There’s a worldwide trend to give employees a stake in the companies they work for. Some countries, like the UK and the US, have made special tax rules to make this easier. Canada is now joining in with similar rules proposed in their 2023 Budget, and expanded on it in the 2024 Budget to introduce employee ownership trusts (EOTs). EOTs present a new succession planning opportunity for small and medium-sized business owners because of the following tax advantages to the purchasing employee(s) and retiring owner(s) of a qualifying business:
- Paying for shares from the business: Employees can borrow from the business to finance a buy-out with up to a 15-year repayment period. Currently, a loan such as this would need to be included in income if not repaid by the end of the following calendar year.
- Deemed interest benefit exemption: Employees are exempt from the deemed interest benefit (currently 5%) on low or non-interest bearing loans from the business to finance the buy-out.
- Double the capital gains deferral period: Retiring owners have up to 10 years instead of 5 to claim the capital gains reserve when proceeds from a sale are received over time.
- 21-year rule exemption: The employee ownership trust is exempt from the 21-year deemed disposition rule for trusts as long as it satisfies the EOT conditions.
