Employee Ownership Trusts Update – The Tax Incentives that Everyone was Hoping For

By Katy Pitch

The Canadian Government released its Fall Economic Statement (“FES 2023”) on November 21, 2023 outlining the government’s fiscal update. FES 2023 focuses on housing, affordability, and fighting climate change. However, buried in the middle of the 131-page document is a paragraph highlighting a proposed tax change regarding the recent tax rules implementing Employee Ownership Trusts (“EOTs”).

Earlier this year, the Department of Finance released (and re-released) draft legislation to facilitate the creation of EOTs. Given the large number of Canadian small businesses that will likely be sold over the next few years, the EOT seeks to provide an alternative business succession option for retiring Canadian business owners to sell to their employees. As opposed to significant tax incentives that are given to sellers who sell to similar structures in the US and the UK, the Canadian legislation surrounding EOTs was missing such incentives. 

Notably, in FES 2023, the government now proposes to exempt the first CAD$10 million in capital gains realized on the sale of a business to an EOT from taxation, subject to certain conditions. This incentive would be in effect for the 2024, 2025, and 2026 taxation years. FES 2023 notes that further details will be provided in the coming months.

This is a significant win for the EOT community and certainly should provide sellers with the tax changes that are necessary to incentive sellers to sell their businesses to their employees. 

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    Katy Pitch

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    Katy M. Pitch is a Partner at Mintz whose practice encompasses all areas of Canadian and cross-border corporate income tax law for public and private companies. She serves as a trusted advisor to clients across a wide variety of industries, including financial services, consumer products, life sciences, pharmaceuticals, health care, energy, technology, fintech, and blockchain.