Backed by Bay Street heavyweights, a new group pushes for employee ownership

A group that includes some prominent Canadian business leaders has launched a new coalition to promote employee ownership and push Ottawa for changes that would make the model a more viable option in succession planning.

The Canadian Employee Ownership Coalition is urging the federal government to create a dedicated employee ownership trust (EOT) under the Income Tax Act, emulating similar approaches in the United States and Britain.

The coalition is also pitching a capital-gains tax exemption for business owners who sell a majority of their companies to workers, rather than strike deals with competitors or private-equity firms.

It’s a pressing issue as the country’s business owners get older and consider their exit strategies. As of 2018, more than two-thirds of private enterprises were owned by someone 45 or older, according to Statistics Canada.

“We feel that there’s a great opportunity right now,” said Christine Cooper, executive vice-president and head of BMO Commercial Bank BMO-T, who is part of the coalition. “Every year, it gets more and more urgent, from a sense of more aging” business owners. “The sooner that we do this, the better,” she said.

The Liberal Party said in its last budget in April that it would create such a trust, although that has yet to happen. The coalition wants to show Ottawa that not only is there broad support for the idea in corporate circles, but several business owners are ready to transfer ownership to their workers, provided that hurdles are removed.

The group’s advisers include Ed Waitzer, former chair of the Ontario Securities Commission, and Roger Martin, former dean of the Rotman School of Management at the University of Toronto. The coalition also includes businesses that wish to become employee-owned, such as the Juno College of Technology.

Employees have significant ownership interests in some companies in Canada. The construction giant Ellis Don Corp. started the process of transferring ownership to its workers about 20 years ago. Cooperatives have been around for decades. And some companies dole out stock-based compensation, particularly to high-ranking executives.

But fully employee-owned firms are still relatively rare in Canada, owing to the complexities of setting up and managing them, according to the coalition and its supporters.

A policy idea that’s gaining political traction: employee ownership

The transfer process often works as follows: A trust takes on debt to purchase the company, with the loan repaid from company earnings over several years. In return, the seller gets a more favorable tax treatment. The idea is that employees don’t pay out of their own pockets to finance the deal.

The trouble, however, is that Canada does not have a formal trust arrangement with three vital attributes to facilitate such transfers: the ability to invest primarily in one company, to finance the transaction with debt and to hold shares for an extended period without the employees getting taxed on capital gains.

“We don’t really have the framework” in Canada, Ms. Cooper said.

The book manufacturer Friesens Corp. of Altona, Man., has been employee-owned in various forms since the 1950s. Its current iteration is not without hassle. Because certain trusts can’t hold company shares for more than 21 years without incurring a tax hit, ownership of Friesens is split among several of them.

“We’re constantly scrambling to try and draw down the assets in a trust before the maturity date of that trust,” said Chad Friesen, the chief executive officer. “It creates a lot of extra administration around the management of our program that’s really unnecessary.”

Employee ownership has proven popular in other countries. As of 2019, nearly 14 million people in the US participated in employee stock ownership plans, which hold total assets of about US$1.7-trillion. In some cases, employees have retired with millions in increased wealth.

Britain brought in EOTs in 2014. Under its system, employees receive a portion of company profits as a bonus, with up to £3,600 ($5,970) being disbursed annually tax-free per employee. Nearly 500 EOTs were set up over 12 months ended in September, 2022, according to a report in the Financial Times.

If Canada converted firms to employee ownership at a similar pace, it could see as many as 757 conversions in the first eight years after EOTs were introduced, according to a recent report commissioned by Social Capital Partners, a non-profit financing company in Toronto. Jon Shell, the managing director of SCP, is among the most vocal proponents of EOTs in Canada, and is part of the coalition that launched on Tuesday.

At Friesens, the benefits are similar to those in Britain. Around 550 employee-owners received $5-million in distributions last year.

“If you’re an employee today, you benefit today,” Mr. Friesen said.

Beyond the potential for wealth generation, the backers of employee ownership say it can keep businesses in their communities, making a positive impact on the local economy.

“We’ve got communities all over Canada that rely very heavily on one or two employers,” said Mr. Friesen. “I believe strongly that Friesens would not exist in southern Manitoba today had it not been for employee ownership.”

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