Aaron Schroeder’s firm was not actively on the market for sale, yet it consistently attracted offers from various entities. Over the years, the Vancouver-based climate engineer received numerous unsolicited bids, with larger companies and hedge funds, particularly those in the U.S., being the primary suitors.
When Schroeder eventually decided to sell Brightspot Climate, an engineering consultancy with branches in Vancouver, Calgary, and Toronto, he opted for a unique approach. He established a special trust to make all 40 of his employees owners without requiring any upfront financial investment from them.
Employee ownership models have been in existence in Canada for many years. However, in 2024, amendments to the Income Tax Act introduced a new option known as an employee ownership trust (EOT). Since then, four companies, including Brightspot, have transitioned to this ownership structure.
This shift to employee ownership comes at a crucial time as Canada faces a significant number of retiring baby boomer entrepreneurs and aims to strengthen the economy amidst trade challenges with the U.S.
Schroeder’s motivation for the transition was to reward his dedicated employees, prevent potential job losses, and maintain the Canadian identity of the business. He expressed concerns that selling to a U.S. company could lead to a loss of intellectual property and cultural identity.
An EOT functions as a trust holding company shares on behalf of employees. The trust funds the purchase of the business, with the owner being repaid over time from company profits. Employees do not purchase shares but are entitled to profit-sharing.
For companies considering EOT conversion, time is of the essence due to a tax break offered by the government for selling businesses to employees, which expires soon. The future of EOTs in Canada hinges on the extension of this tax incentive.
With the potential transformation of Canada’s business landscape, as outlined in a report by the Business Development Bank of Canada (BDC), many companies are slated for ownership changes, representing significant revenue shifts over the next five years.
A $10-million capital gains tax exemption was introduced by the federal government to enhance the financial appeal of EOTs for business owners. This tax incentive has been pivotal in driving interest and participation in the employee ownership model.
The success of EOT conversions, such as the cases of Brightspot Climate and Grantbook, underscores the benefits of employee ownership in fostering alignment, employee engagement, and a shared sense of direction within organizations.
As more companies contemplate transitioning to EOTs, there are hopes for an extension of the tax incentive to further incentivize local ownership and bolster the country’s economic foundation. Despite challenges, the positive impacts of employee ownership on businesses and the broader economy are increasingly recognized.