How Canada’s 2024 Budget and draft legislation open the door to employee-led business transitions through worker cooperatives.

Succession planning just became more flexible—and potentially more lucrative.

While much of the attention on Budget 2024 focused on Employee Ownership Trusts (“EOT”), a lesser-known measure may offer similar tax advantages through a different employee ownership model: the worker cooperative corporation (“WCC”).

With draft legislation released in August 2024, business owners now have an opportunity to access up to $10 million in capital gains exemptions when selling to a WCC, but only if strict conditions are met. This article explains how WCCs function, how they compare to EOTs, and the requirements for qualification.

What is a worker cooperative corporation?

A WCC is a business model in which the employees collectively own and manage the company. Unlike EOTs, WCCs operate on democratic principles. Employees in a WCC have direct involvement in decision-making and governance, with equal voting rights. In this model, ownership is directly tied to membership, with employees holding shares in the WCC.

Worker cooperatives in Canada are governed by both federal and provincial laws. Federally, the Canada Cooperatives Act (the “CCA”) applies to cooperatives that operate across multiple provinces. Provincially, different jurisdictions may have their own laws governing cooperatives. For instance, in Alberta, the Alberta Cooperatives Act (the “ACA”) applies to cooperatives operating within the province.

The CCA specifies that membership shares must be issued to members, each holding the minimum number of shares outlined in the cooperative’s bylaws. Membership shares confer equal rights, such as receiving dividends and a share of the cooperative’s remaining property upon dissolution.

The ACA contains specific provisions about membership, such as requiring that at least 80% of the members be permanent employees or contractors of the cooperative. Additionally, the ACA permits cooperatives to hire non-member employees, but within five years of incorporation or acquiring a business, at least 75% of their permanent employees or contractors must be members.

Benefits of worker cooperatives

  • Democratic control: Employees have a direct say in business decisions, fostering transparency and shared responsibility.
  • Equitable profit distribution: Profits are typically shared equally among members.
  • Job security & stability: WCCs prioritize long-term sustainability, offering employees greater job security.

Comparing EOTs and worker cooperatives

While both EOTs and WCCs promote employee ownership, they differ in several key areas, particularly in governance and ownership structure. EOTs have trustees who hold shares in trust for employees, offering indirect ownership to the employees while being managed by the trustees. In contrast, WCCs provide direct ownership to employees, who participate in decision-making through a “one-member, one-vote” system.

Profit distribution also differs between the two models. In an EOT, employees typically receive bonuses, whereas in a WCC, profits are generally distributed among members based on their remuneration or labour contributions. Additionally, EOTs are governed by a board of trustees who focus on business continuity, while WCCs involve employees in active governance.

WCC vs. EOT: Which model is right for you?

An EOT is ideal for business owners who want to ensure a stable succession plan and provide long-term benefits for employees without requiring them to buy shares directly. This model offers significant tax advantages, preserves company culture, and allows for smooth transitions with minimal governance responsibilities for employees. EOTs are particularly suitable for established businesses focused on continuity and financial stability.

In contrast, a WCC is best suited for businesses that prioritize a democratic work environment, equitable profit sharing, and collective governance. Worker cooperatives are ideal for startups, socially driven enterprises, or businesses where employees are committed to both ownership and management. This model empowers employees with direct decision-making authority and is well suited for businesses that value engagement and shared responsibility.

How to qualify for the $10M capital gains exemption

To achieve the tax benefits discussed above, the business transfer must be pursuant to a “qualifying cooperative conversion,” which is a transfer of shares of a predecessor corporation to a WCC that satisfies the following conditions:

  1. The WCC is resident in Canada.
  2. The WCC was formed under federal or provincial legislation that provides for the establishment of cooperative corporations.
  3. The WCC is established for the purpose of providing employment to its members.
  4. At least 75% of the WCC’s employees (other than employees who have not completed an applicable probationary period, which may not exceed 12 months) are holders of a membership share of the WCC.
  5. Each initial membership share provided to an employee is:
    1. issued in exchange for a nominal amount determined in the same manner for all members; and
    2. offered to each employee following the completion of an applicable probationary period, which may not exceed 12 months.
  6. At least one-third of the directors of the WCC are qualifying cooperative workers of the WCC.
  7. Not more than 40% of the directors of the WCC owned 50% or more of the outstanding shares or debt of the predecessor corporation.
  8. The by-laws of the WCC provide a procedure for allocating, crediting, or distributing any surplus earnings of the WCC, including a requirement that not less than 50% of those earnings be paid on the basis of the remuneration earned by the qualifying cooperative workers from the WCC or the labour contributed by those members to the WCC.

Key takeaways for business owners

  • A new tax incentive is available: A capital gains exemption of up to $10 million is now proposed for the sale of shares to a WCC under specific conditions between 2024 and 2026.
  • Employee ownership options are expanding: WCCs offer a democratic, direct ownership structure as an alternative to the more trustee-driven EOT model.
  • Governance and culture matter: While EOTs are well-suited for business owners seeking continuity and passive ownership, WCCs may better serve values-driven organizations that prioritize employee participation and equity.
  • Strict eligibility rules apply: To qualify, WCCs must meet eight detailed legislative criteria, including employee ownership thresholds, board composition, and profit distribution mechanisms.
  • Act now—uncertainty ahead: With a federal election set for April 2025, the future of this draft legislation is unclear. Business owners interested in WCC conversion should seek legal and tax advice sooner rather than later.

With the Canadian federal election scheduled for April 28, 2025, it’s unclear whether the draft legislation on WCCs will be implemented or abandoned by the incoming government. If the draft legislation is implemented, it will offer business owners yet another option for transitioning their business.

Miller Thomson’s Corporate Tax Group can help you assess whether a worker cooperative model is the right fit and guide you through the qualification process.

Contact us today to start planning your next chapter with confidence.