What is it?
The British Columbia Employee Share Ownership Program (ESOP) is an initiative designed to foster a collaborative work environment where employees have a vested interest in their company’s success. The program offers a significant incentive in the form of a 20% tax credit for employees, making it an attractive option for those looking to have a stake in their company’s future. This program not only benefits the employees but also provides retiring owners with a smooth transition plan to ensure the longevity and prosperity of the business.
If you are thinking of participating in this program, read below for some items to consider.
Is the ESOP Appropriate For Your Company?
Exploring the ESOP can be a strategic move for companies looking to engage employees in the long-term success of the business. However, it’s important to navigate the structural adjustments required for implementation. For instance, the ESOP is designed for BC residents, offering them a tax credit benefit. Employees outside BC, like those in Toronto, won’t receive the same tax advantages, though participation is still possible. Companies should investigate if similar incentives exist in other provinces to ensure inclusivity.
The program offers a $2,000 BC tax credit, which is contingent upon a minimum investment of $10,000 in new shares. This credit is applied against the employee’s BC provincial taxes, but it’s crucial to clarify whether this is a direct reduction in personal income taxes or a credit that lowers the income subject to provincial tax at the employee’s marginal tax rate.
Employees have the option to hold their purchased shares in a Registered Retirement Savings Plan (RRSP), making them tax-deductible. However, this choice affects their eligibility for the lifetime capital gains exemption on qualified small business corporation shares when sold at a profit. If held in an RRSP, the entire value of the liquidated shares becomes taxable income upon withdrawal.
Another key point is that the issued shares must be voting shares. In many companies, these are distinct from the “participating shares” that employees typically purchase, which may carry financial benefits but not voting rights. To align with the ESOP, a shift in share structure may be necessary.
Lastly, the ESOP demands an initial application, approval, and ongoing annual reporting, adding a layer of administrative duties separate from standard annual reports. As you consider the ESOP, it’s advisable to consult with a tax professional to fully understand the implications and benefits for your company and its employees.
