Very Little Uptake Expected for Canada’s New Employee Ownership Trust
Survey of business advisors suggest that without significant change, the employee ownership policy proposed in Budget 2023 is likely to fail.
In Canada’s most recent Federal Budget, the government proposed legislation to create Employee Ownership Trusts (EOTs) in Canada, effective January 1, 2024. The Canadian Employee Ownership Coalition (CEOC) has been advocating for the creation of EOTs in order to encourage more employee ownership in this country. In the US and the UK, robust public policy has helped each country grow employee ownership into a meaningful part of their economies, with tremendous outcomes for companies, communities and workers.
While the CEOC is encouraged by the government’s interest in and action on EOTs, we are concerned that the proposed legislation will not lead to similar outcomes for Canada. There are substantial differences in the government’s proposal versus the other two jurisdictions in three major areas: which companies are eligible, how companies are managed after the transaction and tax incentives for business owners to sell to employees. In each of these areas, the Canadian proposal will be meaningfully less appealing to business owners.
We thought it was important to get a broader perspective on Canada’s proposed legislation from the community of professionals who will advise business owners on succession planning. We send out a short survey to a pre-qualified list of lawyers, accountants and other advisors who we know have read and understand the proposed legislation. We received 29 responses from 20 different firms. The responses confirmed our own analysis, that there is very limited enthusiasm about the proposed legislation.
Charts of their responses follow, but the highlights tell the story. Only one of the respondents thinks a significant number of selling owners will use the EOT, with 25 of the 29 projecting none or very few. It’s not only a tax incentive problem: 25 of the 29 advisors agree or strongly agree that governance and qualification issues will serve as a serious obstacle to adoption.
Perhaps most concerning is that, if an owner came to them determined to sell to their employees, 90% of advisors would choose a different existing structure than the proposed EOT. Given how poor the existing structures are at facilitating sales to employees, it is damning that advisors consider this proposal to be even worse. This quote from one of the advisors is telling:
“Lessons learned in other jurisdictions should clearly be used to inform the design of the Canadian approach. The current legislation seems not to have embraced those lessons…. I hope the Government of Canada will improve the legislation before it goes into effect.”
The main lesson learned from the US and the UK is that business owners will sell to their employees in a way that provides benefits to all employees, and they will even finance the transaction themselves so their workers don’t have to pay out of pocket for their shares, if they receive an appropriate incentive to do so. We also know from the UK that business owners will not choose this approach without an incentive, as they had a trust in place without incentives for decades that nobody used. The Canadian proposal tries to achieve the same outcome for workers, but with no incentives. Not surprisingly, business advisors are not expecting their clients to be excited about this idea.
A further lesson is that both countries, after significant experimentation, have landed on an approach to governance that seems to work, and that’s quite similar. By contrast, Canada’s proposal includes an experimental approach to governance that has surprised both Canadian observers and experts from other countries. This is likely what’s turning off advisors from recommending the proposed EOT even for business owners committed to employee ownership.
We have also sought advice from experts in the US and the UK on how the proposed Canadian approach would affect uptake in their jurisdictions. The UK’s two pre-eminent employee ownership researchers told us they’d expect fewer than 10 a year using the Canadian rules, versus the 300 or so companies that are now selling to EOTs in the UK every year. One of the architects of the US approach who has worked in the industry for almost fifty years predicted that fewer than five would occur there annually, versus the 250 that sell to US-ESOPs today.
It is clear that there is much work to do if the government wants to encourage more employee ownership in Canada. We do believe strongly that the government is genuine in their belief that Canadian workers and communities would benefit from providing business owners a viable alternative to sell to their employees. We look forward to working with them over the months to come to make sure the Canadian EOT can be the resounding success we all want it to be.