What's Happening in Canada?

What does the new EOT budget in Canada mean?

In brief: With an increasing number of older business owners with an interest in selling their companies, the Canadian government proposed a budget, which sets out to provide more business succession options. According to the rules for this budget, a trust is only considered an EOT if it “hold[s] the shares of a qualifying business for the benefit of eligible employees'' and “make[s] distributions to employee beneficiaries using a formula that takes into account each employee’s length of service, remuneration, or hours worked.” This budget introduces some restrictions to intergenerational transfers, such as more involvement in the business before seizing full power. More importantly, however, the budget sets out a new EOT structure, intended to encourage and assist the transition of business ownership to employee groups over time. Based on a report from the Canadian Federation of Independent Business, more than half of the business owners leaving their company would be interested in selling to their employees if the option was presented. The changes within this budget will take effect on January 1st, 2024.

Why it matters: According to Jon Shell, the Managing Director of Social Capital Partners, this is not as good as it seems. In fact, EOT incentives accomplishes the opposite of its intended purpose. Shell looked at what happened in the UK before 2014 when there were no incentives attached to their EOT policy yet. Selling a company can be awfully costly, so when weighing the costs and benefits, a lack of incentives can put people off of certain opportunities. This was exactly what happened; UK business owners felt they were making more sacrifices and incurring little benefits, so they did not sell to EOTs and employee ownership was virtually nonexistent. Once the UK EOT policy was updated to include benefits, employee ownership really started going. Thus, until Canada’s policy includes incentives, Shell doubts this budget will achieve its intended policy of encouraging employee ownership.

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