Employee Ownership Trust: Qualified Business
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 requisite structural and operational steps are followed, including that the Employee Ownership Trust attain shares in Qualified Business.
A Qualified Business is a corporation controlled by a trust that:
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is a Canadian-controlled private corporation (CCPC) [but not a professional corporation],
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no more than 40% of the directors of the corporation are individuals that, immediately before the time the Employee Ownership Trust acquired control of the corporation, owned, directly or indirectly, together with any person or partnership that is related to or affiliated with the director, 50% or more of the FMV of the shares of the capital stock or indebtedness of the corporation, and
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deals at arm’s length and is not affiliated with any person or partnership that owned, directly or indirectly, 50% or more of the FMV of the shares of the capital stock or indebtedness of the corporation immediately before the time the Employee Ownership Trust acquired control of the corporation.
As with the other requirements for an Employee Ownership Trust, it is imperative that the Qualifying Business Transfer 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. These requirements are designed to prevent the Employee Ownership Trust structure from being used as a simple tax-avoidance scheme while an owner retains control or influence over the business. Given the complexity of these rules, it is essential for any business owner considering an Employee Ownership Trust to work with legal and tax professionals who can ensure the business meets all the qualifications for a Qualifying Business Transfer to an Employee Ownership Trust. This is the only way to be sure the significant tax benefits, such as the potential for a $10 million capital gains exemption, are available (presently permitted until December 31, 2026).
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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