Updated June 25, 2024

Canada has enacted legislation that will exempt the first $10 million (Canadian) in gains from the sale of a business to a qualifying employee ownership trust (EOT). The exemption is available only until the end of 2026, although there is a good chance it will be extended. 

EOTs were first developed in the UK and were not intended to convey an equity ownership interest to employees. Instead, dividends on the shares held in the trust are paid to participants. If the company is sold, however, the employees would normally divide up the proceeds. In the Canadian model, companies can design their EOT to function more like an ESOP, however. 

The EOT must meet a variety of rules:

• At least 51% of the stock must be sold to the EOT. The exemption applies only to the first transaction.
• All current and future employees must be named as beneficiaries of the trust.
• The allocation of dividends and any proceeds from a sale paid to employees can be based on relative pay, seniority, hours worked, or a combination thereof. Companies can have a “look-back” provision to provide some of the sale proceeds to employees covered by the trust before the sale.
• At least one-third of the trustee board and company board members must be employees.

Jon Shell of Social Capital Partners, one of the leading proponents of the legislation, wrote an excellent detailed discussion of the bill on Medium.