Employee Ownership Trust: Permissible Beneficiaries

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

To attain the legal and tax benefits of an Employee Ownership Trust, not only must the Employee Ownership Trust's documentation be appropriately drafted to be compliant with the federal government's tax legislation, it must also meet precise operational requirements, failing which those significant tax benefits could be subject to intense scrutiny from Revenue Canada, and its potential denial. As such, it is imperative that the operational requirements of an Employee Ownership Trust are known to all parties involved in the Employee Ownership Trust and those requirements are strictly complied with.

Beneficiaries of the Employee Ownership Trust must consist exclusively of individuals who:

• are employees (current employee beneficiary) or, if the Employee Ownership Trust allows, former employees (including estates) who were employees, while the Employee Ownership Trust controlled the Qualifying Business, of one or more of the Qualifying Businesss controlled by the Employee Ownership Trust; other than employees or former employees that did not complete an applicable probation period of no more than 12 months,

• do not own, except through an interest in the Employee Ownership Trust, shares of a class of a Qualifying Business controlled by the Employee Ownership Trust, the value of which is 10% or more of the FMV of the class,

• do not own, alone or together with any person or partnership that is related to or affiliated with the individual, shares of a class of a Qualifying Business controlled by the Employee Ownership Trust, the value of which is 50% or more of the FMV of the class, and

• immediately before the time of a Qualifying Business Transfer to the Employee Ownership Trust, did not own, directly or indirectly, alone or together with any person or partnership that is related to or affiliated with the individual, shares of the capital stock or indebtedness of the Qualifying Business, the value of which is 50% or more of the FMV of the shares of the capital stock and indebtedness of the Qualifying Business.

As with the other requirements for an Employee Ownership Trust, it is imperative that the beneficiaries meet all the legal criteria established by Canada's federal government for purposes of realizing the specific tax benefits emanating from correctly instituting and operating an Employee Ownership Trust.

For knowledgeable and experienced legal representation for succession planning and trusts, including employee ownership trusts, contact tax lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

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