Employee Ownership Trust: Permissible Trustees

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 ensuring that the Trustees of the Employee Ownership Trust are legally permissible, so as not to invalidate the available legal and tax benefits.

In order to meet the conditions to be considered an Employee Ownership Trust, the Trustees must:

• not act in the interest of one beneficiary (or group of beneficiaries) to the prejudice of another beneficiary (or group of beneficiaries),

• be either:

  • an individual (other than a trust)

  • a corporation resident in Canada that is licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as a trustee,

• each have equal votes,

• ensure that at least one-third of the trustees are current employee beneficiaries of a Qualified Business controlled by the Employee Ownership Trust (this does not include an employee who has not completed the probationary period, which may not exceed 12 months), and

• ensure that if any trustees are appointed (other than by an election within the last five years by current employee beneficiaries of a Qualified Business), at least 60% of all trustees are dealing at arm’s length with each person who has sold shares of a Qualified Business to the trust (or to any person or partnership affiliated with the trust) prior to or in connection with the trust acquiring control of the Qualified Business.

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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