Small business owners seek extension for employee sale tax benefits

As small business owners approach retirement, many are considering selling their enterprises to their employees. However, the impending expiration of a crucial tax incentive designed to facilitate this process raises concerns. The clock is ticking, and entrepreneurs fear they may lose a significant opportunity to pass on their legacy.

Tiara Letourneau, co-founder and CEO of Rewrite Capital Advisors in Vancouver, has engaged with approximately 100 business owners interested in using Employee Ownership Trusts (EOTs). This succession planning mechanism, introduced by the Canadian government in 2024, aims to assist entrepreneurs in selling their businesses to employees, ensuring continuity and stability.

Understanding the Employee Ownership Trusts

Employee Ownership Trusts serve as an innovative solution for business owners looking to transition their companies to employee ownership smoothly. Under this framework, business owners can sell a significant portion—at least 51%—of their ownership stake to an EOT. In return, they benefit from a capital gains tax exemption of up to $10 million, distributed over a decade, which significantly enhances the financial viability of the transaction.

This model provides several advantages:

• Legacy Preservation: The business continues to operate under familiar leadership, ensuring stability.
• Employee Engagement: Employees gain a vested interest in the success of the company, fostering loyalty and motivation.
• Financial Benefits: The tax exemption encourages more owners to consider this route, as it allows them to retain a larger share of the proceeds from the sale.

The Urgency of Tax Incentive Expiration

The capital gains tax exemption is set to expire on December 31, creating a sense of urgency among business owners. Without a clear commitment from the government regarding the future of this incentive, many entrepreneurs are left in a precarious position. Letourneau highlights the difficulty owners face in planning their exits when such crucial policies remain uncertain.

According to Justine Janssen, the interim head of Employee Ownership Canada, the lack of clarity around the tax exemption has made it challenging for business owners to move forward with their plans. The recent federal budget did not address this issue, leaving many to speculate about the government’s intentions regarding the permanence of the incentive.

Potential Legislative Changes

Experts like Letourneau and organizations such as Social Capital Partners and the EOC advocate for a more robust governmental framework to support EOTs. Some proposed changes include:

• Extending the capital gains exemption to include sales to worker cooperatives.
• Allowing business owners with holding companies to qualify for the exemption.
• Streamlining the process to make it easier for businesses to transition to employee ownership.

Currently, there is a bill under consideration that aims to implement these measures; however, its progress through Parliament remains slow, with no definitive timeline for its approval.

Challenges Faced by Business Owners

Transitioning to an EOT is not without its complications. Entrepreneurs often encounter several hurdles, including:

• Funding Delays: Sales proceeds may take time to materialize, as payments are made from the business's profits.
• Governance Issues: Establishing effective governance structures is crucial for the trust's success.
• Employee Education: Employees need to be informed and engaged in the process to ensure a smooth transition.

Letourneau estimates that a well-organized sale to an EOT could occur within six to seven months, but realistically, most transactions take nine to ten months or longer.

The Role of Employee Ownership in Economic Development

Research indicates that companies with employee ownership models tend to outperform their peers in various metrics, including productivity and customer growth. The practice of employee ownership is more prevalent in countries like the UK and the US, where a significant percentage of small businesses have transitioned to EOTs.

In the UK, for example, nearly 10% of small businesses were sold to EOTs in 2024, reflecting a growing trend towards this model. Jon Shell, chair of Social Capital Partners, emphasizes that enhancing Canadian ownership through EOTs can drive economic growth and improve overall productivity.

Real-World Examples of Successful Transitions

Businesses like Grantbook, a consultancy firm in Toronto, exemplify how EOTs can effectively facilitate succession planning. After initially attempting to implement an employee ownership plan that proved inequitable, Grantbook transitioned to an EOT in February 2025. This shift not only provided a viable exit strategy for co-founder Peter Deitz but also established a framework for fostering broad-based employee ownership.

Letourneau anticipates that 15 to 25 additional transactions involving EOTs will occur in 2026, indicating a growing interest in this ownership model among Canadian businesses.

The Future of Employee Ownership in Canada

As the deadline for the tax incentive looms, uncertainty still casts a shadow over the future of employee ownership in the country. Business owners grappling with fluctuating market conditions, post-pandemic recovery, and personal challenges may either rush to complete their transactions or abandon the idea altogether.

The government’s role in providing clarity and support for EOTs will be critical in determining whether this approach becomes a viable option for a broader range of businesses.

As Deitz reflects on his own experience, he notes the emotional and financial peace that comes from selling to employees. "I feel really, really good about where this all landed," he states, emphasizing the benefits of ensuring both personal fulfillment and the company’s future stability.