Canada's Employee Ownership Legislation
Canada's Employee Ownership Legislation
An overview of Canadian employee ownership
In the 2022 federal budget, there was a clear commitment to promoting Employee Ownership Trusts (EOTs) in Canada. While initial steps had been taken to introduce the EOT concept, additional measures outlined in the Fall Economic Statement (FES) by the Department of Finance are poised to make EOTs a more viable option for a wider range of Canadian businesses. One key proposal included exempting business owners from taxation on the first $10 million in capital gains when selling a business to an Employee Ownership Trust, contingent upon meeting certain conditions.
On November 30th, the government of Canada first read Bill C-59 in the House of Commons, including proposals on Employee Ownership Trusts. Among other components, the bill contained certain measures announced in the Fall Economic Statement with certain provisions of the 2023 federal budget, including draft legislative proposals relating to the use of an employee ownership trust to purchase and hold shares of a business. Let’s take a look at the draft legislative proposals. These amendments became applicable as of January 1st, 2024.
Capital gains reserve extension: The previous owner now has an extended window of up to 10 years to claim capital gains resulting from a qualifying sale as opposed to the previous five.
Shareholder loan repayment period: This means a qualifying business can provide funds to an EOT for share purchase, with a repayment period extended to 15 years.
Deemed interest benefit rule exemption: EOTs would not be subject to the deemed interest benefit rules if they obtain low or non-interest bearing loan from a qualifying business for share acquisition, if the loan is repaid within 15 years,
Exemption of EOTs from the 21 years deemed disposition rule: Certain trusts deemed to dispose of their capital property at 21-year intervals. EOTs would be exempt from the 21-year deemed disposition rule that typically applies to certain trusts.