'Casual staff or CEO, everyone gets the same': How a social services agency transitioned to employee ownership

A social services agency is the latest to benefit from Canada’s Employee Ownership Trust legislation. 

Taproot Community Support Services—a privately owned B-Corp formerly known as WSJ Canada—transitioned to becoming fully employee-owned in September this year. 

The move means that each of Taproot’s 750 employees will receive regular dividends tied to the company’s economic performance. 

Many who will benefit from this transition to employee ownership would not typically be business owners in Canada, said Jennifer Williams, founder of Firefly Insights, which supports businesses with succession planning and employee ownership transitions.

“It shows a model of how we can both do good and run a business in a scalable way in social service provision, and therefore also in other industries,” Williams said. 

Supported by Employee Ownership Trust legislation

“One of the main barriers we hear from business owners is ‘I can’t sell my business to my employees because they can’t afford it,” Williams added. 

This is where a recent policy change, the Employee Ownership Trust (EOT) legislation introduced in Budget 2023, comes in. Business owners can sell their shares to a trust, meaning that they can exit the business, and employees are not required to come up with the cash upfront. 

The trust becomes a shareholder in the company, Williams added. 

To transition into an EOT, the seller or sellers must transfer at least 51 per cent of the business to the trust. In all cases of a company transitioning ownership to an EOT, employees will “hold a majority of the voting shares of the corporation so that it has de jure control of the corporation,” write the Canadian Tax Foundation. 

Grantbook, a technology consultancy firm dedicated to the philanthropic sector, became Canada’s first organization to be majority-owned by an EOT. Also, a certified B-Corp, Grantbook already had an employee share ownership plan in place. 

In Taproot’s case, the company has opted to transfer 100 per cent of the business to the EOT. 

Each employee is automatically a beneficiary of the trust. When a new employee joins, they become part of the trust, and when an employee offboards, they are no longer a beneficiary. 

Taproot has decided that profit-sharing dividends will be based on each employee’s hours rather than their existing remuneration package. 

“Even if you’re casual staff or you’re the CEO, everyone gets the same formula,” said CEO Mike Fotheringham. “There is no beneficial treatment for more senior employees.

“We decided that for a number of reasons: our casual staff are really integral to our functioning […] and we have other ways of rewarding managers and leaders in the organization,” he said. 

“To me, that speaks social justice,” said Andrew Achoba, program director at Taproot, working in northern Alberta’s Slave Lake, High Prairie, Peace River and Fort McMurray regions. 

Achoba also now has a secondary role: he is one of three trustees of Taproot’s EOT, representing the interests of the 750 employees. 

Each of the three trustees has been chosen to serve a pre-set term of different lengths. Going forward, employees will nominate trustees. 

“You’re now going to run your company almost like a tiny public company where there is a lot more transparency,” said Justine Janssen, interim executive director of Employee Ownership Canada. “You have to lay out a plan, say what you’re going to do, and show progress against that plan, [as well as] implications for owners.”

Getting the team ready

Even before Taproot began considering the EOT path, Fotheringham wanted to bring more financial transparency into the organization. He began hosting quarterly meetings about the company’s finances to not only give more context around some leadership decisions but also “allow employees to get a bit more of an ownership mindset.”

Fotheringham said Taproot is one of a handful of for-profit entities in the social services space. It launched when the British Columbia government privatized some social services and awarded some of the contracts to non-profits. 

Fotheringham acknowledges that the EOT legislation—and particularly the $10 million capital gains tax exemption, which is an incentive to sellers—allowed Taproot to explore this business succession method. 

“We had gone to a share sale event under our current shareholder agreement and it didn’t garner as much interest as we had hoped,” he said. 

“One of the dilemmas of our success is that we own 17 properties to support our programs. These properties have gone up in value over the last 15 to 20 years and so our share price increased to a point where it made it very difficult for our employees to buy in.”

Taproot worked with Rewrite Capital Partners, a consultancy dedicated to transitioning organizations into employee ownership, and Social Capital Partners. The process took nine months in total. 

Mishka Facey, a program manager at Taproot, said employee ownership is a great sell to prospective hires, especially in a field where employee burnout is commonplace. 

“As a manager who struggles to hire sometimes because we’re in the North, it is an additional benefit that sets us apart from the other social services,” Facey said. 

“When people come to social services, they tend to say: ‘You’re a bleeding heart. You’re not going to make any money [and] there is no ownership.’ But I think moving to an EOT is changing the narrative.

“We can be a bleeding heart and still want to have the rewards.”

A black hole in the legislation

Employee Ownership Trusts allow employees to become business owners without putting their own capital at risk. It does so by allowing the EOT to “borrow money from the underlying business to fund all or part of the purchase of shares,” according to the accounting and tax firm BDO. 

“The most significant tax incentive available to business owners who sell to an EOT is that the first $10 million in capital gains realized on the sale of shares to an EOT in 2024, 2025 and 2026 is exempt from tax,” the firm wrote. 

This exemption incentivizes owners to sell their shares in a business without being subject to capital gains tax, and “since these sales are typically paid out over time rather than in a lump sum, the exemption makes employee ownership financially viable,” wrote Senator Tony Loffreda in a Globe and Mail article.

However, as Senator Loffreda and various others have warned, the tax exemption’s expiration date could set the EOT structure up for failure. With the exemption due to expire at the end of 2026 and employee ownership transition processes normally taking upwards of a year to complete, many are worried that this exemption could be lost if not addressed in the next federal budget. 

Williams and others have also been lobbying to remove the sunset clause on the tax exemption, she said. 

“If a business owner goes to sell their business to a third party, they will typically get 70 or 80 per cent of that money on closing,” she said. 

“In the Employee Ownership Trust, they’re probably only getting about 50 per cent on closing, leaving the other 50 per cent at risk while at the same time giving up control.” 

Business owners, Williams said, are left hoping that they will receive the remainder of the value of the business over the subsequent years. 

Although business owners are likely to have higher returns if they sell to private equity or to U.S. buyers, there are no tax exemptions in those situations. The exemption acts as a further incentive to transition to an EOT, Williams said. 

Canada faces economic sovereignty challenges on multiple fronts. Not only is a large proportion of business owners looking to exit their businesses in the next decade, but U.S. buyers usually purchase many, Williams said. That leads to a transfer of wealth and ownership outside Canada. 

“Let’s enable that [tax exemption] out in perpetuity. Let’s say that this is a smart strategy for Canadian economic and political sovereignty.”

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