It’s not uncommon to hear a founder call a business their baby, a relationship that can make it difficult to sell that business, when the time comes, to someone with no connection to it.
Another option exists in the form of employee ownership trusts (EOTs), which provide a path for owners to pass the torch directly to the workers while receiving relief on up to $10 million of capital gains tax.
“As more founders approach succession, we face a real risk that strong domestic firms are sold to foreign buyers or private equity.”
Patrick Searle, CCI
The tax incentive to encourage the creation of EOTs was introduced as part of the 2023 federal budget. But the incentive is set to expire by the end of the year, meaning future business owners would no longer be incentivized with $10-million in capital gains tax relief to pass down majority control of their company to their employees.
Now, the advocacy group Employee Ownership Canada has penned an open letter urging the government to extend the incentive.
Unlike worker-owned co-operatives, in an EOT, employees don’t actually buy the company. Rather, the trust secures a loan for the purchase and holds company shares on the employees’ behalf while the owner is paid back over time with company profits.
Companies like philanthropy consultancy Grantbook and community support services provider Taproot have opted into the EOT tax incentive, to the delight of many employees.
“Knowing that Grantbook is employee-owned was a huge draw for me. It means I’m joining something built to last where I’m not just contributing, but also helping shape the future, and where my voice matters,“ Grantbook employee Melissa Chungfat said in a blog post celebrating the new ownership model last year.
Employee Ownership Canada says the small window the tax break was available discouraged adoption of the niche exit path; The organization’s open letter calls for the tax incentive to become a permanent Canadian policy. Addressed to Finance Minister François-Philippe Champagne, the open letter says EOTs “keep businesses Canadian-owned, enable workers to share in the success they help create, and support long-term investment in local economies.”
“Making the Employee Ownership Trust capital gains tax incentive permanent would unlock broader adoption, support thoughtful business succession planning, and allow employee ownership to become a mainstream pathway,” the letter argues.
BetaKit has reached out to Minister Champagne for more information and to ask if the government plans to extend the tax incentive.
The letter is signed by some of the leaders of Canada’s top banks, like BMO CEO Darryl White and Scotiabank CEO Scott Thomson, and tech leaders like Build Canada chair Daniel Debow and Borrowell CEO Andrew Graham.
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In an email to BetaKit on Tuesday, Graham said that “shared stake matters,” and that the Borrowell team has skin in the game through stock options.
“EOTs won’t apply universally, but they fill a real gap in how we support Canadian business owners looking to transition their companies while keeping them in the hands of the people who built them,” Graham said.
Council of Canadian Innovators CEO Patrick Searle told BetaKit in an email on Monday that he signed on because “employee ownership is fundamentally about keeping Canadian companies Canadian.”
“As more founders approach succession, we face a real risk that strong domestic firms are sold to foreign buyers or private equity, with decision-making and long-term value moving out of the country,” Searle said. “It’s not the right fit in every case, but where it works, Employee Ownership Trusts provide a practical alternative that keeps companies rooted here, protects jobs, and maintains strategic capacity in the Canadian economy.”
A study from the UK, where EOTs have become increasingly popular, found that EOTs are 8 to 12 percent more economically productive than other ownership models, and invest more in research and development than their traditionally owned counterparts.
The Canadian Federation of Independent Business, which also signed onto the letter, has been warning about a “succession tsunami” since at least 2018. The business group released a report in 2022 that found 76 percent of Canada’s business owners planned to exit their business within a decade, with 49 percent planning to exit their business by selling to an unrelated buyer. While Canada’s EOT policies were under development at the time, 53 percent of owners said they would be more likely to sell their business to employees if the option were available.
Feature image courtesy Unsplash. Photo by Redd Francisco.