Employee ownership trusts FAQs
By Jon Shell
Why do we need this trust? Can’t I just sell my company to my employees if I want?
Yes, you can! But you’re probably not going to. There are very few companies in Canada where employees hold a majority stake. The new EOT is designed to solve the two biggest barriers to these sales: funding the transaction, and decision-making after you sell.
The first question that normally comes up when talking about employee ownership is: how are my employees going to come up with the money?
The answer, in the case of EOTs, is they don’t have to. Like the structures in the US and the UK, the purchase is funded by future company cash flow. In the simplest case, a business owner will transfer their shares to the EOT in exchange for fair market value. Instead of getting paid up front, the company agrees to pay the purchase price to the business owner over time.
For example, let’s take a company that produces $1,000,000 in after-tax cash every year, and the fair market value is $4,000,000. If the owner sells 100% of the company to the EOT, it will take four years to pay the owner back. At that point, the EOT will own the company debt-free on behalf of its employees. This is obviously a very simple example, but hopefully illustrates the point.¹ A business owner could also approach a bank to lend some of the money to pay for the shares, so they get some cash up front. For example, it’s common in the US for a bank to lend up to 50% of the transaction to the company to fund the purchase, meaning in this case the owner would get $2,000,000 up front, and an additional $2,000,000 over time, once the bank is paid off. (In this UK example, HSBC participated in the financing of a company sale to an EOT).
A trust helps by holding the shares on behalf of employees, and committing to pay the owner the purchase price over time. For a bunch of tax reasons we won’t get into here, the trusts that were available in Canada prior to the EOT don’t work well for this kind of transaction. In contrast, the EOT has been designed for this express purpose.
The trust owning the shares is also helpful for the second common barrier to selling to employees: decision making. How does it work once I sell? Do all the employees get to vote on every decision after the sale?
If you sell to an EOT, they do not. The reason why these trust models have been so popular in the US and the UK is they allow for companies to be managed the same way they’ve always been, and help with a seamless transition. EOTs are often referred to as “indirect ownership” because employees benefit from the financial success of the company without owning the shares directly. The EOT will have a Trustee Board, who will make a limited set of decisions on behalf of the employees, and the company will have a Board and a management team that will make the decisions required to run the company.
For example, if you’ve been running your businesses with a traditional structure for decades (i.e. with a President or CEO, and with different layers of management), and you’ve already identified a new management team to take over for you (or you intend to stay and keep running the company yourself), that works perfectly well with an EOT.
So, the EOT gives business owners a new alternative for selling their business, financed by the future cash flows, and in a way that limits disruption at the company as much as possible. Using a trust is helpful to make all this work, and the EOT is a new trust that’s set up specifically for this purpose.
How much of my company do I need to sell to use an EOT?
In order to qualify as an EOT, at least 51% of the company needs to be sold to it in the initial transaction. An EOT needs to be the majority shareholder of the company. In the UK, the most common percentage to sell is 100% — more than 50% of companies who have sold to an EOT in the UK have sold 100% in the initial transaction. One reason for that is that the tax incentive available to owners who sell their companies to EOTs in the UK are only available on the first transaction. So, if an owner sells 51% to an EOT up front, and then the rest over time, they won’t be eligible for the tax incentive on the remaining 49%. That will also be true in Canada — the tax incentive will only apply on the initial transactions.
As I said, if you’re looking to sell a minority of your company to your employees, the EOT is not for you.
Who am I selling to, exactly, when I sell to an EOT? My management team? Some of my employees? All of my employees?
In an EOT, you are required to sell to a trust that will hold shares on behalf of all your employees (both current and future). Today, many sales to employees in Canada are management buy-outs, where a management team will take some of their own money and buy out an owner, often with a promise to pay over time. That’s of course a perfectly legitimate succession plan, but the EOT is designed to be more inclusive.
Many owners in the US and UK have described this as one of the most attractive features of this structure: that all employees benefit, even if they don’t have the money to pay for shares. EOTs are often described as broad-based employee ownership plans, because of how widespread the benefits are for employees. Owners see this as a legacy for all the current and future employees that have contributed to their success.
This broad-based approach is also important for governments, and the reason why selling to an EOT will qualify for tax incentives. It’s been proven that these structures lead to great outcomes for employees, and keep jobs in local communities. That’s a great result for the economy and society, and as a result governments want more of them to happen. We’ll get to these incentives in more depth a bit later on.
In the Canadian EOT, once employees have fulfilled their probationary period, which can be up to one year, they will qualify as beneficiaries of the trust. Now, this doesn’t mean that everyone gets equal benefit, which we’ll get to now.
So, what rights and benefits do the employees have with the EOT?
First, benefits:
The employees are the beneficiaries of the EOT, which means if the company has enough cash to pay dividends, or if it is sold to a third party, the money goes to the employees (according to the percentage owned by an EOT. If the EOT owns 100%, they get all the money and if they own 51% they get about half, etc.).
How it gets divided between the employees is determined by a formula that is set up in the initial EOT document. Business owners and the initial trustee board will decide on this together. The formula can allocate benefits based on three different criteria, alone or in combination: wages, hours worked and the number of years worked at the company. There can also be different formulas for different events, like an annual dividend payment or a sale of the company.
For example, a common approach might be to divide dividends based on employees’ wages, and proceeds from a sale of the company based on a combination of wages and years worked for the company. So, if someone makes $50K a year, they’d get half the annual profit share of someone who makes $100K a year. But, if the company is sold and that person making $50K a year has been with the company for 30 years, they may get a lot more than someone who makes $100K but just started.
There’s any number of ways to set up these formulas — I’ve only scratched the surface here. The Canadian EOT is very flexible in terms of allocating benefits to employees, which is a great thing.
A Canadian EOT is also flexible in providing benefits as additional income (dividends) or assets (shares)⁵. This blends the UK approach, which focuses on dividends with the US approach which focuses on shares. The right answer will depend on the company and the objectives of the seller and the trustee.
You’ll want a good discussion with your accountant to work out what’s best for you and your company.
Second, rights:
While they don’t vote on every decision, employees do have important rights in an EOT.
They have representation on the Trustee Board, which has to be at least one-third employees. So, a Trustee Board of three needs at least one employee, and Board of five at least two.
The employees, through the EOT, are also the majority shareholder in the company. That means both the Trustee Board and the Company Board have a responsibility to do what’s in the best interest of the employee beneficiaries of the Trust.
While the Trustee Board and Company Board are the entities making most of the strategic and oversight decisions, employees get to decide directly on whether the business can get sold to a third party, or can sell a large division of the company to someone else. At least 50% of all employees would need to approve a transaction like this, so the company can’t be sold out from under them without their explicit permission.
In summary, the company can continue to be managed the same as it was before, but the employees now have a voice, have to be consulted if the business is going to be sold, and get to split the proceeds of any cash distributed by the company.
What about my rights as the previous owner? Can I continue to run the company if I want to?
After a sale to an EOT, the previous ownership is able to have up to 40% of the Trustee and Company Board seats of the company. So, you can’t control the Boards, but you can have a voice in decisions.
If you provided some of the funds to buy your shares by offering to get paid over time (which is considered a loan), you can get some rights related to that loan to make sure you do eventually get paid. That’s a topic you should discuss thoroughly with your accountant or lawyer.
And yes, if you’re not ready to retire, you can continue to run the company. And hopefully do a great job for your shareholder employees! You now need to report to a Board that will have employee representation, and that you won’t control. But many owners in the US continue to run their companies after selling them to employees, and are able to plan for a smooth transition over time.
For you, the business owner, there are some real legacy benefits to selling to an EOT. You’ve likely built up your company over years or even decades, and you care about the people it serves: clients, your community, your suppliers and your employees. Selling to an EOT gives you a great chance to protect your legacy by selling it to people you know and who know the mission, while increasing the chances your company stays rooted in its local community.
How does selling to an EOT compare to selling to someone else?
For you, the business owner, there are some real legacy benefits to selling to an EOT. You’ve likely built up your company over years or even decades, and you care about the people it serves: clients, your community, your suppliers and your employees. Selling to an EOT gives you a great chance to protect your legacy by selling it to people you know and who know the mission, while increasing the chances your company stays rooted in its local community.
There is a cost, though. Instead of getting paid most of the proceeds up front, you’ll get paid out over time out of company cash flow. Because you’ll likely be providing a lot of the loan to your company to buy out your shares, you’ll want to stay connected to the company for at least as long as the loan is outstanding (generally 4–8 years, but really depends on the transaction structure); it’s not a clean break. While you’ll be selling for fair market value, you won’t be able to have a “bidding war” for your company which might have otherwise inflated the price you get. And you’ll need to engage in the complexity of designing the EOT so it works for your company.
So, there are a lot of considerations to weigh when thinking this through. But as I said earlier, it’s quite a popular option in the US and UK for owners who care deeply about their company, their community, and the legacy they leave behind.
This brings us to two key questions: what type of company works best in an EOT, and what incentives are available to help me get over some of the negatives listed here?
What companies and industries are normally appropriate for EOTs?
In the US and UK, companies from all industries and of all sizes have sold to their employees through their respective trust models. However, there are industries and sizes where it tends to be more popular. Common industries are construction, wholesale distribution, light manufacturing, retail, finance and IT consulting and professional services.
The vast majority of companies are between 25 and 250 employees when they sell, with a tiny minority larger than 1,000. At the smallest end, companies just don’t have the administrative capacity to manage an EOT structure, and there just aren’t too many privately-held companies that are bigger than a few hundred employees. This still leaves a lot of companies! There are about 150,000 companies in Canada between 25 and 250 employees, employing about five million people.
Not to discourage anyone else, but I normally say that the best candidates for EOTs are companies with strong and consistent cash flows in mature industries with a thoughtful management transition either in place, or in progress. These things lower the risk of the transaction, and help ensure that there’s sufficient cash to pay the purchase price of the company, leaving a lot of future benefit left over for a company’s employees.
Finally, it’s often less about the company, or the industry, but about the owner themselves. Business owners who sell to EOTs are generally very passionate about their companies, and very much against the idea of selling to the most common buyers, like competitors in their industry or private equity companies. They worry about losing the culture they’ve worked years to build. A lot of Canadian business owners feel this way, as shown in this survey of business owners by the Canadian Federation of Independent Business.
Here’s Nigel Schroder, CEO of Herd Group, explaining what drove their decision to sell to an EOT:
“Within our industry sector we see so many businesses being swallowed up by larger competitors or taken over by outside investors when they reach a certain size…Invariably, the original business and the culture of that business are destroyed, broken up, diluted…The people that built the original business become a number and the culture that created the success is forgotten.”
This video, by the previous owners of Taylor Guitars in the US, is representative. If these folks sound like you, this is a path worth looking into.
We’re 2,000+ words in and you haven’t discussed these incentives yet. What gives?
Milk is at the back of the store for a reason — I wanted you to read the whole article. I hope you’re not lactose-intolerant because it’s time to talk about incentives.
In both the US and the UK, governments provide a tax incentive to owners for selling to employees in the form of a reduction in capital gains taxes. They do this because they know that selling to employees is riskier, more complicated and potentially (but not always) less lucrative than selling to someone else, and they really like the social outcomes of employee ownership. For them, it’s a good trade-off.
That will be true in Canada as well. The government has announced that the first $10M in capital gains in a sale to an EOT would be tax free. So, if your sale to employees netted you a capital gain of $20M, you would only pay tax on $10M, and if your sale netted a $5M capital gain, that gain would be tax free. Assuming you’re paying the highest tax rate when you sell your company, that means you could save up to about $2.6M in taxes ($10M gain, times the highest rate (about 50%), times the inclusion rate for capital gains (50%)).
This incentive is less generous than the UK, where the entire capital gain from a sale to an EOT is tax free, and the US, where an owner can eventually eliminate their capital gains tax (it’s the US, so it’s complicated). But, it is still attractive, and will hopefully encourage many Canadian business owners to overcome the challenges of an EOT transaction.
Importantly, the tax incentive is only available for sales to EOTs that happen before December 31, 2026. We hope this deadline will be extended, but if you’re interested in this and the tax incentive is important to you, my advice is to move as quickly as you can.³⁴
In addition, if you sell to an EOT you will be able to take your capital gain over a 10 year period, as long as it matches when your loan to the company is repaid, and as long as it’s at least 10% a year. (For example, if you sell for $10M, and are repaid $1M a year, you can claim only $1M each year). The business advisors we’ve talked to do not see this as a very meaningful benefit, but for some it might be helpful.
You haven’t talked about other kinds of employee ownership, like co-ops or employee holding companies? How does the EOT compare?
A worker co-op can be a great answer for an owner looking to sell to their employees, and there are about 500 of them in Canada today, employing about 6,000 people, according to Statistics Canada. The decision here is really about what works for your specific company. Most worker co-ops operate democratically, giving employees a lot of say on how the company is run. That works for some, but doesn’t work for everyone. The EOT is designed to provide an option for business owners who don’t think a co-op is best for them, but you should explore all your options. You can find out more at the Canadian Worker Co-Operative Federation website. The tax incentive for EOTs will also be available for sales to worker co-ops.
Employee holding companies can actually do a lot of what I described in this article. They can take on the loan from the business owner in exchange for the shares, and they can house the shares for employees. They’re also more flexible in some ways — you can sell less than 51% to an employee hold company.
There are a couple main reasons to choose an EOT over an employee holding company. The first is the capital gains tax incentive. With the holding company, there are no rules around a broad distribution of shares, or required employee voice, so the government won’t provide incentives for selling that way. The EOT’s incentive would not be applied to a sale to a holding company.
The second is that there can be a lot more decisions involve in a holding company. How will employees get shares? How will they vote those shares? What happens if and when a small number of employees gain the majority of shares, and have control? The trust model, through an EOT, limits these decisions to a more manageable number, and protects against any small group of employees from exercising too much control.
There’s nothing wrong with either a co-op or an employee holding company, but there are differences that you should go through in detail with your advisor.
OK — I’m still with you and I like it. What do I do now?
In the UK, sales to EOTs are often completed with the help of a company’s accountants and tax lawyers. Some firms have developed specific expertise. We’re seeing new advisors in Canada start to organize around serving this market: consultants, financial advisors, lawyers and accountants. If you write to me, I can give you some names, and I’ve included below a number of links to articles written by people who are becoming experts in this space.
I’m sure I’ve left a lot of questions unanswered, but hopefully some of the links below get into the details you need, and if not feel free to write me (I’m accessible, if not speedy, on LinkedIn). We don’t do any advisory work in this space, so any advice we give is both free and also non-expert. We can probably direct you to the right place.
Bringing EOTs to Canada has been a labour of love for a lot of people over the last few years. We’re deeply grateful to the government for establishing the policies we need for employee ownership to flourish here. Now that it’s real we can’t wait to see the community pick the idea up and run with it. It’s going to be an exciting few years. Let’s go!
Budget 2024 unleashes unprecedented opportunities for employee ownership in Canada
TORONTO, May 8, 2024 – Last week, federal Minister of Finance Chrystia Freeland introduced the government’s 2024 Budget Bill, which contains exciting new updates about their made-in-canada employee ownership strategy. The Canadian Employee Ownership coalition (CEOC) is thrill ed that the government has introduced a new tax incentive that will level the playing field with competing succession options and lead to the widespread adoption of employee ownership in Canada.
“This new incentive, combined with the government’s recently created Employee Ownership Trust structure, is poised to create tens of thousands of employee-owners over the next few years said Jon Shell, a member of the CEOC’s Steering Committee.
This policy initiative comes at a critically important time. Over the next decade, 76% of Canadian business owners intend to retire, and the vast majority have no succession plan in place.
The creation of an Employee Ownership Trust and accompanying tax incentive will, for the first time, provide business owners with a viable alternative to selling their businesses to intemational private equity firms or competitors.
“This is smart business” said Tiara Letoumeau, CEOC Steering committee member. “With every sale to an Employee Ownership Trust, we’re increasing the likelihood that companies stay Canadian-owned, remain resilient in the face of economic turbulence, and provide meaningful wealth for working Canadians.
Employee Ownership Trusts are proven public policy. In the U.S., where these policies have been in place since the 1970s, 14 million American workers are already sharing in $2.1 trillion of wealth. Since the U.K. introduced these policies in 2014 it has witnessed rapid adoption, with more than 1,650 companies becoming employee-owned.
“As the CEO of an employee-owned company in a small town, I have seen firsthand what a difference it makes in culture, purpose and performance.” said Chad Friesen, CEO of Friesens Corporation, and member of the CEOC Steering Committee. With these policies in place, the CEOC looks forward to working with governments across the country to support substantial growth in employee ownership.
“Employee Ownership Trusts (EOTs) are proven public policy. In the U.S., where these policies have been in place since the 1970s, 14 million Americans workers are already sharing $2.1 trillion of wealth.”
About Social Capital Partners
Who owns the economy matters. Social Capital Partners believes working people deserve a fighting chance to build economic security and wealth. A Canadian nonprofit organization founded in 2001, we undertake public policy research, invest in initiatives and advocate for ideas that broaden access to wealth, ownership and opportunity, and that push back against extreme economic inequality. To learn more, please connect with us on LinkedIn or Bluesky or visit socialcapitalpartners.ca.
For more information, or to arrange an interview, please contact:
Katherine Janson
Director of Communications
Social Capital Partners
647-717-8674
katherine@socialcapitalpartners.ca
Billionaire Blindspot: How official data understates the severity of Canadian wealth inequality
The report contains three recommendations for the federal government and Statistics Canada:
- Ensure that the wealthiest Canadians – including its billionaires – are captured by creating new tiers of estimated ‘net worth’ that target the top 2-0.001% in all future SFS surveys, as done in the U.S.;
- Modernize how wealth inequality data is published and displayed, including ways to track the wealth shares of the top 0.1% and 1%;
- Treat the Statistics Canada Survey of Financial Security (SFS) with more seriousness by deploying it with greater frequency.
Preparing for SCP's next strategic phase
Social Capital Partners has a long history of investing in people and projects that create more economic opportunity in Canada. Recently, our focus has been on establishing more avenues for working Canadians to build wealth through ownership.
We will continue this work by supporting efforts to make the new legislation around Employee Ownership Trusts effective so that it can be used to support business transition and build wealth for workers.
But we will also deepen this work. In SCP’s upcoming strategic phase, we will build on our experience advancing employee ownership by focusing on additional issues which impact the ability of working Canadians to build wealth and economic security. We will look for projects, policies and investments that will lead to more democratic control of the economy and confront the wealth concentration that is plaguing most democratic societies.
We will do this because the evidence is clear that extreme wealth inequality leads to a concentration of economic and political power, which has negative implications for social cohesion, economic resilience, community well-being, human happiness and democratic stability. We don’t think these issues are getting the attention they demand.
Wealth today is being created in very different ways than it was 20 years ago. Capitalism is changing dramatically, with wealth and value creation driven by American-based tech platforms, private equity buy-out funds, oligopolistic markets, geopolitical competition, wealth sheltering strategies, intellectual property, Artificial Intelligence, financialization, and state-led economic activity, amongst others (whew!).
And yet, in Canada, our public narratives about economic policy are trapped in the long, boring debates of the 1990s. Too many of those influencing decisions and leading discussions don’t seem to understand how our economy works anymore.
“The evidence is clear that extreme wealth inequality leads to a concentration of economic and political power, which has negative implications for social cohesion, economic resilience, community well-being, human happiness and democratic stability. We don’t think these issues are getting the attention they demand.”
Thankfully, there are many ideas around the world about how to confront this moment so that capitalism is more inclusive and works for more people, and many people in Canada with ideas about how to break down the barriers to wealth creation that many people experience. At SCP, we hope we can use our knowledge, experience, licence and insight to convene, provoke, and shape an intentional conversation about the way the economy works and who it serves.
And we will focus on practical solutions. We remain humble because, like all those who try new approaches, we have often failed on our path to innovate. But we are comfortable taking risks, trying things that others can’t and telling the truth as we see it. We might not know all the answers, but we work hard to make sure that we ask the right questions:
- How can we get more capital going to the people and places where it does the most good and produce systems-level change?
- How can we reshape public policy frameworks to change incentives and produce better outcomes for working Canadians?
- How can we scale the initiatives that we know are already working?
We genuinely believe that good choices in the coming years can create more opportunities for more people to build wealth, which will lead to a more inclusive capitalism and a more resilient democracy.
The issues we are confronting are enormous. We hope our friends, networks and communities can help us identify where we can have the most transformative, enduring impact in the coming years and join us on our journey.
Getting the facts straight on the changes to capital gains tax in budget 2024
By Jon Shell
In the 24 hours after the federal budget was announced, my social media and news feeds were inundated with misinformation about the capital gains tax changes and some shockingly bold predictions about how they’ll affect the country. I haven’t seen such a strong reaction to a Budget since Bill Moreau’s failed 2017 effort, and there’s a ton of groupthink going on. A lot of the reaction is based on misunderstanding of what’s actually proposed. So, before you sell your home and move to Austin, or fire your employees, or decide to become a welder instead of acting on your terrific tech start-up idea, let’s talk about what’s in the Budget.
First, what’s been proposed is an increase in the capital gains inclusion rate, from 50% to 66.67%. This is not a tax rate. The number of people getting this wrong makes me glad we have lots of accountants in this country (for the first time). To clarify, “inclusion rate” is the percentage of capital gains (profit after deducting what you paid for the asset that you sold) included in your income for tax purposes. On eligible capital gains before this change, 50% of those gains were added to your income, and now 66.67% will be added to your income. Meaning, if you pay tax at a 50% rate (50% rate used for ease), you would have paid 25% before, and 33.33% now.
Second, the above only applies to individuals on a capital gain of more than $250K in a given year. For example, let’s say your stock options pay off, and you make a capital gain of $500K one year. The first $250K are still included in your income at 50%, so you’ll pay about $62K on that gain – same as before. The next $250K is included at the new rate, and you’ll pay just over $83K on that (instead of an additional $62K). This is an increase of about $20K more in tax on a gain of $500K. If we bump that to $1M in capital gains, you’ll pay about $62K more in tax. And also, congrats! You’ve done well.
“A lot of the reaction is based on misunderstanding of what’s actually proposed. So, before you sell your home and move to Austin, or fire your employees, or decide to become a welder instead of acting on your terrific tech start-up idea, let’s talk about what’s in the Budget.”
Third, the Lifetime Capital Gains Exemption (LCGE) has been increased, and this is a really, really big deal for a lot of entrepreneurs. Right now, the LCGE is about $1M and is being increased to $1.25M. That is an increase of $250,000 in tax-free earnings, but is actually worth a lot more for many Canadian entrepreneurs because many of them make use of multiple LCGEs by transferring shares to spouses or other family members, each of whom can use their own LCGE.
So let’s imagine a small business with two equal partners, with one spouse and one child each as shareholders. For that company, this change means that there can be an increase of $1.5M of tax-free capital (i.e. $250K times 6 people). That’s a savings of about $375K of tax savings compared to the old inclusion rate of 50%. If these business owners sell their company for a gain of anything up to $7.5M, the proceeds will be entirely tax free. That is a huge win for the vast majority of Canadian entrepreneurs.
Fourth, one of the main arguments against the change is that it will discourage people from founding new companies. As someone who’s started four companies and had hundreds of conversations with founders over the years, I can tell you that no one thinks about the capital gains tax rate when they’re bitten by the entrepreneurial bug. Duncan Rowland wrote a great post on LinkedIn on the topic. The actual impact on proceeds for founders depends on a lot of things, but as the Canadian Entrepreneurial Incentive kicks in the “break-even” will be between $5-10M. If a founder exits for a gain of $5M or less, they pay less in tax with these changes, while a gain above $10M results in more. This spreadsheet lays it all out, but on the whole it’s hard to see this changing the motivation of entrepreneurs.
Finally, the inclusion rate for capital gains tax was 75% in the 1990s, which also happens to be the decade many of those currently worried about our “productivity crisis” say was best for productivity, growth, investment, etc. The inclusion rate was lowered to 50% in 2000, around when we started to see lower productivity, so it’s certainly not clear that capital gains tax rates had much direct impact on Canadian productivity. What we know for certain, though, is that cutting the inclusion rate was great for the super rich, and was certainly great for me when I sold my companies in 2020.
In fact, as Trevor Tombe points out, increased rates should discourage share buy-backs by Canada’s public companies, which should lead to more business investment. Business investment is generally considered the most important driver of productivity. My point is that anyone who says, with certainty, that the increase in the capital gains inclusion rate will lead to lower productivity in Canada is making a claim they can’t back up with facts.
There are legitimate areas for debate about these measures. But as this discussion unfolds, it’s critical to understand what they actually mean, and for those in the debate to present the changes fairly and honestly. And, as is always the case, beware of anyone who seems certain about the long-term economic impact of these changes, as they’d be the first person in history blessed with that level of insight.
Unlocking the potential of employee ownership in Canada
TORONTO, Apr. 19, 2024 – Social Capital Partners welcomes the federal government’s decision to explore options to unlock the potential of employee ownership trusts (EOTs) as part of Canada’s economic recovery. This is a first step toward making broad-based employee ownership a more significant part of our economy. Social Capital Partners produced Building an Employee Ownership Economy in October 2020, a report calling for the establishment of EOTs in Canada, as a way to grow Canada’s comparatively low levels of employee ownership.
“There is a large body of research from around the world that points to employee ownership trusts as a powerful tool to reduce wealth inequality, support business succession, protect local jobs, and promote economic resilience,” says Jon Shell, managing partner of Social Capital Partners. “It’s great to see the government recognize that employee ownership could be part of rebuilding a more inclusive, more resilient economy.”
In the US and the UK, employee-owned companies grow faster, pay better, are less prone to lay-offs or bankruptcies in economic downturns, and are more likely to keep jobs in local economies. Due to public policy that encourages their use, EOTs are a popular structure for business succession in those countries, where they have generated significant wealth for front-line employees. EOTs are common in the US, where 14 million employees own $1.4 trillion in shares at over 6,000 companies. Since their introduction in the UK in 2014, they have become increasingly popular, with almost 100 companies becoming employee-owned in 2019 alone. Canada does not have a business structure comparable to the employee ownership trust.
“There is a large body of research from around the world that points to employee ownership trusts as a powerful tool to reduce wealth inequality, support business succession, protect local jobs and promote economic resilience.”
A recent survey by the Canadian Federation of Independent Business (CFIB) suggests significant interest among Canadian business owners in employee ownership. Fifty-nine percent of respondents were either strongly or somewhat in favour of introducing policies similar to the US and UK, and 53% said they were more likely to sell to their employees if such a policy were introduced.
“Canadian business owners are very community-oriented. We think employee ownership in Canada can be even more successful than the US and UK with the right policies in place,” said Shell. “That would mean more Canadian companies staying Canadian-owned.”
Canada’s current regulatory environment makes selling to employees very difficult. “As a business owner who believes in the power of employee ownership, I’m really excited to see it in the budget. It’s been very difficult, and taken a very long time, for me to sell some of my company to my employees. It should be a lot easier,” said Peter Deitz, Co-Founder and Board Chair of Grantbook. His comments echo those of Geoff Smith, CEO of EllisDon, one of Canada’s largest employee-owned companies, in a video he posted this past month encouraging the government to implement employee ownership trusts.
“Given the benefits, a made-in Canada approach to broad-based employee ownership should be a priority for policymakers that are looking to strengthen Canada’s economic recovery and increase the well-being of Canadians over the long-term,” says Shell.
Canada is bad at studying wealth inequality and we explain why that matters
By Dan Skilleter | The Toronto Star
Canadians have a long-standing tradition of downplaying the severity of our inequality problem by comparing ourselves to our southern neighbours.
Even when new data gets published by Statistics Canada showing worsening income and wealth inequality — as happened recently — it’s tempting to dismiss the results by thinking about how out-of-control inequality is in the U.S.
When it comes to wealth, we have little reason to be so smug, as we outline in a new report, Billionaire Blindspot, released Thursday by Social Capital Partners.
An analysis we undertook averaging multiple studies found Canada’s top 1 per cent owns 26 per cent of all wealth in Canada, and our top .01 per cent owns 12.4 per cent of all wealth. This is somewhat lower than the U.S. numbers, but it is much higher than official Statistics Canada numbers report.
If that seems hard to believe, it’s likely a symptom of the inequality conversation in Canada being historically dominated by income. Canada does very well compared to the U.S. on measures of income disparities and poverty rates, especially after you consider our progressive taxation and benefits regime.
But looking only at income paints an incomplete picture because it ignores intergenerational wealth that has been inherited. It also ignores that the wealthiest often keep their growing fortunes within private business enterprises where the tax rates are lower, or use other wealth sheltering strategies to avoid taxation.
“An analysis we undertook averaging multiple studies found Canada’s top 1 per cent owns 26 per cent of all wealth in Canada, and our top .01 per cent owns 12.4 per cent of all wealth. This is somewhat lower than the U.S. numbers, but it is much higher than official Statistics Canada numbers report.”
We have seen a recent global effort by experts, like Thomas Piketty, to focus on wealth rather than income disparities, recognizing that wealth — or its absence — can be more important to the lives of individuals, as well as to broader social cohesion.
But in Canada, we have been slow to broaden our discussion to wealth for at least two reasons.
First, wealth data is harder and slower to come by, obtained by occasional surveys. Statistics Canada runs its wealth survey, the Survey of Financial Security (SFS), only occasionally. The last one available is 2019 (with 2023 data due any month).
Second, our SFS hasn’t kept up with trends and isn’t designed to capture the wealth of the richest Canadians, which paints an artificially rosy picture of inequality. For example, in the 2016 SFS survey, the wealthiest family that participated had a net worth of only $27.3 million.
This obviously paints a misleading picture, given that Canada punches well above its weight in billionaires. Statistics Canada doesn’t even publish data on the top 0.1 per cent or 1 per cent — or even the wealthiest 10 per cent.
Luckily, some independent and academic researchers have stepped up to the plate in an effort to tackle these challenges.
The Parliamentary Budget Officer (PBO) — Canada’s non-partisan agency of financial modelling — produced studies in 2020 and 2021. The PBO created a more realistic Canadian wealth distribution by carefully incorporating the publicly listed networth of some our country’s richest families into the existing Statistics Canada data set.
Academics have undertaken similar studies and have consistently produced similar results that point to an inescapable conclusion: our richest own a much greater share of wealth than Statistics Canada reports.
Canada’s official wealth survey appears to be much worse at accurately capturing and publishing the wealth of our richest citizens than the American survey. When academic researchers in the U.S. study wealth inequality, their results are significantly closer to official government estimates.
We should not need to rely on independent researchers to provide us with sporadic glimpses of the state of inequality in Canada. Improving the accuracy of our survey would be relatively straightforward. As we lay out in our report, we can just use many of the approaches that the American statistical agency uses. This will allow Canadians to get a better handle on one of the most important issues of our time: growing wealth inequality.
Around the world, governments are grappling with how to confront wealth inequalities, intergenerational inequities and the economic and social problems they bring. Canada needs more accurate, timely data so we can engage in these issues with the seriousness they deserve.
Social Capital Partners releases new report on wealth inequality in Canada – concludes that official statistics significantly underestimate the problem
TORONTO, Apr. 4, 2024 –Social Capital Partners (SCP) today released a new report documenting how wealth inequality in Canada is far closer to the inequality that exists in the United States than official statistics claim.
The report, entitled “Billionaire Blindspot: How official data understates the severity of Canadian wealth inequality”, critically analyzes Canada’s flagship wealth survey, the Survey of Financial Security (SFS), and outlines how its methodological shortcomings lead to significant underreporting of wealth inequality.
“Wealth concentration is getting worse in Canada, just like in the U.S. The difference is that Americans have the data they need to accurately understand, discuss, and propose solutions,” explains the report’s author and SCP’s policy director, Dan Skilleter. “StatsCan has already acknowledged the need for better data, and we hope that this report will encourage them to act on our recommendations, ensuring a more accurate understanding of wealth inequality in Canada.”
The report concludes that the top 1% in Canada own 26% of all wealth, and the top 0.1% own 12.4% of all Canadian wealth. These numbers are significantly higher than official estimates and are much closer to U.S. levels of wealth inequality than previously understood. The report concludes that the American survey, the Survey of Consumer Finance (SCF), does a much better job of measuring reality and presents a series of recommendations to improve the Canadian survey.
“Deep wealth inequality corrodes democratic societies and threatens economic resilience,” said Matthew Mendelsohn, CEO of Social Capital Partners. “The misleading portrait of wealth inequality in Canada undermines our ability to have an evidenceinformed debate about how to address growing wealth concentration. Canadians are telling ourselves a story about wealth inequality that is fundamentally wrong.”
“Wealth concentration is getting worse in Canada, just like in the U.S. The difference is that Americans have the data they need to accurately understand, discuss and propose solutions.”
Social Capital Partner’s Director of Policy, Dan Skilleter, on The Agenda with Steve Paikin
Social Capital Partner’s Director of Policy, Dan Skilleter, sits down with Steve Paikin on The Agenda to discuss his recent report “Billionaire Blindspot”. This segment digs into how Canada’s official statistics severely underestimate how rich the richest Canadians are and includes steps that can be taken to correct this misrepresentation.
Speakers
Bank of Canada’s unproductive productivity speech
Why did the Senior Deputy Governor of the Bank of Canada give a speech on productivity that could have been given in the 1990s?
I just read the speech from the senior deputy governor of the Bank of Canada that says that Canada’s long-standing poor performance on productivity is an “emergency.” As far as I can tell, there was not one real idea in that speech, and almost nothing that hasn’t been said for 30 years.
And then the Public Policy Forum, which is about to do its annual Growth Summit, re-posted the speech claiming that their summit would focus on “fixing productivity once and for all.”
The narrowness and orthodoxy of the Bank and our public discourse on these issues is a problem.
I hope the PPF panels will have new insights. The presence of Indigenous leaders is great. Labour and climate perspectives add value. Global perspectives are important. But it seems a lot is missing.
Reading the speech, and looking at the topics of the panels, I have a few questions:
Where is childcare? Where is housing? And particularly, will there be a critique of investor activity in residential real estate that absorbs so much Canadian capital and I would assume impacts our productivity numbers? (I would guess that some of the panelists have personally contributed to this problem). Where is public transit and the impact of gridlock and commutes on productivity?
Where is a reflection on how the structure of capitalism has changed dramatically and is dominated by a few American-based platforms that generate huge profits from surveillance, data, IP, scale, GAI, and anti-competitive behaviour? How much of our productivity gap with the US is explained by these tech giants? Where is a reflection on the role of private equity, which is transforming many sectors?
“And what about wealth distribution? I don’t want to live in a country where our productivity goes up marginally but ¾ of our grandchildren are serfs. I really don’t want my grandkids to be serfs.”
And why do so many of our firms innovate on skimming fees from consumers, rather than doing real innovation on products, processes or price?
And what about wealth distribution? I don’t want to live in a country where our productivity goes up marginally but ¾ of our grandchildren are serfs. I really don’t want my grandkids to be serfs.
These issues were absent from the speech and, to my friends at PPF, prove me wrong! I hope you can orchestrate discussions that don’t sound like the ones I listened to in the 1990s (and participated in during the 00’s)!
At least no one seems to be talking about the importance of lowering corporate taxes to increase productivity anymore, because that was clearly BS. So I guess that’s good!
These are not my areas of professional expertise (although I did do a paper for a federal task force on productivity in 1999 I think!), but it strikes me that we need to come at these issues with fresh ideas, fresh voices and fresh questions.