Advocates urge Ottawa to extend ‘no-brainer’ tax incentive for employee ownership | CTV News

It took Peter Deitz eight years to figure out the best way to sell his business. But it wasn’t until the federal government opened up a new option for succession planning that he found the right buyer: his own employees.

Deitz—co-founder of Grantbook, a Toronto-based firm that supports organizations doling out grants to non-profits—said he dreaded the idea of simply selling to an outside buyer who couldn’t see beyond his company’s bottom line.

“I could not foresee a scenario where I would sell the company to a third party that might change that culture or change that special quality within the business,” he said.

Deitz found an alternative he could live with in an employee ownership trust—a vehicle that sees employees of a business get a stake of the firm without having to pay for shares while the owner is paid out over a period of time, typically through the company’s profits.

The group’s executive director Justine Janssen said the model is great for employee engagement and for company founders worried about what will happen to their legacy when an outside party takes over and starts looking for efficiencies.

“We’ve had hundreds of businesses reach out and start to understand and contemplate the structure and many are on their way to taking advantage of the trust structure and the capital gains exemption that supports it,” she said.

Janssen said Employee Ownership Canada knows of four trusts established so far in Canada but added another 20 to 30 more could be in the pipeline this year.

Nina Ioussoupova, spokeswoman for the Canada Revenue Agency, said in an email that the CRA does not have “reportable data on the number of employee ownership trusts established to date in Canada.”

She said the “relevant data fields associated with these transactions are not captured in a way that allows for reliable reporting.”

Ioussoupova also declined to say how many company founders have claimed the capital gains tax exemption related to the trusts since it was made available, citing confidentiality provisions in the Income Tax Act.

Employee ownership trusts are a niche option and many businesses are just learning about them now, said Pamela Cross, tax partner at Borden Ladner Gervais LLP.

But if the capital gains exemption is waived, that will only limit their adoption, she said.

That exemption can help to mitigate some of the upfront risks for owners—which are often families trying to cash out from their businesses via the trust.

While employee ownership trusts remove some barriers holding employee groups back from buying out an exiting owner, Cross said financing the transition can be tricky and the model is best suited for businesses with predictable revenue sources.

After a trust is established, exiting owners can retain a minority stake and remain involved in the business but can’t hold a controlling share. Sellers looking to access the capital gains exemption also face a strict test of whether they still effectively control the firm, Cross said.

Some founders may feel letting go of the reins could affect their odds of getting a full payout, she said.

The capital gains tax exemption can also be clawed back if there’s a “disqualifying event” in the years after the sale—essentially, something that stops the business from operating as an employee-owned trust while the seller is still being paid out.

“Certainly there’s been a lot of interest in them,” Cross said. “The concern I have is that the benefits of them are not attractive enough to really make them comparable to a third-party sale, where you can just get paid out on closing and walk away.”

Succession plans are often hammered out over the course of years, not months, and Janssen said the narrow window remaining on the capital gains exemption could limit the number of businesses seriously considering the model.

She said she wants to see the federal government commit to making the tax incentive permanent, or at least offer a defined extension, to give some predictability to owners considering an employee ownership trust.

“We’ve heard many business owners say that that capital gains tax exemption was just enough to make it a no-brainer for them and to feel like they really got fair value and got compensated for that wait time as part of the transaction,” Janssen said.

When asked whether the federal government will extend the expiring exemption, a Department of Finance official told The Canadian Press in a media statement that “while the Government of Canada reviews the tax system on an ongoing basis, it would be inappropriate to speculate on any potential or prospective changes.”

The official noted that the 2025 budget implementation act, which has yet to be passed into law, proposes to extend the exemption to businesses sold to worker co-operatives.

Employee ownership trusts have proven popular in other jurisdictions, including the United Kingdom and the United States—though Cross said the programs in those countries are more generous for founders. In the U.K., for instance, the exemption applies to all capital gains earned from the sale of the business.

Deitz, who earlier this year got the full payout for his employee ownership trust ahead of schedule, did not use the capital gains exemption offered by the government because it’s only available to individual owners, and his stake in Grantbook was through a holding company.

But Deitz also said there should be no cap on the capital gains exemption and that it should apply to small and medium-sized businesses of any ownership structure.

He and Janssen both argue it’s in the federal government’s interest to promote employee-ownership models that keep Canadian companies—and decisions about their intellectual property and the welfare of employees—in Canada.

“This could be the signature project of the Liberal government as a nation-building endeavour to protect the economic sovereignty of Canadian small businesses,” Deitz said.