs, provide other tax changes to worker co-operatives, such as:

o   Creating a Federal Co-operative Investment plan (as exists in Quebec), a program to encourage investment in the sector through a tax deduction on the investment that would support and grow the worker co-op sector.

o   Ensuring co-op entrepreneurs are eligible for the Small Business Deduction without penalty. This would allow co-operatives, entrepreneurs, and businesses that operate in sectors other than agriculture and fisheries, to claim the Small Business Deduction (SBD).


As we look for ways to address the business succession crisis, decrease income inequality, and look after collective well-being including for equity-denied groups, providing tax and other incentives to worker co-operatives in harmony with any incentives provided to Employee Ownership Trusts will assist in creating an equitable playing field for workers.