Published in Financial Post on March 30, 2022.
Canada will face an unprecedented transfer of wealth in the next five years as more than three quarters of small- and medium-sized business owners get set to exit their businesses, with billions of dollars of assets changing hands. With the right tools in place, this transition can be a catalyst to broadening Canada’s ownership class and propagating wealth among lower- and middle-income earners.
Canada’s public policy framework for business ownership does not promote alternative structures proven to lead to greater access to the personal wealth and retirement security opportunities that come with ownership. Employee Ownership Trusts (EOTs) have been embraced by the United States and the United Kingdom for their unmatched ability to share the benefits of ownership with those least likely to have it. As a bank that works with employee-owned businesses in the United States and Canada, we at BMO believe Canada needs to adopt policies that make it simpler and more attractive for business owners to sell to their employees, to match the opportunities available in other countries.
Employee ownership has a 45-year history in the United States, with employee-owners earning higher wages and enjoying greater job security and more retirement savings than their peers. Recent data from the National Center for Employee Ownership show that employee-owners have a whopping 92 per cent more net wealth than their non-employee-owner counterparts. This trend is especially true for young people, single women, visible minorities and parents raising young children.
Families earning low and middle incomes struggled to make ends meet long before COVID-19. The pandemic has exacerbated this issue and as the cost of living rises, the wealth disparity among Canadians continues to widen. In Canada, the wealthiest one per cent of families hold nearly 25 per cent of the country’s total net wealth, while the bottom 40 per cent hold just over one per cent. Existing options to break this cycle include building savings or taking advantage of RRSP-assisted tax savings. But perhaps the most impactful and accessible to this cohort, with the right tools in place, is employee ownership — where business owners are incentivized to sell to their employees when the time to transition comes, enabling employees to share directly in the success of the company and build wealth over the term of their employment.
One of the better-known examples of an employee-owned company is the American supermarket chain Publix. The chain has 1,200 locations across the Southeastern United States. Employees who work at least 24 hours a week receive shares equivalent to eight per cent of their pay. Upon retirement, employees can sell their shares back to the company. Several long-serving frontline workers have publicly disclosed that they cashed in their shares for over a million dollars when they retired. Overall, EOT participants in the U.S. have double the retirement savings as the average American and are twice as likely to plan to retire before the age of 60. Employee-owners report higher job satisfaction, lower turnover and higher job stability than their non-employee-owner counterparts.
While the personal wealth-building benefits for employee-owners are unmatched, EOTs also offer local economic benefits. Employee-owned businesses are more resistant to economic cycles, insulating communities from downturns and protecting local jobs. Because employee-owners typically live where they work, they are more likely than an external buyer to keep their business operating locally, supporting their communities and providing economic opportunity to local talent. A recent survey by John Zogby Strategies found that having an employee-ownership model in place before the worst of the COVID-19 crisis helped employee-owned businesses not only survive the economic downturn, but also take better advantage of growth opportunities than non-employee-owned counterparts.
For Canada to benefit from employee ownership, public policy change is needed. Today, implementing an employee ownership trust in Canada is difficult and expensive. Current tax treatment significantly reduces the value for both employees and owners, and legislative barriers prevent the U.S. model from being replicated. Drawing on the experience and success of other jurisdictions, we can create a made-in-Canada employee ownership program.
First, we need a legislative framework that makes employee ownership trusts accessible to business owners, with clear rules and a structure that is easy to implement. An “off-the-shelf” corporate form has helped create awareness and accessibility for business owners in the U.S.
Second, we need tax incentives that make employee ownership attractive for all parties. In jurisdictions where EOTs have been successful, governments have married legislative changes with tax incentives. Canada's current tax system makes employee ownership transitions less attractive than other forms of ownership. For Canada to reach the levels of employee ownership the U.S. has experienced and reap the benefits for our local economies, there must be financial incentives for sellers and companies to remain employee-owned over the long term.
Finally, we need oversight, ensuring the public interest is protected as well as the interest of employee-owners. This could include independent and fair corporate valuations before a transaction takes place and rules governing who can participate in an EOT and how they will benefit.
Without these tools in place, we should expect that exiting business owners will follow traditional routes of selling their companies when they retire. Instead, by choosing to encourage alternative pathways like employee ownership, Canada can take advantage of upcoming transitions and broaden the economic benefits for all.