Employee Share Ownership Programs
Employee Share Ownership Program (“ESOP”) promotes investment by employees in their company. Retiring business owners can use an employee share ownership plan to transfer ownership of their company to employees by selling shares directly to their employees.
BC’s ESOP provides employees with a tax credit for making investments in their employers’ businesses. In most cases, investments can be made from or transferred to self-directed RRSPs, which can result in further tax benefits. The program also shares the costs of setting up a plan. The program is available to both privately held and publicly traded companies. Ministry staff is available to help along the way to provide sample plans and concrete examples of successful ESOP plan terms and guidance through the process from the initial consultation with employees to applying for tax credit certificates.
There are no fees payable upon registration of the ESOP plan or application for tax credits.
Tax Credits
The Employee Investment Act (BC) under section 7 provides employees with a 20% tax credit to be deductible against the Provincial tax payable in a year (section 13.1 Income Tax Act (BC)) for making investments in their employers’ businesses. There is a $2,000 tax credit limit per person per calendar year, which translates into a $10,000 investment. There is no life time limit on the amount of the tax credit.
The employee investor must hold the shares acquired for a period of 3 years. If the employee investor sells his or her shares prior to the end of the 3-year hold period, they will be required to repay all of part of the tax credits received on the shares, depending on the selling price.
Cost Sharing
The Government of BC will reimburse the company, or an employee group, 50% (up to $2,500 per calendar year) of the eligible costs of a professional advisor used in the establishment, registration or ongoing administration of an ESOP plan.
Any company with fewer than 150 employees is eligible to apply or any group of employees no matter the company size.
Eligibility – Company
Any private or public company is eligible as long as it meets the following requirements:
- incorporated or registered to do business in BC;
- with a BC payroll of at least 25% of total payroll; and
- with less than $500 million in assets.
Eligibility – Shares
The shares that employees may purchase under the Plan must be “equity shares” out of the company’s treasury. Equity shares are fully participating, voting shares not restricted in their right to share in the profits of the company or in the division of the company’s assets on dissolution and which are not limited as to risk.
The common shares of most companies will meet these requirements. Share certificates representing the ESOP shares must be sent to an authorized depository to be held in escrow for three years.
Eligibility – Employees
Employees wishing to invest under an ESOP plan on a tax-credit-eligible basis must be:
- BC residents;
- work an average of 20 or more hours per week for the company, and not already be major shareholders together with associates and family members of the company (10%+);
- Plans may require employees to work for the company for a qualifying period not to exceed two years. In some cases, employees who do not meet the above criteria may purchase shares under the Plan, but will not receive a BC tax credit.
The individual must purchase the shares after the registration of the ESOP plan with the Government of BC. Out of province employees are able to purchase shares under the registered ESOP plan but only BC residents are eligible for tax credits under the plan.