Major political parties in Canada are starting to embrace policy reform that would allow private companies to transfer ownership to employees, making the idea a potential area of co-operation in the new minority government.
Employee ownership is common in the United States, where some 14 million participants hold a combined US$1.46-trillion in assets. Britain has also embraced it. The country enshrined employee ownership trusts (EOTs) in a 2014 tax reform, which has paved the way for hundreds of transactions.
The mechanics are fairly simple. A company sets up a trust to hold shares for its employees. The trust then usually secures a loan to purchase the shares, which is repaid from company earnings over time. In the U.S. model, employees receive shares in proportion to their seniority and pay, and then continue to accumulate them. By selling to their employees, a company’s owners are able to secure more favourable taxation of capital gains.
Employee ownership is associated with better company performance, stronger job protections and higher levels of job satisfaction. And the practice’s boosters point to its potential to reduce wealth inequality. It’s also a viable option in exit strategy planning – a pressing concern as entrepreneurs near retirement age. As of 2014, the most recent year for which figures are available, around half of the owners of Canadian medium-sized businesses (100 to 499 employees) were between 50 and 64.
The trouble is that there are several legal obstacles to instituting such ownership structures in Canada, including the fact that Ottawa doesn’t allow trusts to engage in leveraged buyouts on behalf of employees. But increasingly, it appears that politicians are willing to rewrite the tax code.
In its spring budget, the Liberal government said it would “examine” the barriers to creating EOTs. The Conservative Party recently went a step further. In its election platform, it pledged to allow the trusts to be established. And the party said that it would impart a tax advantage to sellers.
“This will take the form of a reduction in capital gains tax when the owner sells to a trust owned by the employees, enabling ownership to transfer to the people who have partnered in building the business,” the Tories’ platform said. “We will also ensure that BDC makes financing available to support these trusts,” it added, referencing the Business Development Bank of Canada, a Crown corporation.
The trust model is picking up momentum after a public campaign spearheaded by Jon Shell, managing director and partner at Social Capital Partners, a Toronto-based non-profit financing company. Earlier this year, SCP and the Healthcare of Ontario Pension Plan provided debt financing to transition Taylor Guitars, a San Diego–based guitar manufacturer, to employee ownership.
Mr. Shell has spoken with the Liberals and Conservatives about clearing the way for EOTs in Canada, and he’s optimistic it can happen under the new minority Liberal government, which will be looking for broad consensus on policy moves.
“It’s just one of those common sense, market-based solutions with huge, proven results,” he said. “And nobody in Canada’s ever heard of it.”
In Canada, there are existing forms of employee ownership. Stock options are a notable example, but they are usually given only to executives. The trust model, however, allows all employees to become company owners.
In the U.S., employees are able to accumulate company shares over time, which are cashed in at retirement or resignation. The Publix Super Markets chain, which has roughly 1,300 locations in the Southeastern U.S., has had a stock ownership plan for decades. The Atlanta Journal-Constitution reported in 2016 that a long-term employee cashed in more than US$1-million in company stock upon early retirement.
In Britain, employees who participate in EOTs are given annual bonuses out of company earnings, and they can each receive up to £3,600 ($6,250) tax-free every year.
Mr. Shell said he favours a hybrid approach that would allow Canadians to accumulate shares, but also to redeem some every year for additional pay. The key to making a domestic system work, he added, is to write EOTs explicitly into the tax code, while pairing them with tax incentives.
Even with a tax code that encourages EOTs, there would be cases where owners would want to bypass the trust model. They may simply get better deals from competitors or private-equity funds. Also, a seller may have to extend a significant amount of credit to its employees in a transaction. Paying that off could take time, and would be contingent on company performance.
Still, there appears to be an appetite for bringing EOTs to Canada. In a March survey, the Canadian Federation of Independent Business found that roughly six in 10 small business owners supported adopting the trust model. Around half of respondents said it would make them more likely to sell to their employees.
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