In Budget 2022, the Federal Government made a number of high-profile announcements, including a tax-free first home savings account, a ban on foreign investment in Canadian housing, strengthening the general anti-avoidance rule and a new 30 per cent tax credit for critical mineral exploration. One announcement that may not have received quite the same amount of attention, was the proposal to introduce a new special purpose trust, the “Employee Ownership Trust”, under the Income Tax Act (Canada), to encourage employee ownership of Canadian businesses.
Employee ownership trusts encourage employee ownership of a business, and facilitate the transition of privately owned businesses to employees. Budget 2021 announced that the government would engage with stakeholders to examine what barriers exist to the creation of these trusts in Canada. These consultations revealed that the main barrier to the creation of employee ownership trusts in Canada was the lack of a dedicated trust vehicle under current tax legislation tailored to the requirements of these structures.
Budget 2022 proposes to create the Employee Ownership Trust: a new, dedicated type of trust under the Income Tax Act (Canada), to support employee business ownership in Canada.
Both the United States and the United Kingdom support and encourage employee ownership through these types of arrangements, along with the corresponding tax legislations to facilitate their use.
With the future release of draft legislation, we will see the scope and degree to which employees and owners of private businesses in Canada, could benefit from the use of Employee Ownership Trusts.
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