A Success Story in Consultations at the Federal Level: Employee Ownership Trusts Are Coming to Canada

We publish an update from the Honorable Tony Loffreda (in the pic above), independent Canadian senator, about the employee ownership trust (EOT) regime.

Canada will soon have an employee ownership trust (EOT) regime. We knew this was coming as the Federal Government had first articulated its intention to engage with stakeholders to examine what barriers exist to the creation of these trusts in Budget 2021. 

A year later, in Budget 2022, and most recently, in Budget 2023, the Government reconfirmed its commitment to incorporate EOTs into the Income Tax Act and sought further stakeholder feedback to make sure that the model Canada would adopt can be successful and achieve its intended objectives.  Following consultations this summer, the Government finally set out its plan in the Fall Economic Statement that the Deputy Prime Minister and Minister of Finance delivered in the House of Commons last week.

As described by the Government, EOTs enable employees to share in the success of their work by supporting participation in business decisions and allowing workers to receive their share of profits.  Because of this, I have been a vocal advocate for EOTs.

For months, the Canadian Employee Ownership Coalition, of which I am a supporter, has been collaborating with the Department of Finance and advocating for the best possible EOT model for Canadian entrepreneurs and businesses.  Our Coalition knew that without proper incentives, business owners would likely not consider EOTs as an attractive option.

All our hard work paid off last week when the Government announced that it would integrate incentives into its model, something it had been hesitant to include from the outset.  The Government is now proposing to exempt the first $10 million in capital gains realized on the sale of a business to an EOT from taxation. 

The timing of this measure could not have been any better.  Projections suggest that 76% of Canadian business owners anticipate retiring in the next decade.  Having EOTs as an alternative option for any business succession plan is quite appealing and, with last week’s announcement, a very incentivizing one that, I hope, Canadian business owners will seriously consider.

Indeed, according to the Canadian Federation of Small Businesses, 59% of entrepreneurs support adopting EOTs and more than half of those surveyed also said they would be more likely to sell their business to their employees if incentives would be incorporated into the Canadian model.

The Government projects this measure will reduce federal revenues by $52 million over the next four years.  While I appreciate that the Government needs to be increasingly more fiscally responsible, I strongly believe the long-term benefits certainly outweigh the short-term costs.

First, and perhaps most importantly, EOTs allow employees to reap the benefits of its employer’s success and take part in profit-sharing.  Beyond that, EOTs can also help support local economies, protect jobs, improve business performance, and can even help mitigate and reduce worker inequalities. 

With a Federal Government committed to growing the middle class, this measure should help Canadian workers accumulate more wealth and, hopefully, make life a little more affordable for them in the long run.  Of course, EOTs are also quite appealing to entrepreneurs and owners themselves because they could help secure and preserve their business legacy, ensure that their life’s work remains in their community, and protect and strengthen the connection they have established and cultivated with its people, its customers and its staff over many years and decades.

Putting politics and partisanship aside, I believe that last week’s announcement can serve as a great example of consultations gone right.

Just a few months ago, it was apparent that the Government wanted to introduce EOTs without the capital gains incentive.  I had a sense that they wanted to introduce EOTs incrementally and evaluate its initial success before adding any incentives into the model. 

Clearly, the Government always kept an open mind.  I wrote extensively on the subject, spoke with the minister’s office and the Coalition lobbied Finance Canada.  The Government listened, and I think, what we have before us, is an interesting and appealing alternative for business owners to consider, whether it be a part of a succession plan or not. 

Business owners and workers alike can benefit tremendously from employee ownership trusts, and I look forward to casting my vote in favour of this measure when the Senate reviews the upcoming bill that will legislate this concept into law.

The Honourable Tony Loffreda, Independent Canadian Senator (Québec)