Overview
Preliminary draft laws to facilitate creating worker possession trusts (EOTs) was launched within the 2023 federal budget. After session, modifications to the EOT guidelines have been made in a legislative package deal launched on August 4, 2023, and in Invoice C-59, Fall Financial Assertion Implementation Act, 2023. Notable modifications in Invoice C-59 included permitting for an EOT to distribute shares of a qualifying enterprise to a beneficiary, and altering the definition of qualifying enterprise to take away the requirement that every one or considerably the entire truthful market worth of the company’s belongings be attributable to belongings utilized in an lively enterprise carried on primarily in Canada. Moreover, the 2023 fall financial assertion (2023 FES) proposed a short lived exemption for the primary $10 million in capital positive factors realized on the sale of a enterprise to an EOT.
The 2024 federal price range supplies extra particulars on the $10 million exemption from taxation on capital positive factors realized on the sale of a enterprise to an EOT that weren’t included in 2023 FES or Invoice C-59, and likewise proposes to increase a qualifying enterprise switch (as outlined for functions of the EOT guidelines) to incorporate the sale of shares to a employee cooperative company assembly sure definitions within the Canada Cooperatives Act.
Who will this have an effect on?
The $10 million exemption from taxation on capital positive factors will have an effect on enterprise house owners by offering a further tax incentive to contemplate when planning for enterprise succession and retirement. The EOT guidelines additionally have an effect on workers and employee cooperative companies by facilitating worker possession of a enterprise in a tax-efficient method.
Key options
The $10 million exemption from capital positive factors on the sale of shares to an EOT can be accessible the place sure circumstances are met. The exemption requires that the person, a private belief of which the person is a beneficiary, or a partnership by which the person is a member, disposes of shares of an organization (aside from an expert company) pursuant to a transaction that could be a qualifying enterprise switch (as outlined within the proposed EOT guidelines). Moreover, the belief buying the shares can’t already be an EOT or the same belief with worker beneficiaries, and 90% of the beneficiaries of the EOT should be resident in Canada instantly after the switch. Just like the lifetime capital positive factors exemption (LCGE) accessible on the disposition of certified small enterprise company shares, the EOT exemption imposes sure necessities on possession of shares and involvement with the enterprise previous to the switch:
- All through the 24 months instantly previous to the switch (i) the transferred shares will need to have been owned completely by the person claiming the exemption (or a associated particular person or a partnership by which the person is a member) and (ii) over 50% of the truthful market worth of the company’s belongings will need to have been used principally in an lively enterprise.
- At any time previous to the switch, the person (or his/her partner or common-law companion) will need to have been actively engaged within the enterprise on a daily and steady foundation for a minimal interval of 24 months.
The exemption for as much as $10 million in capital positive factors may be claimed by a number of people on the identical switch, however the complete exemption claimed can’t exceed $10 million, and the people should agree how the exemption is allotted. The exemption can’t be claimed by a belief. Additional, any exempted capital positive factors can be topic to the choice minimal tax (AMT) at an inclusion price of 30%, which matches the AMT inclusion price for capital positive factors eligible for the LCGE.
There are particular disqualifying occasions that may trigger the exemption to be unavailable or denied, and will trigger tax legal responsibility for the EOT following the switch. A disqualifying occasion would happen if (i) an EOT loses its standing as an EOT or (ii) lower than 50% of the truthful market worth of the shares of the enterprise is attributable to belongings used principally in an lively enterprise originally of two consecutive taxation years. The EOT can be deemed to understand a capital achieve equal to the whole quantity of exempted capital positive factors except the disqualifying occasion happens inside 36 months of the switch, by which case the exemption just isn’t accessible and is retroactively denied for the person if it has already been claimed.
An election is required to ensure that a person to say the exemption whereby the EOT (and any company owned by the EOT that acquired the shares) can be collectively and severally, or solidarily, accountable for any tax payable by the person in circumstances the place a disqualifying occasion has occurred inside 36 months of the switch. The conventional reassessment interval of a person claiming the exemption can be prolonged by three years for the exemption.
Lastly, qualifying enterprise transfers for EOT functions can be expanded to incorporate the sale of shares to a employee cooperative company assembly sure definitions within the Canada Cooperatives Act. Promoting a enterprise to a employee cooperative would permit a person to say the $10 million exemption, and would even be eligible for the prolonged 10-year capital positive factors reserve and the 15-year exception to the shareholder mortgage guidelines which are in any other case accessible on a qualifying enterprise switch to an EOT.
The $10 million exemption from taxation on capital positive factors realized on the sale of a enterprise to an EOT would apply to qualifying disposition of shares beginning January 1, 2024, and ending on December 31, 2026.
How we may help
The $10 million exemption from taxation on capital positive factors on a sale to an EOT supplies a further incentive for enterprise house owners contemplating retirement and succession planning for his or her Canadian companies. Cautious planning will likely be required to say the $10 million exemption and keep away from subsequent tax legal responsibility for the person or the EOT on account of a disqualifying occasion. This complexity can be along with the planning wanted to adjust to the proposed EOT guidelines, and the associated tax, belief and employment necessities wanted for an EOT construction. Norton Rose Fulbright may help you assess whether or not an EOT could also be proper for your online business and worker group.
