Employee Ownership Trust: Qualifying Business Transfer

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 operation steps are followed, in particular a Qualifying Business Transfer to the Employee Ownership Trust.

A Qualifying Business Transfer means a disposition by a taxpayer (the "seller") of shares of a corporation (the "subject corporation") to a trust, or to a Canadian-Controlled Private Corporation (the "purchaser corporation") that is controlled and wholly-owned by a trust, if:

• immediately before the disposition, all or substantially all (generally 90% or more) the FMV of the assets of the subject corporation are attributable to assets (other than an interest in a partnership) that are used principally (generally more than 50%) in an active business carried on by the subject corporation or a corporation that is controlled and wholly-owned by the subject corporation;

• at the time of the disposition:

  • the seller deals at arm’s length with the trust and any purchaser corporation,

  • the trust acquires control of the subject corporation, and

  • the trust is an Employee Ownership Trust, the beneficiaries of which are employed in the business [see more on EOT Beneficiaries];

• at all times after the disposition:

  • the seller deals at arm’s length with the subject corporation, the trust and any purchaser corporation, and

  • the seller does not retain any right or influence that, if exercised, would allow the seller (whether alone or together with any person or partnership that is related to or affiliated with the seller) to control, directly or indirectly in any manner whatever, the subject corporation, the trust, or any purchaser 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.

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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