Types of Employee Ownership

This is general information only—always obtain independent legal and tax advice for your situation.

Employee Ownership Trusts (EOTs)

An Employee Ownership Trust (EOT) is a Canadian succession model (enabled in 2024) that transfers a controlling interest (51%+) to a trust for the benefit of all employees.

How it works

• The owner or owners sell a minimum of 51% of the shares to the trust.
• Employees do not pay personally; the trust finances the purchase (e.g., vendor note plus future company profits, or external financing).
• The employees are represented by one or more trustee. Employee-beneficiaries must hold a minimum of 33% of the trustee seats.
• Employees typically receive profit-sharing distributions, although these may be rare until the debt is paid off. They can also have individual capital accounts that follow the price of the share as in the American ESOP.
• Distribution of profits and/or equity is done according to criteria for equitable application: hours worked, total compensation, tenure. Formulas can be different for profit and equity.
• Any person holding more than 10% of the shares cannot also be in the trust.

Benefits

• Values-aligned exit that preserves independence, culture, and jobs.
• Clear path to long-term, broad-based ownership.
• Current federal rules provide a targeted capital-gains incentive (up to $10M on qualifying sales)—confirm details with your advisor.

Best fit

• Healthy, cash-flowing SMEs; owners ready to step back and prioritize legacy and employees’ long-term welfare.

Learn more at Resources for Employee Ownership Trusts

Employee Stock Ownership Plans (ESOPs)

An ESOP lets employees earn or purchase shares over time, creating a direct equity stake.

How it works

• Shares can be granted (bonuses), purchased (payroll deductions), or acquired via options that vest over time.
• ESOPs often start as minority ownership, allowing a gradual transition while founders retain control (e.g., through non-voting or restricted share classes).
• Voting power depends on the number and class of shares held (employees may hold non-voting or restricted shares)

Benefits

• Aligns employees with company performance (dividends, share value).
  Improves retention and engagement (“ownership thinking”).
• Flexible for private and public companies; can be a first step toward broader employee ownership.

Best fit

• Owners seeking to reward and retain talent or phase succession without an immediate majority sale.

Phantom Equity

Phantom equity (synthetic equity/phantomstock) is a contractual bonus plan that mirrors ownership economics without issuing.

How it works

• Employees receive cash payouts linked to enterprise value, profit, or a liquidity event (per a written plan).
• No changes to the cap table; low legal complexity versus share plans.
• Can target leaders or be broad-based; time- or performance-based.

Benefits

• Creates ownership-like incentives and retention now, even if an ownership transfer (ESOP/EOT) comes later.
• In Canada, payouts are generally taxed as employment income when paid.

Best fit

• Owners who want alignment and retention without issuing equity today, or who want to bridge to a later ESOP/EOT.

Mutual Fund Trust (Registered Plans)

A Mutual Fund Trust (MFT) approach uses a trust that holds company shares, while employees hold units of the trust—often inside registered plans like RRSPs or TFSAs.

How it works

• The company issues or sells shares to an MFT.
• Employees acquire trust units (e.g., via payroll deduction or compensation), frequently held in RRSP/TFSA accounts subject to plan limits.
• The MFT aggregates ownership, distributes income/capital gains to unitholders, and may set liquidity windows for units.
• Voting/governance follows the underlying share classes the trust holds and the trust deed; employees are unitholders rather than direct shareholders.

Benefits

• Provides a tax-advantaged savings wrapper for employees (via registered plans) while creating exposure to employer equity.
• Useful where the company wants broad participation but prefers centralized ownership and administration through a trust.
• Can coexist with ESOPs or direct ownership and may help with liquidity management.

Best fit

• Employers seeking a structured, payroll-friendly path for employees to accumulate an equity-linked position within registered accounts, with centralized governance via a trust.

(Implementation involves securities, tax, and trust law—obtain professional advice on plan design and eligibility for MFT status.)

Worker Co-operatives

A worker co-operative is owned and democratically governed by workers—with the concept of one member, one vote.

How it works

• Employees become member-owners (usually after probation) by purchasing a membership share.
• Surplus is allocated under bylaws (often in proportion to hours worked) with limited returns on capital.
• Members elect the board and participate in key policies.

Benefits

• Deep employee engagement and workplace democracy.
• Strong community alignment; profits often reinvested locally or shared via patronage dividends.
• Federal rules set to provide the same targeted capital-gains incentive (up to $10M on qualifying sales) as the EOT—confirm details with your advisor.

Best fit

• Teams with a collaborative culture prepared to participate in governance.

More on co-ops: Canadian Worker Co-op Federation and Co-operatives and Mutuals Canada