New Employee Ownership Trust = $10 Million in Capital Gains Exemption!
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Introduced on January 1, 2024, Canada's new Employee Ownership Trust Legislation signals a significant shift in how business owners can transfer ownership of their businesses to their workforce.
Under this law, sellers are granted a Capital Gains Tax exemption (CGTe) on the initial $10 million of sale proceeds, marking the largest individual tax exemption ever introduced by Canada's Department of Finance - a truly remarkable feat.
What is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) is a trust established to hold a controlling stake in a company on behalf of its employees. The primary purpose of an EOT is to promote employee ownership of the company, which can lead to a more engaged and motivated workforce.
Budget 2024
On April 16th, the Federal Government unveiled Budget 2024, laying out its vision for the direction of the Employee Ownership Trust (EOT) Capital Gains Tax exemption (CGTe). Building on the budget's insights, the Federal Government recently issued their Budget Implementation Act 1, outlining comprehensive guidelines for sellers.
Here's a breakdown of its key provisions:
Eligibility Criteria:
Individuals, holding companies, and partnerships are eligible for the CGTe, while corporations and trusts are excluded—a limitation that warrants future advocacy efforts for expansion.
Only sellers (or their spouses) who have actively participated in the business at some stage qualify for the CGTe, with passive investors ineligible.
Sellers of businesses transferring ownership to an existing EOT are ineligible for the incentive, ensuring equitable competition among EOTs and other private investors in acquisitions.
Professional corporations, encompassing doctors, dentists, accountants, lawyers, veterinarians, and chiropractors as defined in the Income Tax Act, are exempt from the CGTe, although they can still transition to EOT status without seller tax exemptions.
Timing and Conditions:
The CGTe is applicable upon a Qualifying EOT Transaction, wherein an EOT assumes majority ownership of the business.
Sellers cannot claim the exemption twice for the same company, preventing double exemptions in successive buyback and resale scenarios.
Upon EOT formation, 75% of Trust beneficiaries must be Canadian citizens.
Sellers with multiple businesses can access the exemption for each business sold to an EOT, enabling multiple exemptions.
The CGTe can be stacked with the Lifetime Capital Gains Exemption of $1.25 million, culminating in a potential total exemption of $11.25 million—an impressive benefit for sellers.
Contingencies:
If the business ceases to be employee-owned due to ownership falling below 51% for two consecutive reporting periods or a sale to an external buyer, a disqualifying event occurs.
In case of a disqualifying event within 24 months, both the seller and the EOT are liable to repay the CGTe, although sellers may receive protection while the EOT assumes financial responsibility.
Disqualifying events beyond 24 months post-EOT formation render the EOT accountable for the previously exempted CGT amount—a measure aimed at ensuring fairness in EOT transitions and tax liabilities.
These detailed provisions underscore the government's commitment to fostering a robust environment for employee ownership while safeguarding tax integrity and fairness.
Malahat Valuation Group is a leading business valuation firm that provides independent business valuations to market leaders such as Rewrite Capital to aid them in the implementation of the new EOT's. For more information on how we can help you, email us at info@malahatvaluationgroup.com or give us a call at 250-929-2929.
Malahat Valuation Group specializes in business valuation and real estate appraisals to owners of privately owned companies and their professional advisors.
When owners need to leverage, sell or reorganize their assets, we answer the age-old question "What is it worth?".
We provide our clients and their advisors peace of mind by preparing professional valuations that stand up to scrutiny from lenders, the Courts, and the Canada Revenue Agency.
Malahat Valuation Group Inc.
(250) 929-2929
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