New rules help more Canadian businesses be sold to workers

When a long-standing Canadian company goes up for sale, the news can leave employees to face an uncertain future.

The buyer could be a competitor, a hedge fund or an investor from outside the community. In other cases, no buyer emerges at all. Any of these scenarios could see the business downsized, merged, moved or closed outright after it changes hands.  

Now, changes to Canadian tax laws that came into effect this year will, at least until the end of 2026, make it easier for employees to buy a company the owner wants to sell. 

It's called an employee ownership trust (EOT) and is essentially a mechanism that creates an incentive for business owners to sell their companies to employees in the form of shares that are managed in trust. In most cases, the owner agrees to be paid over time with money generated through earnings. The purchase is typically financed, so no money comes out of workers' pockets. Once the owner is fully paid, profits can be paid to the employees in the form of dividends. 

Graham Henderson is CEO of London's Chamber of Commerce. He said that while workers always had the option to buy a company if the owner wanted to sell it to them, now up to $10 million of the price of an employee purchase is exempt from capital gains tax. 

"With the incentives, the employees don't have to offer top dollar," said Henderson. "They can compete with a third-party transaction because their money is worth more."

Henderson said employee purchase structures are very popular in the United States and the United Kingdom. Both countries already offer incentives for employee purchases. He feels Canada needs to catch up.

"In Canada, we lacked the regulator incentives and support to make this easy," he said. "A lot of people don't even know it exists."

Henderson pointed to the 2021 sale of the U.S. company Taylor Guitars. A Canadian pension fund helped finance the deal. 

"It was Canadian money going south of the border because you couldn't do it up here at that time, but now you can," said Henderson. 

He said as more business owners of the Baby Boomer generation retire more companies stand to change hands, either through sale or succession. It's all part of the so-called "silver tsunami" trend of assets shifting to the next generation. 

Jon Shell is the chair of Social Capital Partners, a Toronto-based non-profit that works to expand access to company ownership. 

He points out that in EOT structures, the employees don't actually become CEOs. They're beneficiaries of a trust with shares that they own indirectly. The company's board of directors typically reports to trustees. 

However, Shell said employees often benefit because the company is more likely to avoid post-sale shakeups that could cost them their jobs. Also, a long-established business is less likely to move if its employees become owners.

"There's more stability, and these businesses tend to perform better and keep jobs in the local economy," said Shell. "For owners who care deeply about their communities, this is a good answer."

Ontario MPP backs employee ownership

This week, London North Centre NDP MPP Terence Kernaghan put forward a private member's bill calling on the Ontario government to provide more support for employee purchases of companies. 

Henderson was at Kernaghan's Queen's Park news conference about the private member's bill. 

"We want the provincial Conservatives to see this is a non-partisan, pro-worker, pro-economy move," he said. 

Henderson said the tax changes that came into power this year aren't perfect. He'd like to see more government money set aside to support businesses selling to workers. 

Also, the federal legislation is time-limited and set to expire at the end of 2026. 

Shell hopes that before then, enough Canadian businesses will have used the incentives and shifted to employee ownership, and the EOT concept will have proven its value and be extended.

"It would be great if 50 companies sold to employees by the end of 2026," he said.