When businesses are sold to their employees, it helps support local economies and protect jobs, and it contributes to employee wealth. In light of the proven benefits to society of employee ownership, the government should give serious consideration to include a capital gains tax exemption for business owners in its trust model.iStockPhoto / Getty Images
Tony Loffreda is a member of the Senate standing committees on banking, trade and the economy; national finance; and internal economy, budgets and administration. He was a vice-chairman and executive at Royal Bank of Canada.
Seventy-six per cent. That’s the number of Canadian business owners who anticipate retiring in the next decade and must now explore what’s next for their company.
With the federal budget just around the corner, the government is in a unique position to help these owners protect their businesses, look after their workers and preserve their legacies with the implementation of employee ownership trusts, in which businesses are essentially sold to staff.
I understand the government may be finalizing regulations and amendments needed to enact these trusts, fulfilling a commitment made in the previous budget. As a supporter of the newly formed Canadian Employee Ownership Coalition, and in light of the proven benefits to society of employee ownership, I would urge the government to give serious consideration to include a capital gains tax exemption for business owners in its trust model.
Employee ownership draws closer to breakout moment in Canada
This would remove a significant barrier to the creation of the trusts. It also reflects the results of the government’s recent consultations with stakeholders.
Typically, when entrepreneurs retire, they can sell their company to any interested party, or transfer their business to a family member. It could also mean a foreign takeover or merger with some other entity. In other words, some of Canada’s most successful and vibrant small and medium-sized enterprises could be swept up by foreign interests and, even worse, jobs could leave the country.
Another option, which is gaining much traction in many business circles and is becoming increasingly more appealing, is the idea of employee ownership trusts.
In broad strokes, employee ownership is when a company’s employees own shares in the company’s stock. The trusts are a form of employee ownership designed for succession, where an owner sells a majority of a company to employees all at once. Company shares are bought through a trustee, using borrowed money to buy these shares at fair market value. These shares are then distributed over time to all employees, not just executives, at no cost to workers.
But selling shares to employees through an employee ownership trust requires an owner to provide much of the financing themselves. Rather than sell to an outside investor or a competitor and get fully paid upfront, the owner would take on more risk and get paid over a much longer period.
In both Britain and the United States, politicians of all stripes have decided that the outcomes of employee ownership are so good that they need to be encouraged and facilitated. The Canadian government has also been watching what’s going on abroad.
With the American and British models, owners who sell a substantial portion of their company to employees have access to capital gains tax incentives. This works as a tax deferment for business owners, so that the employees, who received their shares free, will eventually pay taxes when they sell them. Therefore, at no long-term cost to government, it can encourage this new path to wealth-building for Canadian workers, most of which would be lower-wage workers who could never otherwise have access to business ownership.
In Britain for example, thanks in part to this capital gains tax waiver introduced in 2014, business sales to workers have increased from about 10 a year to approximately 300 in 2021.
The benefits of legislating employee ownership trusts into our Income Tax Act are plentiful. When businesses are sold to their employees, it helps support local economies and protect jobs, and it contributes to employee wealth. In this age of increasing affordability challenges, building wealth for Canadian workers is a great way of mitigating inequality.
I spent more than three decades in banking, mostly in commercial banking, prior to my appointment to the Senate. In my experience, one common denominator for entrepreneurs, who basically risk everything every single day, was the value they attributed to their employees, who become like family. For many mom-and-pop shops, employees are the heart and soul of the company. Many stick around through the highs and lows and they are often best positioned to help businesses succeed, grow and remain in Canada.
For many retiring business owners, selling their business is a very difficult decision, heartrending even. They want to secure their legacy and, hopefully, ensure the business they’ve built continues to thrive. Employee ownership trusts are a great option in securing this legacy and, perhaps more importantly, it gives an added incentive to employees, who would now have skin in the game to work harder, innovate and help expand the business.
The trusts are a win-win for business owners and employees. With appropriate incentives, they have the potential to help Canadian businesses and our work force thrive over the long term.