Why Some Canadian Companies Are Turning Their Workers into Owners Instead of Selling to the U.S.
Aaron Schroeder's company wasn't for sale, but the offers kept coming. For years, the Vancouver-based climate engineer received a few unsolicited bids every month, sometimes a couple every week. The offers were often from larger companies and hedge funds, especially those based in the United States.
When Schroeder was ready to sell Brightspot Climate, an engineering consultancy with offices in Vancouver, Calgary, and Toronto, he decided to take a different approach. He created a special trust to make all 40 of his staff owners.
"I wanted a model where everyone in the company could participate, but nobody has to pay any money upfront," he said. "I also wanted to reward the employees who helped build the business and feared a sale would result in job losses and erode the company."
Employee ownership has existed in Canada for decades, but a recent federal government amendment to the Income Tax Act introduced a new option called an employee ownership trust (EOT) in 2024. Since then, four companies, including Brightspot, have made the switch.
This shift in ownership comes at a critical time. Canada is facing a wave of baby boomer entrepreneurs nearing retirement, and there's a renewed focus on strengthening the national economy amid a trade war with the U.S. The Business Development Bank of Canada (BDC) reports that this demographic shift represents over $300 billion in revenue over the next five years.
An EOT is a trust that holds the company's shares on behalf of the employees. The trust finances the purchase of the company, and the owner is paid back over time using the company's profits. Employees don't buy shares, but there is profit-sharing.
Time is of the essence for companies considering becoming EOTs. The federal government offers a tax break for owners who sell their businesses to employees, but this incentive runs out at the end of this year. Without the tax incentive, the future of EOTs in Canada is uncertain.
"There is a hard cutoff deadline," said Tiara Letourneau, CEO of Rewrite Capital Advisors, a Vancouver-based consultancy. "Because companies need a long time to do it, having that cutoff means they pretty much need to have started now or they're running out of time."
EOTs have existed in the U.K. and the U.S. for several years, offering advantages but also presenting challenges. Typically, an owner sells the majority of the company to employees and receives some money upfront, with the remainder paid over several years. Business owners may need to accept a lower price compared to selling to a third party on the open market. The owner also has to wait to receive all the money.
The federal government introduced a $10-million capital gains tax exemption to make EOTs more financially appealing for owners who have typically spent many years building their businesses. This tax incentive is "a nice kicker and definitely gets them interested and gets them looking at it more in-depth," said Wes Novotny, a tax lawyer with Bennett Jones in Calgary, who has worked with several companies interested in becoming EOTs.
Employee ownership can present challenges if the founder decides to no longer run the company and employees don't have the management skills or experience to take over. Staff may also need more financial literacy to understand balance sheets and other documents. Additionally, employee ownership is not necessarily for everyone, as some entrepreneurs may struggle to give up control of a company they built, and decision-making may slow down with a board of directors in charge.
Despite some bumps in the road, Schroeder is happy with the changes at Brightspot, including employee retention and attraction. The entrepreneurial spirit is growing within the company, and he expects some employees to start their own companies in the future, which he believes is incredible for the Canadian economy.
As more companies consider becoming EOTs, the future of this ownership model in Canada remains uncertain. The federal government's tax incentive is temporary, and its extension is not guaranteed. However, advocates like Justine Janssen, executive director of Employee Ownership Canada, argue that keeping businesses local is essential for the country's economic future.
