STANDING COMMITTEE ON FINANCE
COMITÉ PERMANENT DES FINANCES
[Recorded by Electronic Apparatus]
Tuesday, June 5, 2001
The Chair (Mr. Maurizio Bevilacqua
I call the meeting to order and welcome
everyone here this afternoon.
This is one of the round tables we decided to have.
It's an issue members are interested in, the
ownership plan. It's come up quite a few times. Even
in my days with Human Resources Development, when I was
parliamentary secretary, a lot of people were talking
about this issue, and I'm sure it's going to be one we
will debate when we have to make recommendations to the
Minister of Finance for the next budget.
I want to welcome, from the Crocus Investment Fund,
Sherman Kreiner, president and chief executive officer,
and Robert Hilliard, chairman of the board. I also
have Nick Logan, president of National Leasing Group
Inc.; from ESOP Builders Inc., Perry Phillips; and from
the Employee Share Ownership and Investment
Julia Markus, executive director, and John Kidder,
Welcome. You've all appeared before the finance
committee. You have five to seven minutes to make your
presentations, and then we'll get to the Q and A.
We'll begin with Sherman Kreiner.
Mr. Sherman Kreiner (President and Chief Executive
Officer, Crocus Investment Fund): Thank you. Good
afternoon, Mr. Chairman, and members of the committee.
Crocus Investment Fund is a Manitoba labour-sponsored
fund with nearly $200 million in assets and 30,000
The purpose of my remarks today is to encourage your
committee to initiate appropriate tax law and related
legislative changes so as to increase employee
ownership of Canadian companies. We are specifically
requesting appropriate legislative changes to
facilitate the creation of employee benefit trusts
modelled on U.S. employee stock ownership plans, or
ESOPs. In the U.S. these trusts are designed to
leverage corporate assets to borrow acquisition capital
for the benefit of the firm's employees. A broad-based
group of company employees become owners through a
mechanism that requires no out-of-pocket investment by
employees. The U.S. framework offers tax incentives to
shareholders who sell shares to employees in this
fashion, to the employee-owned companies themselves to
repay the debt in pre-tax dollars, and at times to
lenders who provide ESOP financing. ESOPs have been
extremely successful in the United States, where more
than 10% of all corporate equities are owned by
employees and business productivity is extremely high.
The benefits of employee ownership are significant.
Shared wealth creation can close the increasing gap
between rich and poor more substantially than improved
employment opportunities alone. Employee ownership can
be a valuable tool in our efforts to close the
productivity gap. Employee-owned companies with
participative management outperform conventional
companies with regard to productivity, sales growth,
and employment growth. Employee ownership is an
effective mechanism for intergenerational transfer of
family-owned businesses, and it also ensures that
decisions affecting local businesses are made locally.
In addition to the economic benefits associated with
employee ownership, we believe an analysis of return on
taxpayer investment associated with ESOPs would be
extremely positive. Newer studies in the United
States, including an extremely comprehensive study in
Washington State in 1993, continually confirm these
results. Interest in employee ownership in Manitoba is
quite high. Among the 55 current Crocus investee
companies, broad-based employee ownership plans are in
place at 20, including, among others, Cando
Contracting, Wellington West Capital, Online Business
Systems, and National Leasing Group.
Arthur Andersen in the National Post recognized
the latter three of these companies as being among the
50 best-managed private companies in Canada this past
year. You'll hear from Nick Logan, president of
National Leasing, in a few moments. I also have
letters of support with me today from Angus Reid,
president of the former Angus Reid Group, recently
purchased by Ipsos, the ninth-largest market research
firm in the world; David Friesen, president and CEO of
Friesens Corporation, a leading Canadian printing
company based in Altona, Manitoba; Terry Smith, CEO of
the Boyd Group, a large Manitoba-based auto repair
company with locations throughout Canada and the U.S.;
and Brian Klaponski, president of Carte International, a
Manitoba manufacturer of electoral transformers
distributed in North America and overseas. These are
all local Manitoba companies that are committed to
employee ownership and have implemented employee
ownership plans through their relationship with Crocus.
There are numerous challenges associated with
establishing employee ownership in Canada, but none is
greater than the lack of specific ESOP legislation.
Because Canada has no ESOP legislation, the plans being
used to date jury-rig other employee benefits
structures to create employee ownership. In some
circumstances where we would like to create employee
ownership the use of these structures is flatly
prohibited by existing law. In other cases the
structures used are unnecessarily complex.
We think the U.S. experience can be successfully
adapted to Canada. For Canada, it is clear that
legislative changes and associated tax treatment must
be consistent between Ottawa and the provinces. With
this in mind, we have been exploring a strategy under
which Manitoba would also undertake a tax law change,
providing preferred tax treatment for ESOPs under
provincial law. Discussions with the Manitoba
government have been positive. A letter forwarded
today by Manitoba finance minister Greg Selinger to
federal finance minister Paul Martin reads, in the
For some time governments in Manitoba have viewed
employee ownership as an important tool to retain and
expand business in our province. The Crocus Investment
created with a mandate that included promoting employee
It is time that Canadian governments looked
closely at other mechanisms to promote employee
ownership. There are several successful examples in
North America that indicate opportunities for success.
In particular, Employee Stock Ownership Plans (ESOP)
deserve serious study.
Here in Manitoba our officials
have begun to review ESOPs to see if they are feasible
in our province. I also understand that you have
expressed some interest in ESOPs during a recent visit
to Manitoba. To this end it is possible we could
achieve greater success if our governments worked
together cooperatively on possible options.
At Crocus we believe strongly that successful
implementation of new employee ownership legislation in
Canada and the provinces will benefit all Canadians.
Accordingly, we encourage you to consider the
significant merits of this proposal.
I now call upon Rob Hilliard, the chair of our board
and president of the Manitoba Federation of Labour.
The Chair: Thank you.
Mr. Rob Hilliard (President, Manitoba Federation of
Labour): Thank you for the opportunity to address the
committee in support of a proposal to undertake
legislative changes to facilitate expanded employee
ownership in Canadian companies.
My remarks and involvement today are as the president
of the Manitoba Federation of Labour, although I am
also chair of the board of directors of the Crocus
The origin of the Crocus Investment
Fund lies in a resolution that was adopted in 1983 at a
convention of the Manitoba Federation of Labour, and
from that day onwards members of the Manitoba
Federation of Labour's leadership played a central role
in shaping the fund. From the outset the labour
movement pursued this project with two central and
interlinked goals, job creation in Manitoba and the
expansion of employee-owned enterprises. We are
pleased with the significant job creation that has
resulted in Manitoba, and enthusiastic about the
demonstrated benefits for workers associated with
In my role as board chair of the Crocus Investment
Fund, I have had the opportunity to witness the real and
direct benefits to the 2,500 employees in both
unionized and non-unionized Crocus investee companies
where it has been entrenched.
One of the challenges in cascading employee ownership
down to the rank and file level is that employees often do
not have the personal resources to make a significant
investment in their own company. Yet the research
evidence is quite clear in demonstrating that positive
business and job satisfaction outcomes associated with
employee ownership are most pronounced when plans are
broad-based and create a significant level of ownership
for employees. Too often the few employee ownership
plans created in Canada are limited to senior
The framework being proposed by Crocus overcomes this
skewed result. The work of the Crocus Investment Fund,
with many of its investee companies, has served to
reinforce the MFL's commitment to the concept of
employee ownership. It is clear that companies with
employee ownership are more productive, and therefore
more likely to remain competitive and successful in the
future. This means more job security. In an
increasingly competitive world, this is an important
benefit for all Canadians.
Equally important for the labour movement, successful
employee ownership can also provide workers with
additional wealth that can serve multiple needs in
Canadian families. To provide context, in the U.S.
experience the average employee will accumulate an
ownership stake equal to twice annual earnings within
ten years. This new wealth is significant for
employees. In our view, it is important that it not be
seen as a substitute for current wages or pension
The Manitoba Federation of Labour is supportive of
legislative changes that facilitate broad-based
ownership opportunities for workers in Manitoba
Thank you for your time and consideration.
The Chair: Thank you very much, Mr. Hilliard.
We'll now hear from Perry Phillips of ESOP Builders
Mr. Sherman Kreiner: Excuse me, but is there an
opportunity for Nick Logan to speak?
The Chair: Absolutely. Would you like to follow?
Mr. Nick Logan (President and Chief Executive
Officer, National Leasing Group): Sure. Thank
you, Mr. Chairman, and members of the committee.
My name is Nick Logan. I'm the president and CEO of
the National Leasing Group. I'm pleased to offer the
support of our company to this proposal, and to be a
living testimony that these ideas actually work and
The Crocus Investment Fund has been a shareholder in
the National Leasing Group since 1996. At the time, it
funded a successful employee ownership plan. Today
approximately 50% of our 170 employees are owners. This
includes employees at all levels of the organization.
For National Leasing, the benefits have been long term
In today's marketplace, the key to success is the
ability to attract and retain quality employees. At
National Leasing we have been extremely successful in
both areas. The turnover rates among staff are lower
than the industry average. We have consistently been
able to attract the quality staff necessary to support
our significant growth in each of the past several
We demand high performance and get it. Shareholders
are pleasantly surprised each year, as both their
profit sharing and share value reward them for their
extra efforts or late nights. Growth has been in
excess of 20% per year. We have met our board's ROE
expectations each year. At the same time, I think
we've won the productivity battle against our
While all of our success cannot be directly attributed
to employee ownership, it is my personal belief that
it is a
key factor. We have not only embraced the concept, but
are studying ways to expand it. Over the years I have
encouraged my colleagues to think like owners, not
like line staff.
I have to tell you, it has been a lot easier working
with owners over the last four years, as we made the
transition from a completely paper-driven company in
1997 to a completely electronic work-flow today.
Owners expect change. They thrive on it. In fact, I
think they demand it.
This past year our director of human resources
completed a certificate program in participative
management that was started by Crocus in cooperation
with the University of Manitoba. While skeptical at
first, this individual found the experience
tremendously rewarding. Our company has already seen
the value of her expanded knowledge. This experience
reinforced our belief that the combination of employee
ownership and participation in management
decision-making is a formidable combination in
A major challenge for National Leasing initiating
employee ownership was the uncertainty associated with
the tax mechanics. Any structure that involves tax
must be certain. What would happen if we had to undo
the plan at any time? It would have been disastrous.
For us, it would have been beneficial if legislation
and tax treatment were in place to eliminate the
concerns and even widen the selection of options
Our society, through its government legislation, needs
to say out loud that we believe, support, and encourage
the principle of employee ownership. Many times I have
spoken to colleagues in other companies across Canada
about employee ownership. In the discussions, a common
barrier to the concept of employee ownership is the
financing of such a program.
It is clear from our experience that appropriate
financial incentives should support existing employees
to access ownership, either by adding new equity or
facilitating the transition of ownership from one
generation to another. It is not realistic to expect,
as our banks do, the existing ownership should finance
the next period for the new owners.
I am the current chairman of the Canadian Finance and
Leasing Association. I know our business well. I
want to tell you the major issue at our company is the
potential for a takeover by U.S. competitors. Today
our competitors are four multinational, global
organizations. At various times, all have made offers
to buy our company.
An employee ownership base would not be as tempted to
sell out to another owner, as would another ownership
structure. As the only substantial Canadian company
left in our industry, I am very sensitive to our
longevity. At the current time, we are only 14%
employee-owned. It is my job to see the base is
expanded to ensure our future.
Thank you very much.
The Chair: Thank you, Mr. Logan.
We'll now go to Julia Markus and John Kidder of the
Employee Share Ownership and Investment Association.
Then we'll go to Perry.
Ms. Julia Markus (Executive Director,
Employee Ownership and
Incentives Association): Thank you.
I'd like to thank Mr. Bevilacqua, Mr. Cullen, and the
other members of the committee for allowing us to come
and delve into employee ownership for a little bit
longer. All of us are very happy for the opportunity
to do so.
I'm Julia Markus. I'm executive director of
what's now actually called the Employee Ownership and
Incentives Association, Mr. Chair. We've broadened to include
stock options and share purchase plans. We are a
We now have close to 300 member companies from coast
to coast, ranging from the smallest to the largest,
with tens of thousands of employees in the country.
They come to us because there's so much interest in
employee ownership. All of this has happened in the last
five years. We haven't solicited the members, they've
Interestingly, we're headquartered in British
Columbia, not in Toronto, believe it or not. We're
there because British Columbia was the first province
to introduce employee ownership tax credits 12 years
I think it's important to note ESOP tax incentives in
B.C. have never been a political issue. They were
brought in by the Social Credit government and
continued by the NDP government. The Liberal finance
critic was one of our founding board members. We
expect it to continue. There has never been a problem
with employee ownership in that aspect.
Today I'd like to address the basic policy question
of why we should have employee ownership in Canada in a
larger way than we do now. I'm going to try to offer
two suggestions as starting points.
But before I get into it, I think it's quite pertinent to
this discussion to review how employee ownership, as a
concept, was started and what it was intended to do.
Louis Kelso, an American lawyer and investment
banker, believed capitalism would benefit more people
if employees were also able to own equity. He
envisioned equity as an employee retirement benefit,
where there would be less need for government
assistance when people retired.
However, although we have RRSPs in Canada, he wasn't
thinking along those lines. He felt, if share
ownership was limited to what employees could afford to
invest, too many people would be left out. As an
investment banker, he knew there would be great
interest if companies were able to borrow money,
ostensibly to buy shares for employees, that could be
used for other business purposes as well. If they were
permitted to treat the cost as a business expense, the
stock would go to an employee trust. It would be held
on behalf of the employees until they left the company
or, ideally, retired.
Once the U.S. finally enacted its first of many
federal ESOP tax incentives in 1974, they grew quickly
to, as you can see, 11,000 ESOPs, with shares given to
over ten million employees throughout the country.
As employee ownership grew, research began to uncover
unexpected side effects of greater employee commitment
It led to increased productivity,
lower staff turnover, and ultimately faster-growing
companies that were generating more new jobs and
salaries and benefits to their
If you think about that employee response,
it's not hard to understand in the context of the
difference between renting a house and owning one.
For example, imagine you rent a summer cottage on the
lake for your vacation. You relax and enjoy yourself,
and you tidy up when you leave. But cleaning,
maintenance, and repairs are definitely not your
problem; they're the owner's responsibility.
Now imagine that you bought that cottage. Right away
you decide to install a wraparound veranda and do some
gardening. The next year you decide to upgrade the
dock. Think about this: Do you resent the extra work?
No, because you know the investment is going to
increase the value and that you ultimately will benefit
from that. Being an employee-owner brings about a very
similar transformation, and I've seen it in many
Does employee ownership actually increase employment
and strengthen Canadian business? Yes. Job creation
is unquestionably one of our priorities as a country,
and employee ownership is undeniably one of the
Here are some of the results. One
statistic, according to the British Columbia
government's own data, is that 8,000 jobs are a direct
result of the government-sponsored ESOP program,
which was at a cost of only $6 million in tax credits
over 10 years. Generally speaking, in terms of how
employee ownership strengthens businesses, ESOP
companies will grow a third larger than their non-ESOP
competitors, according to one U.S. study.
Clearly, employee ownership increases job creation,
which indicates a thriving business. But growth in a
business also takes money, and for private companies,
financing is traditionally harder to come by in Canada
than it is south of the border. So can we finance
business growth with employee ownership? Yes, and
there are two ways of doing this.
The first, which is already in use, is an employee
share purchase plan, which, even though we say ESOP in
Canada, is actually an ESPP. This sells shares to
employees. In a typical private company, these plans
can generate up to a few hundred thousand dollars for a
small business with each share offering. In British
Columbia, over $30 million has been raised by 70
companies using the government ESOP incentives, which
provide employees with a 20% tax credit for the value
of their investment.
It's my contention that ESPPs have similar objectives
to labour-sponsored investment funds, such as Mr.
Kreiner's Crocus Fund, and that they have the
advantage of being able to offer a 15% federal tax
incentive. To be equitable, ESPPs
should receive the same treatment and should be able to
offer that same 15% tax credit. That alone
will encourage provinces without their own ESPP
programs to create them, and it would improve the
take-up in the provinces that do, which at this time
are B.C., Saskatchewan, and, in its own way, Nova
The second method for financing businesses with
employee ownership refers to a model similar to what
Mr. Kreiner has told you about. That's to create
legislation equivalent to that used in the United
States and allow companies the very simple action of
being able to deduct the interest portion of loans used
to buy shares for an employee benefit plan that does
not require any investment on the employee's part.
Both these methods have value, and they benefit all
parties. They're not exclusive; they are
complementary. In one, the company can borrow money at
a lower after-tax cost, and in return, employees
acquire shares at no cost. Then, in addition, through
the other program, employees would have the opportunity
to invest voluntarily if they felt that the company
would continue to be successful, which would again
provide the company with new equity, as opposed to
debt, which the other method offers them. With greater
access to financing, companies are going to expand
once again, create more jobs.
We've always had the question of whether employee
ownership and trade unions are antithetical to each
other, and I want to show this slide to give you an
idea of how many unions I know of that have experience
with employee ownership, both in Canada and in the
So that's not one of the problems, but there are
several other large ones that employee ownership
can alleviate. I don't have time to do anything other
than mention them very briefly, although they are huge
issues and will have to be addressed soon.
One is retirement security. We all know the baby
boomers are going to strain our pension system. The
ESOP concept, as it was originally conceived, is a
retirement benefit. In the United States, it is not
uncommon for employees to retire with equity in their
ESOP accounts worth three- to five-years' salary.
The other is the business succession dilemma, also an
offshoot of the baby boom. A huge number of business
owners are approaching retirement, and far too many of
them either have no interested heirs or no plans for
succession. That means we're going to have a lot of
companies that will either be simply shut down because
the owners can't find somebody to buy them, or a
competitor will buy them in order to gain their
customers and then shut them down because they don't
need the operations. ESOP buyouts by management and
employees will be one of the very few viable
alternatives in this circumstance and will need to be
looked at further.
I was also asked to look at what some of the
challenges are to implementing employee ownership in
Canada. These are the three that I think we have to
One is encouraging companies to offer shares to
employees. This will have to be done in a way that
provides a financial advantage to either the owner or
the company or they will not be interested. I think
it's a very worthwhile investment on the part of the
government. In British Columbia, the tax credit ESOPs
generate $7 in new provincial taxes for every dollar in
tax credits they issue, which is astonishing.
The second challenge is to reduce the financial risk,
basically, to employees. I have personally seen
companies that have been purchased by the employees and
have failed. They have lost not only their savings but
their jobs. It's a terrible tragedy when that happens.
With the best of intentions, they've gone into these
situations. I think this is one of the best arguments
there is for encouraging employee ownership that allows
employees to acquire shares at no cost other than their
hard work and ingenuity, and their savings can be
invested elsewhere and diversified so they're
Our third challenge, of course, is making it
worthwhile. One of the arguments is that even with
incentives for employee share purchase plans, most
employees can't afford to purchase enough shares either
to have a substantial block of ownership or to create a
large enough gain to make an impact on their retirement
circumstances. I believe, like Kelso,
we should be looking at ESOPs as a
supplement to RRSPs.
In conclusion, I don't know if you're aware of this,
but every European country, much of the former Soviet
bloc, Egypt, Argentina, South Africa, and Japan all
have legislation encouraging employee ownership.
Knowing that it enhances job creation, corporate
performance, and financial security for all the
participants, we have to get involved in this area or
we're going to lose out on the competitive advantage
that other countries have. I think the time is
excellent. We can build on the experience of these
other countries and develop our own leading-edge
legislative policy for employee ownership.
I know the country will respond to your
leadership, and there are two initial steps that I
recommend, very simple ones—to allow ESOP
loans to be treated as a regular business expense and
to extend the 15% labour-sponsored venture capital tax
credit to employee share purchase plans.
Thank you, and I truly encourage you to move forward
with this powerful tool.
The Chair: Thank you very much, Ms. Markus.
We'll now hear from Mr. Perry Phillips. Welcome.
Mr. Perry Phillips (Board Member, ESOP Builders Inc.):
Thank you, Mr. Chairman and committee members, for
inviting me to speak to you this afternoon.
I'd like to commend Julia for an excellent
presentation. I think she summarized a lot of the
issues that are important to ESOPs in Canada.
Canada is the only G-8 country other than Russia
that has no ESOP legislation and no policy in this
area. Why is this?
I have been coming to Ottawa for
about eight years now.
met with the last two finance ministers. I've met with
multiple numbers of department officials at the
administrative and deputy-administrative levels. And I've
come to the conclusion that there are basically two
reasons Canada does not have ESOP legislation in place
The first is that it's not on the radar screen of the
politicians. There is a handful of politicians who
understand this concept; they have an understanding of
what it can mean to our country. But it's not enough.
It really isn't enough.
Secondly, and probably more importantly—and I say
this with all due respect—the senior bureaucrats in
the finance department are hostile to the very mention
of ESOP legislation. I don't know the reason for this.
In talking with other people and in trying to
understand why this is so, the only conclusion I can
come to is that ESOPs basically empower Canadians to
take control over their own economic destiny. This is
an empowerment that...and I personally don't think the
finance people trust Canadians to take that control
over their own destiny. Basically, they don't trust
the voters who put you into place to do that.
What I'm saying here is there's no reason Canada
should not have ESOP legislation. We're not creating
something new. This is something that's been in the
U.S. for 25 years. They have $1 trillion invested in ESOP
companies. One out of three employees in the U.S. owns
shares in their own companies. In the U.K., they have
had ESOP legislation for 10 years now. It was started
under Margaret Thatcher and it was expanded under Tony
Blair, so it crosses all levels of political thought.
In the U.S., it was started by Republicans and expanded
under the Democrats, and now it's been expanded again
under the Republicans.
So again I ask, why is Canada not here? Why are we
not doing this?
The ESOPs we're suggesting are basically ones that are
going to solve a lot of problems. Canada is facing a
brain drain. We are competing now with countries that
are growing in sophistication, so whereas before we
could bring people into this country into high-tech
communities and knowledge-based industries, now we're
going to have to compete with offshore countries who
are growing their high-tech communities.
We're also looking at a baby boom situation, where
people who have started their companies 20 to 25 years
ago are looking to find succession for their companies.
Where are they going to find these people? They're
going to be American companies, just as Nick said. And
once you sell out, it's very hard to start that company
The reason I'm here today is to urge you to go forward
as politicians, because the only way this thing is
going to get done is if there is the political will to
do it. In the United States, the only reason this got
put into place was that Senator Long, who was the
chairman of the finance committee in the Senate,
decided that he was concerned, and he didn't want his
country to be in a situation where 1% of the population
owned 90% of the wealth. He put through this
legislation for that very reason, and the results have
spoken for themselves.
The time is ripe to look at some type of legislation
in this area. There are a lot of countries to look at,
to see what they have done, what's done right and
what's not done right, but again, it's going to take
political will. I urge you to do that.
The Chair: Thank you very much, Mr. Phillips.
Mr. John Kidder (Director, Employee Ownership and
Incentives Association): Mr. Chairman, my name's
I'll try to present rather briefly, because
the other members of the delegation have, more ably than
I can, covered a lot of general points. What I want to
be able to do is to get through this and get into some
data, which I think you'll find interesting and I hope
Perry's talked about the need for political will.
Well, political will is necessary to put in place
public policy, and public policy's necessary to try to
get those things done that the country wants to get
I think it's very clear, and you'll see as I go
through this little exercise here, that employee share
ownership is one of those things that has tremendous
benefits for companies, for employees, and for the
nation as a whole. So I'll go very quickly through
these things. We've heard them all before.
Frankly, I think you all know this, and I'm sure everyone in
this room supports these objectives—the employee benefits
from ownership; potential good long-term
gains; low marginal cost of getting in; a clear
understanding of the company position, since a kind of
open-book approach is taken in most employee-owned
companies; and a chance to have a piece of the pie
that those people bake, which is a very important part
of satisfaction, part of living a good life.
Employee owners' interests are congruent with those of
the other shareholders, which gets their
drive to work
persistent over the long term. Performance is
motivated by the overall success, and improvement in
productivity, which is incredibly important these days,
is empowered across the entire enterprise.
In regard to the employer's point of view, I'll go
quickly through this. Perry talked briefly about
competition for staff. I really am in competition for
staff. I run a small technology company in Vancouver,
and I'll tell you, the great sucking sound from south of
the border is audible to me every day. I hear people
This kind of stuff helps us very much to attract,
retain, and compete with the kind of benefits offered
in the U.S. It's critical that companies in Canada
have this. We're not talking about grand lowering of
tax rates or that sort of thing. I don't think that's
what's important. What's important is for us to
provide employees with an equivalent-quality job with
the same kinds of benefits that pertain.
It is an astonishing performance motivator. To have
people who are fully aligned with the goals of the
company, as Nick said, makes an enormous difference to
performance. We all know about the situation with
productivity in Canada. We're falling behind in the
G-7, much of the world. We know this is a great driver
for moving that ahead and it's a driver for continuous
improvement, no matter what the metrics are, quality,
etc. Everybody involved makes these things fly.
I'll go very quickly to new companies, only because I
represent a new company. We're cash poor. New
companies are cash poor generally in the near term. The
market for people is extremely competitive now. It's
only going to get worse as the boomers start to retire.
Shares and options are used to make up competitive
remuneration. Without a shadow of a doubt, employee
share ownership is an important factor there.
I won't even get into shares versus options. Options
can be complicated. Shares are simple. Financial
benefits are only part of the equation here. The sense
that people have a piece of the rock is a different
sense in that they have a potential for making profit.
It is a totally different feeling. I know that from
all of my staff. Everybody in my company owns shares
in the company. It's absolutely fundamental to the way
they feel about it. They also all have options, which
causes them to be reviewing the stock charts every day.
That's a different set of feelings, totally different.
I don't know whether you can see this, but you do have
the slides here in your packages somewhere. Let me
just go quickly through and summarize some of the
research results, which are immensely important.
First of all, there was a study done at Rutgers.
ESOP companies grew 2.35% faster per year. That's a
couple of more significant digits than you could probably
put on that, but over 10 years, that's
26% extra growth attributed to ESOPs. ESOP companies
paid in Washington State 5% to 12% higher than non-ESOP
companies, and they had about three times better
retirement benefits. That's a very significant benefit
for the employees.
Northwestern University estimates that the return
on assets of ESOP companies—I'm a chief executive, and
these things are important to me—is 6.9% better
post-ESOP. If that's compounded over 10 years, you're
looking at 95%.
According to the Rutgers study, the ESOP share-price
growth was 133% better than in the non-ESOP companies.
This is from 1992 to 1997, when the stock markets
were moving along pretty rapidly. Now, one may quibble
over whether share prices are a proper metric of
corporate performance, and certainly they are in many
ways not, but clearly these companies outperformed
other companies on that basis.
There was a study done in the TSE that I found
startling. They had 24% higher productivity; 123%
higher five-year profit growth; 95% higher net margins;
and 65% higher return on capital. These are
astonishing numbers. If you find anything in public
policy that enables you to differentiate
so quickly between high-performing companies and companies that
don't do so well, I suggest you jump on it also, just
as I suggest you jump on this.
In terms of operating margins, they're 2% better per
year; that's about a 23% compound growth over 10 years.
I can't resist this. My shareholders can't resist
this. I want all the shareholders in my company, all
the employees, to be owners so they can't resist it
either. This is clearly a huge incentive, and I
suggest it can be done by government at very little
Clearly, then, employee share
ownership has benefits to the employee and benefits to the
employer. What I want to talk about now is the
benefits to the taxpayer, because we're all taxpayers
here. As well as being people with various other axes
to grind, we all write cheques to you guys to
From the taxpayer's perspective, these tax credits are
astonishingly efficient job creators—I'm going to base
a lot of this on the data from B.C. that Julia referred
to earlier—and astonishingly efficient
Here's the B.C. government data, as I have it. I don't have the
direct study but I'm taking this from secondary
sources. There were 8,000 new jobs from a 10-year
ESOP program, with about $30 million in total
raised in that ESOP program. They pay a 20% tax
credit, so there was a $6 million tax expenditure to
generate 8,000 new jobs. I'll point out that's $750 a
job. You might want to ask HRDC, Industry Canada, and
some of the others how they'd do with $750 a job, and see
where that comes. This is an amazingly efficient way to
The government estimated in B.C. that they get 7% new
tax revenues over a 10-year stream for a $1 tax
expenditure. That's a 33% internal rate of return.
You're not going to beat that. I
know what the hurdle rates are for government
investments, and they sure are lower than 33%. It's a
remarkably cost-effective way to create jobs. It's a
remarkably good investment to boot.
Now, that's just
If you extrapolate that to Canada and make a few
assumptions, let's assume for the sake of argument the
federal government matches a 20% credit. So we're
trying to overestimate the tax expenditure here
following the leadership of our finance minister. The
federal leadership, though, makes the program national. That
is, other provinces, etc., say “Okay, we have some leadership
coming from the feds here, we can follow British
Columbia, Manitoba, and Nova Scotia”, which I think are
the three now. And let's assume then that as a result
of this participation nationwide, it grows 20% over the
British Columbia rate.
The numbers are pretty straightforward. The
federal tax expenditure to do that would be $5.4
million a year. That's not exactly peanuts to a
little company, but it's not a very significant tax
expenditure. Compare that with your SRED programs,
compare that with any number of other tax credit
programs—it's a very small amount of money.
result is that over 10 years the total investment generated,
assuming the B.C. numbers flow, would be $268 million.
That is astonishing leverage. You're not going to get
that with many other programs or any other ways to
manage your fiscal policy. If you follow the B.C.
model, 71,000 new jobs would be created; again, that's $750 a
crack. And you would generate, according to the B.C.
model, $375 million in new tax revenue over the period.
I'm happy to sit down with anybody or provide what
data I have to the researchers so you can verify this
and take a look at it. I want to suggest that
even if you take these assumptions and whack them in
half, what you have here is an astonishingly effective
way to affect behaviour.
better business performance, certainly; look at those
numbers from the TSE, local companies. You'd get
better employee security, absolutely, without a shadow
of a doubt; improved productivity, because employees are
engaged in their businesses; greater Canadian ownership
to help some of the things that Nick talked about and
to ward off an ever-present threat; and of course
enhanced government revenues. All those things flow
from a relatively simple set of actions such as the
ones Julia has recommended.
In summary, ESOPs are efficient. They're
cost-effective means to assist economic growth.
Non-partisan support, and I suggest all the members of
the delegation have spoken to this, can be expected. I
believe this kind of program speaks to the general
needs of citizens, businesses, poor people, rich
people—all people can get behind this kind of a
program because it just makes sense all around. The
tax expenditures required are small and the results are
measurable and substantial. You can hang your hat on
it, you can lay out a certain program of tax
expenditures, and you can say “Based on prior
these are the results we expect to get”, and you can then
measure whether or not those results do occur. And you
will understand this is a program that needs your support,
needs to be moved forward through this committee on
Thank you very much.
The Chair: Thank you very much, Mr. Kidder.
Now we'll go to the question and answer session. Any
member can have up to 10 minutes to ask questions.
Mr. Ken Epp (Elk Island, Canadian Alliance): Thank
you, Mr. Chairman.
I found this really fascinating. I
was wondering how we could incorporate this in the
federal government and maybe somehow make our employees
of the government shareholders in the country more than
they are. In a sense we're all shareholders of the
I have a couple of questions. It's curious that you
should come here today because it's only three days ago
that I was talking to two guys who worked for Canadian
Airlines. It's interesting, because one guy told me
it cost him $100,000 because he owned shares in his own
As you know, Canadian Airlines had a very strong
employee participation program just to keep their
company afloat. He told me he lost $100,000. He paid
$110,000 for his shares and at the end he got $10,000
for them. He said it wasn't a good deal, but
the only thing he could argue was that he
kept his job for about three years longer than he
might have if they hadn't
entered into that particular
agreement. So I guess he did say there was a little
bit of an indirect help there for him.
I like your enthusiasm for your topic. That's really
good. But none of you has even come close to saying
“But you know, members of the finance committee, you
should be aware, there are a few downsides, and a few
risks, and a few problems”. You didn't mention any of
them. You must be aware of some of them.
Ms. Carolyn Bennett (St. Paul's, Lib.): I think
you must have been snoozing.
Mr. Ken Epp: No, I sure wasn't.
Ms. Carolyn Bennett: It's right here under
Ms. Julia Markus: It's one of the challenges, the
risk of employees losing their investment.
Mr. Ken Epp: All right.
Ms. Julia Markus: May I respond to that?
Mr. Ken Epp: Sure, please.
Ms. Julia Markus: I'm fairly familiar with the
Canadian Airlines employee buyout. In fact, one of the
board secretary treasurers had been the international
secretary treasurer with the machinists, who initiated
that buyout to keep the airline afloat. I learned
quite a lot about it and I can say that it was very
badly designed. It was set up so that the employees
had no control over their equity and they had no real
level of participation in decision-making. It was a
very difficult situation and it could have been avoided
if there had been regulation for employee ownership
plans, which of course there would be if there was any
tax support for it. I think a very important aspect of
the government being involved in it is to safeguard
that these don't happen.
Mr. Ken Epp: But there are always risks, when you
have shares in a company, that the company is not going
to perform as anticipated. I know that having the
employees involved, as you're suggesting, would
certainly improve the probability of success because
the employees are really all going to work together.
I've worked in both kinds of places, where the
employees own the company and in other places where
they're nothing but employees. One thing I have
observed is that if there are two or three people
working together and they own the company, the guy who
isn't pulling his share of the load soon has what we
call peer pressure to pull up his socks, whereas
in the case where they are just employees you tend to
say, I want to keep peace in the family so I won't
say anything, and nothing happens.
So there is that part to it, but there are also many
factors totally outside of the control or even the
influence of employees or shareholders who aren't
employees. There is an added risk in that sense.
I want to move on to another question. You indicated
a few things specifically with respect to what
governments should do. You mentioned allowing loans to
be made to buy shares for employees and to allow that
interest to be a business expense. Are there any other
tax incentives that you have in mind?
Mr. Sherman Kreiner: Perhaps I can respond to
The American model both Julia and I spoke about
basically tries to have a set of
aligned tax incentives for all stakeholders in the
transaction. The first thing it does is create a
tax incentive for the selling shareholder. The selling
shareholder could sell to anybody. But if the selling
shareholder sells to an employee group, then there's a
different capital gains tax treatment than if the
selling shareholder sells elsewhere. If 30% or more of
the company is sold to employees, then the selling
shareholder doesn't have to pay any capital gains tax,
there's a rollover. Basically he can take the
proceeds, invest it in a qualified business, which can
be IBM or a new start-up, and there's no capital
gains tax that accrues to that individual until he
disposes of the investment he makes subsequently. So
it's trying to provide an incentive for shareholders to
sell to employees.
For the employee-owned company itself, the mechanism is
a borrowing mechanism, a leveraging mechanism. To
make sure the company is not overly leveraged, both
interest and principal payments are tax deductible.
That's a way to encourage the company to proceed in
And then for about 12 years during the seventies and
eighties, the U.S. legislation also provided
incentives to lenders to facilitate them participating
in the transactions. Once it became a routine
transaction they didn't do that any more. But they
gave a 50% interest tax credit to lenders who provided
loans to transactions that facilitated a selling
shareholder selling 30% or more of the company to
employees. So all the parties who would be part of
that transaction were encouraged through a set of
incentives that were appropriate to their needs to
participate in the transaction.
Once that was routinized, it wasn't necessary to
provide those incentives to lenders any more. It was
then a routine lending transaction, and the tax
incentive for lenders was removed from the U.S.
legislation, without there being any subsequent impact
on the rate or scope of participation in those plans.
Mr. Ken Epp: Does that not generate an IRS
nightmare, to attract these different components?
Mr. Sherman Kreiner: Just regular standardized
filings are required by ESOP companies. There are
11,000 companies that do these filings, and there seem
to be appropriate administrative safeguards in place to
be able to track the programs, the employee benefits,
and the tax benefits associated with them.
Mr. Ken Epp: This is a question I was actually
going to ask first, but I had my mind thinking about
these things. Going back to Crocus, you're an umbrella
group that manages the shares of the different
employees from the different companies. Is that what
Mr. Sherman Kreiner: No, we're an investment fund.
We're a labour-sponsored venture capital corporation.
Manitoba shareholders invest in us and then we invest
our money in small and mid-sized Manitoba businesses,
primarily giving them equity capital to help them grow.
One of the judgments we made was that it was
important, in terms of being able to help businesses
grow and maintain these Manitoba-owned businesses, to
have it as one of our objectives to try to
facilitate those companies in the transition of
their ownership to employees.
The question Julia raised was how do
you get these
companies from one generation to the next? You have
a lot of family-owned businesses. There's no
succession plan. The kids aren't there. They're
doctors or lawyers, or whatever. They're not
interested in taking the business over. The people who
want to operate the business and maintain it are the
managers and employees of the company, but nobody
treats them as serious buyers because they don't have
enough resources to be able to buy the company.
The idea of the Crocus Investment Fund was to create a
supplemental pool of equity, so their money and our
money could be facilitative of a gradual transition,
instead of the owner shutting the business down on the
day he retires, or selling to a non-local owner, who's
buying for market share and not for operating capacity.
Because we're so far away from commercial centres, on
the first opportunity to rationalize the Manitoba
business will be shut down. We're trying to facilitate
a process of involving employees in that business,
because they'll operate it from one generation to the
Because employee ownership has positive business
effects, you can start implementing that when the owner
is 45, 50, or 55. It doesn't have to occur right at the
time of transition. If the employees have a stake,
that's going to increase the value of the owner's
shareholdings over the next 20 or 25 years. Then the
employees will have a large enough stake that it
will become another estate planning option. He might sell
to them, or he might not sell to them, but if they
own 15%, 20% or 25% of the business, it's another real
option and an alternative to selling the assets and
shutting the business down when he turns 65 or 70, and
finds out there are no other buyers out there.
Our goal is to provide capital to help those
businesses grow; to help transform them into
minority employee-owned businesses, where there's an
interest as they're growing; and then be facilitative
of a major transition to employee ownership at
retirement age, if that turns out to be in the owner's
The Chair: Ms. Markus.
Ms. Julia Markus: I'd just like to place this in
One of the major accounting firms recently did a study
and said that this is a situation we're going to face
in Canadian companies worth $1.7 trillion. Depending on
which study you read, between 50% and 80% of them have
no clue of what they're going to do as an exit
strategy. This is a fairly frightening scenario, if we
look at companies as being the wealth generators of our
The Chair: Mr. Epp.
Mr. Ken Epp: The other thing you talked about was
productivity. We did some productivity study in this
committee, and I found it interesting that productivity
was correlated to, but not equivalent to, standard of
living. It talked about the economic output per
person employed. So if you had a whole bunch of
people who were unemployed, they wouldn't enter into
the productivity equation at all, which of course would
affect the economic welfare of the whole country.
When you talk about productivity, I presume you are
indeed talking about more output per employee. That
certainly seems to be your theme. You had some numbers
out there that flew by rather fast, but I'm just
wondering whether you have any hard data, say from the
United States, where this has been tried in a better
experiment than here—actual productivity numbers, as
opposed to just output per company, and so on.
Ms. Julia Markus: How would you define actual
Mr. Ken Epp: According to our definition—the best
I could get—productivity is an economic output per
Ms. Julia Markus: Do you want to somehow roll in
the unemployed as well?
Mr. Ken Epp: On the unemployment rate, according
to your work, you're talking about employing more
people, but if you employ more people, then the output
for that company has to grow at a greater rate than
the percentage of new employees.
Mr. Sherman Kreiner: That's what the study showed.
Two things are happening. The level of revenue growth
and the level of employment growth are increasing. In
addition to that, the level of output per employee,
even including the employment growth, is increasing.
So two things are happening at one time. The business is
growing faster, so the number of jobs is increasing,
and the level of output per employee is also
increasing, taking into consideration the increased
number of employees that are associated with the
Mr. Ken Epp: I just wanted to confirm that this
definition of productivity.
Mr. Sherman Kreiner: Yes, and the studies are
actually quite sophisticated because they've been going
on for 27 years now. There are matched pairs of
businesses to look at—specific conventional companies
with identical characteristics, or as close to
identical as possible, matched up with companies that
have either employee ownership, participative
management, or a combination of employee ownership and
Ms. Julia Markus: We've provided a summary of all
the pertinent research in your package of material.
Mr. Sherman Kreiner: We have, as well.
Mr. Ken Epp: We just got them.
Mr. Sherman Kreiner: There are 43 studies now in
the United States. It's exciting when virtually all of
them reach the same conclusion.
Mr. Ken Epp: Okay, good.
Mr. Nick Logan: One of the problems with measuring
productivity is if you start measuring a company that
isn't productive, it's not there when you finish
I'm in the money business, and if we can't be
productive in lending our money out, we're not going to
be there at the end of the line. So productivity is
not a very good measuring point.
Mr. Ken Epp: I have one last question on your
relationship with employees. Do you find that the
anxiety level of employees goes up? This is sort of
the flip side of what I was saying before, where there
seems to be peer pressure and employee-to-employee
accountability, if you all own a cut of the cake.
In companies where there is employee ownership, I
would think it could also lead to an increased amount
of inter-employee conflict, because some people just
don't produce up to par. Then they would get into
trouble. I wonder if you have any perspective on that.
Mr. Perry Phillips: I think I can answer that. We
found, in companies that placed ESOPs into their
companies, it's not for everybody in the company.
We're talking about human emotions and human behaviour.
There is usually a certain percentage, around 10%,
that because of their risk profile will not invest in
their company. There is some peer pressure on those
people to invest. They tend to leave the company, and
the company then attracts more entrepreneurial types.
You're quite right, it's not a culture that lends
itself to everybody, but because participation rates
are high enough, it does create the culture where
people are in the same boat and are pulling in the same
An ESOP is not a magic bullet. You mentioned CP. When
the economic conditions are such that a company is
going to go under, it's going to go under. There's
nothing you can do to prevent that. You can prop it
up, but it's a false use of economy.
ESOPs are really good for companies that are growing
and want to be even better. In the United States,
studies have shown that 9 out of 10 companies in
turn-around situations, such as CP, have used ESOPs to
actually turn around their companies. So maybe CP was
one of the 10 that didn't do it.
The Chair: Mr. Kidder.
Mr. John Kidder: I'd like to respond to both the
last question and the first one.
I can't imagine any government program initiated that
would eliminate risk from the business climate. I
don't think any of us would countenance such a thing.
Clearly, evolutionary pressure, if you can
call it that, is very important for selecting good
companies from poor companies, and good business plans,
etc. But to a certain extent, I think, employee
involvement, in whatever fashion it may take, certainly
mitigates that risk. It reduces it quite
I'm sure my company is a very different kind of
business from Nick's, because we are in
high-technology, start-up mode, and believe me, this is
fraught with peril. We could
fall at any moment, and everybody in the company knows
In the situation where the people in the company are
employees working for wages, and they know they
can fall off a cliff at any moment, there's a certain
set of pressures there. In the case where
they're shareholders, the same pressures exist. It
doesn't change that. You may stand to lose your
livelihood; you may stand to lose your benefits; you
won't have a medical plan—all that sort of stuff. But
you have a different set of incentives for working to
keep that thing going. So it's actually less likely to
fail. I don't know whether there's data on this in
these many, many U.S. studies, but I'm sure there is
some, or I'm sure it could be pulled out from other
So I think that's one thing that's very important.
Nothing can eliminate risk. But my employees—and this
is just a personal, anecdotal experience—are
on me all the time about ways we can do
this better, ways we can in fact further mitigate or
reduce risk, or, “Have you seen this? There's some new
competitor I found on the web. For God's sake, what
are they doing?”
This is a different kind of a reaction than from
people who aren't owners in the company. Sure, they
live with a higher level of stress, I suppose, because
in fact they're going to share the resulting rewards,
and they feel like they're building the company. So
it's quite a different mindset, in my particular
The Chair: Thank you.
Ms. Julia Markus: I'd like to add to
that by reiterating that part of the reason we're
recommending the creation of a no-cost equity plan for
employees is the financial differential
and the risk aversion differential that exist among
employees. So I've seen before kind of a have/have
not mentality develop in a company, which is somewhat
If you were to do an ESOP with the shares being
allocated to employee accounts, it would be equal across
the company. It would involve everybody and give
them the incentive but take away some of the risk.
The Chair: Okay.
Mr. Cullen, followed by Ms. Barnes.
Mr. Roy Cullen (Etobicoke North, Lib.): Thank
Thanks to all of you, some of whom are very familiar,
and vice versa. I thank you for coming, and I
encourage you not to be frustrated. I'm glad that you
The productivity issue is an important one, to my mind.
I know our chairman and this committee have been very
much interested in productivity. If you look at
productivity trends generally in Canada and compare us
with our U.S. neighbours, although there has been some
positive movement, there's always a challenge to keep
up with the productivity in the United States. And
that says a whole stack about our standard of living
and our disposable income, etc.
Mr. Kidder, you talked about the Northwestern study.
If we're looking at a return on assets of 6.9% better
post-ESOP, it seems to me that there are so many
different proxies here that speak so positively to
productivity gain. If you're looking at total factor
productivity, return on assets is a pretty good proxy for
getting more mileage out of all your assets, it seems
to me. The Toronto Stock Exchange study...24% higher
productivity. I presume that was labour productivity
per employee. But I know...and it seems to me the
productivity argument is very, very strong.
Mr. Kidder, you
talked about federal tax expenditure of $5.4 million a
year, and you offered to share that with the committee
and the researchers. It would be useful because I know
that when Perry and Julia and I were mucking around
with the department and that, we got significantly
higher figures than that. Of course, that would be
consistent if the department was not very keen on the
idea. When you're making estimates, you can be
conservative, or you can be whatever. But it would be
interesting to know how you derived that number because
it's significantly lower than the number we have. And,
of course, it depends on the tax measure that you
I have just a couple of questions. On employee share
purchase plans and employee share ownership plans, can
you—whoever wants to have a bash at this—just
highlight the difference? Are employee share purchase
plans sort of focused more on large, publicly traded
companies? Define the difference.
Mr. Sherman Kreiner: I think the basis for
them is different. The employee share purchase plan is
basically a plan where we're trying to encourage an
individual to reach into their jeans, take out some
money, buy some shares, and try to get the most mileage
out of that. And the way we get that mileage is
through providing a tax credit for them so that in some
ways they're able to extend their money a bit further.
An employee stock ownership plan is really a mechanism
that is leveraging corporate assets. So they're leveraging
individual assets. An employee stock ownership plan is
a plan that's leveraging corporate assets. Basically,
employees as a group are borrowing against the assets
of the company to create employee ownership.
I think there's a fundamental difference between those
two, and the employee stock plan ownership model is the
U.S. model. To the extent that we have a model at all in
Canada, it's the employee share purchase plan. I think
the productivity and other consequences are most
profound when the ownership is as broadly based as
I think it's instructive that in Canada, in the median
private, employee-owned company—and there are fewer
private, employee-owned companies than in the
U.S.—employees own 11% of the stock. In the median
private, employee-owned company in the United States,
it's 35% ownership. In public companies in Canada it's
5% ownership, and in public companies in the U.S. it's
14% ownership. The scope of participation in the
United States, where there's an employee ownership
plan, is such that in most cases 80% to 90% of the
employees participate in that plan. In Canada, in more
than one-third of the employee ownership plans, less
than one-half of the non-management employees participate
in the plan.
So if you look at the breadth and scope of ownership,
the employee stock ownership model has many more people
participating with a much higher percentage of ownership.
Share purchase models have many fewer employees
participating with a much lower percentage of
ownership. To the extent that you're trying to get
employment growth, sales growth, and productivity
growth, you want to have broader ownership and greater
ownership. You can get much more ownership if you
leverage corporate assets than if you leverage personal
Mr. Roy Cullen: Okay. Now maybe everyone in the
group can comment on this. In terms of employee
share ownership plans, would you suggest that the
employees would be required to, or should also, contribute?
It touches on Mr. Epp's point about risk. It also
touches on Ms. Markus' point about feeling more
committed and involved. What formula would you be
Perry, do you want to have a crack at that?
Mr. Perry Phillips: Sure. I guess we probably
differ there a little bit. It's been our experience
that, if someone has an investment and actually signs a
cheque, they take a higher level of interest in the
company. You don't have to basically spend your total
bank account to invest in the company, but there should
be some type of investment and some type of cheque
written because we find then that it becomes real to
the person. When you give something to somebody,
sometimes that's what they feel it's worth. But we
would not go to the extent that anybody should be
encouraged to spend a lot of their money investing in
their own company.
Mr. Roy Cullen: Thank you.
You've touched on many of the advantages of
employee share ownership plans. If you look at the
demographics, the baby boomers, and the pressures
that are going to be on our retirement system.... We
looked at the baby boomers, succession planning, and
some of the clear ideas there that make some sense.
As far as a source of capital, let's say for SMEs,
which are always a challenge, could you just elaborate
for the committee? If employees, for example, are
not putting up any of their own capital, clearly, if
it's tax deductible.... One of the witnesses
mentioned that the principal and interest would be tax
deductible. Maybe you could elaborate on how that would
work. That's a pretty generous provision. But is it
because of the tax-sheltered leverage finance that
provides a new source of capital, or where does the new
capital actually come from?
Perry, could you answer
Mr. Perry Phillips: Well, Sherman can answer for
the venture capital.
What we've seen is that there's normal financing
availability for these issues. In other words, the
employees certainly have a certain portion of their
capital invested. It may come from RRSPs. It may come
from either current or past contributions, and then the vendor
may do a take-back. In other words, like a
mortgage...if they sell their company for $10 million, the vendor
may take back $4 million or $5 million and finance it
that way. As well, there are financial
institutions that are looking at the succession issues
and are financing the deals on leveraging the assets.
Mr. Roy Cullen: Sherman, maybe you
could expand on this. I thought you'd said “deductibility
of principal and interest”. Could you
comment? Let's say employees are not putting up any of
their own capital. Where is the source of capital
Mr. Sherman Kreiner: It would be from a
conventional lender. The conventional lender would be
loaning money to the employee benefit trust, often
secured by a hard asset of the corporation. The trust
is then using that money to purchase shares from a
shareholder. The company is making an undertaking that
it will contribute to the trust an amount that's
equivalent to what the trust owes under the loan. So
the company makes that payment to the employee benefit
Because it's a contribution to
an employee benefit plan, it's deductible in the same
way as a contribution to a health benefit or
a pension plan. Then the trust just takes the cheque,
turns it, and signs it back over to the lender.
Since it's structured as a contribution to an
employee benefit plan, the full contribution of that
benefit plan is deductible. And that is the
equivalent of interest and principal payments on the
loan. So the way the American model works is that
there's basically lending coming in for the benefit of
employees being repaid by an undertaking from the
company to contribute to an employee benefit plan.
That undertaking and the money that's paid is all
deductible. So both the interest and the principal
payment are done in pre-tax dollars.
That model is a model of buying out a selling
shareholder. I was talking about the incentive
that's provided for that individual. Many transactions
in the U.S. involve the same mechanism. Instead of
purchasing from a selling shareholder, they're
purchasing from treasury. So in fact it's normal
corporate financing that's occurring, that's being funnelled
through an employee benefit trust for the benefit of
employees. It's expanding ownership. It's diluting
current owners to the extent that it's expanding
ownership. The benefit that the company gets or
the existing owners get is that the repayment is in
The dilution is to an extent an ownership base, but
that ownership base has the outcome expectations in
terms of productivity, sales, and employment growth that
we're talking about here. Notwithstanding that there's
diluted ownership, the return to the existing owner
should still be as good or greater than it was in the
past, because you now have everybody pulling together
on the same side of the equation in terms of
In response to the question
you asked earlier, while it's intuitive that a
sense of ownership comes from people going to their
chequebook and writing a cheque, actually the U.S.
experience and all the U.S. outcomes are
non-contributory plans. They're based on people
getting that ownership through the leverage mechanism
I just outlined. The outcomes come from a
sense of ownership associated with what occurs on your
job from day to day.
So ownership alone doesn't do it. Ownership combined
with participatory management does do it, because
participatory management causes you to act and think
like an owner. So the acting and thinking like an
owner comes from what you do on the shop floor
every day, what decisions you have, the ability to
participate. That's going
to have a longer-term impact than the impact that comes
from writing a cheque.
For employee-owned companies alone, the performance
outcomes are short term. There's the Hawthorne
effect. It goes up and it goes back
down. You write the cheque, you feel like an owner for
a couple of weeks, but if you don't have any say on a
day-to-day basis in what occurs, that gets lost. If
you have it every day, then it's maintained.
Mr. Roy Cullen: All right.
Ms. Markus talked about the idea of a similar tax
credit as it relates to employee-sponsored venture
capital funds, to applying that to tax credits for
ESOPs. Would an organization such as yours support that?
Mr. Sherman Kreiner: Yes. I don't think it's
contrary to what we do.
I think it has less of an impact because it's
leveraging personal assets than would be the case if you
implemented a mechanism that leveraged corporate assets,
which is closer to the U.S. model. I don't think
it's inconsistent, contrary to, or competitive with the
tax credits that would be provided to investors in the
labour-sponsored investment funds.
Mr. Roy Cullen: When you talked about the
original thinker on ESOPs in
the United States, Mr. Kelso, it looked like
some kind of move against capitalism and sharing
of the wealth and the assets...although in later
years the productivity
argument probably became stronger.
It clearly distributes wealth as an incentive
for more people to achieve those
productivity gains and those personal gains.
Even if you look at the United Kingdom, under Margaret
Thatcher, the very staunch Conservative, she brought in
a number of measures to broaden employee ownership.
Even the council houses—it gave them
a piece of the rock, so they took more responsibility
One of the propositions
has always been that in Canada we need to deal with
general tax relief first, because every time you look
at specific tax measures...and this committee hears
thousands of ideas that sound very
good. If you added them all up and implemented them
all, then our government would not have been able to
introduce a $100 billion tax relief package in Budget
2000 and the economic and fiscal update.
It seems to me we're on our way. In the United
Kingdom, I'm told that they
started out with general tax relief first under
Margaret Thatcher and introduced incrementally the
employee share ownership incentives.
You could perhaps
tell me if I'm right or wrong on that.
I understand that recently the U.K. has introduced tax
incentives for ESOPs, and all employees must be
eligible to participate, not required,
obviously. Employees are allowed to receive up to
about $13,500 in shares tax-free, with no tax on
subsequent capital gains, if shares are held for at
least five years.
Could you perhaps comment, Perry, on
the U.K. experience and the way they've staged it, if
they have, and whether this type of provision makes
sense in Canada?
Mr. Perry Phillips: You're quite right. That's
basically the way the U.K. plan implemented itself. It started
off small and then the plan was amended as it went along.
The current situation is that Tony Blair has indicated
publicly that he wants to triple the number of ESOP
companies. So they've taken
their current plan and expanded a lot of the limits
they had prior to that.
Mr. Roy Cullen: So this is just an expansion,
this tax-free, no-capital
gains if the employees hold the shares for
five years. It is not a new tax measure.
Mr. Perry Phillips: As I understand
it, basically, they rolled a lot of the measures into
one or two measures that were previously in
multi-jurisdiction. So in that sense it's a new role,
but it's still using a lot of the basics they had
10 years ago.
Mr. John Kidder: I'm sure you hear hundreds
and thousands of proposals, and I
know that in your various letters you get probably, in
order of magnitude, more proposals.
I would suggest,
though, that data from various studies seems remarkably
consistent. I haven't looked at this
in anything like the depth that Sherman has,
but I certainly concur with Sherman.
It's quite astonishing to me.
Before I decided to have a real
life, I used to be an economist. It's amazing to look at
this very large number of different studies and see the
consistency. It's quite something. So that tends to
give it a certain veracity it might not otherwise have.
Assuming that some of those extrapolations are even
reasonably true, then just from the direct tax
expenditure point of view, the rate of return on
this kind of thing is really astonishingly high. I
would suggest it far exceeds whatever you might have
set as a hurdle rate to look at things moving
forward, and you'll find it to be extremely competitive.
Certainly the numbers with respect to job creation, if
the B.C. experience is right, are again a remarkably
cost-effective way to do that.
So I understand you do have to go through a
ranking process with these things. I suggest that
a cursory look at this data suggests that this should
come fairly close to the top of the stack. And that's
not including the actual effects on the general
economy of productivity, of employment, and of
potentially saving businesses in Canada, which might
otherwise go to foreign ownership, etc. All of those
things can be viewed as very positive externalities of
this kind of program, but on the basis of the
direct measurable effects of fiscal policy, I think
this thing should come fairly high.
Mr. Roy Cullen: I agree with you. The data
is fairly strong. In terms of, let's say, jobs per
tax expenditure dollar, productivity lift, or economic
growth per tax expenditure, it looks fairly convincing.
In Budget 2000 we introduced the tax-free rollover.
You could roll over your capital gains as long as you
invested in a qualifying company, and a qualifying
company is basically any kind of small company. Would
that be equal or somewhat equivalent to what the U.K.
has done? In other words, if an employee held
shares in a firm, could they not take advantage
of the tax-free rollover?
Mr. Sherman Kreiner: I think that's more
equivalent to the selling shareholder rollover
provisions that exist under the U.S. law. The section
1042 rollover is basically that, but it's triggered by
selling 30% or more of the shares of a company to an
Mr. Roy Cullen: Our provisions don't require that.
I'm not suggesting that this goes the distance,
but in terms of what they've
done in the U.K., it seems that if an employee held
shares, they could at least defer their capital gains.
The problem is that most of the people, in terms of
longevity and turnover, don't want them to keep
rolling their shares and moving to other companies, but
at least that's a step forward.
I'm not sure it really
addresses the challenge you're proposing here.
That's all for now, Mr. Chairman.
The Chair: Mrs. Barnes.
Mrs. Sue Barnes (London West, Lib.): Thank you,
Thank you for coming today. This is my first hearing
on this area, so some of my questions I'm sure are
simple and straightforward, and then others are just
First, some of the provinces have legislation. Could
you tell me which ones they are?
Ms. Julia Markus: British Columbia and
Saskatchewan both have employee ownership tax
incentives, though in different forms. Nova Scotia's
is not specifically directed at employee investment,
but rather investment in any provincial businesses.
Mrs. Sue Barnes: The American states all have
their separate tax regimes, which are quite complex and
quite different. I was wondering if, from what you see
on the table in other countries, there is any one
jurisdiction you would point to as a model piece of
Mr. Sherman Kreiner: The answer is that state
legislation is not terribly relevant to this. In the
United States it's all really federal tax and employee
benefit law. What we would be advocating is an
adoption of those U.S. provisions into Canadian federal
tax and employee benefit law. But I recognize that in
Canada it would be most effective if it were done
correspondingly by the provinces as well, which is why
we're also exploring similar corporate tax treatment of
employee-owned companies in Manitoba, so that for
provincial and federal tax purposes the treatment would
be the same.
One of the things we would propose as a way to test
this out and try to understand what the fiscal
consequences, as well as the non-fiscal benefits, of
this are is a demonstration project, where you
introduce ESOP legislation with one province and say
that if a province chooses that treatment under
provincial tax law, they'll get the same treatment
under federal tax law. You then have the ability to
demonstrate that on a relatively small scale, and you
can do a fiscal analysis of return on taxpayer
investment without expending huge amounts of money
across the country to try to see if the fiscal benefits
we think will occur would in fact occur. Then you
could roll it out more broadly.
Mrs. Sue Barnes: I was looking at the letter from
the Boyd Group, and they're talking about cross-border
issues. In their case, are they cross-border with
federal U.S. tax?
Mr. Sherman Kreiner: Yes.
Mrs. Sue Barnes: And provincial legislation?
Mr. Sherman Kreiner: Yes. That's correct.
Mrs. Sue Barnes: Okay. We have a lot of
multinational companies, obviously growing quickly, and
there are cross-border issues. Would it be easier for
these corporations to use the options method of
compensating their employees, because they do not get
into the cross-border issues that you're seeing here as
a challenge and a problem?
Mr. Sherman Kreiner: I guess this is really a
Mrs. Sue Barnes: It certainly is.
Mr. Sherman Kreiner: —about what you accomplish
by offering options. It may be that it's easier to
implement options, but it's not clear that the outcomes
you want to derive are going to be accomplished by
Mrs. Sue Barnes: But it is the main reward program
for most multinational corporations that are growing at
a fast pace right now. Do you have examples within the
same company where they're using both options and
employee share ownership?
Ms. Julia Markus: Yes, and it's more and more
frequent. Celestica, for example, has a completely
broad-based employee share purchase plan and an options
Mrs. Sue Barnes: For executive level?
Ms. Julia Markus: No, company-wide. They did
offer financial support to their management people so
they would invest heavily.
We are now dealing with a lot of growing technology
companies, and there is, as you probably know, a real
backlash from shareholders about continuing to offer
option grants. Stock options seem to be a necessity as
a recruiting incentive, because other companies are
offering them as well. But subsequent to that, a share
purchase plan seems to be a way to keep employees
onside. Even though there is no apparent advantage for
employees in actually purchasing shares in their
company, if the company adds a matching contribution to
that, then it becomes advantageous for them to do so.
Mr. John Kidder: I'd like to make a quick comment
on that too, if I could.
In our very small company—and I wouldn't suggest you
can take data from Coldswitch and apply them to
the rest of the world—we have both options and
employee share ownership, and I wouldn't have it any
other way. But I think some of Sherman's data, which
indicated the wide discrepancy between Canadian and
American companies, are relevant to this also. Junior
companies in this country are very limited in the
numbers of stock options that can be offered. There
was a tendency, when these things were unregulated, for
the CEO and his or her friends, of course, to have vast
numbers of options, relative to what the shareholders
got. This is now limited by the CDNX and various other
regulatory bodies, securities commissions across the
country, to the point where for junior companies it's
very difficult to allocate more than, say, 5% of the
total issued and outstanding share base as options.
That then means there's a very strong push to find
a better way to actually get ownership in the hands of
employees, because you're very limited, as a junior
company, in what you can do with options, there's a cap
on the amount you can issue.
Mr. Nick Logan: Can I just add a bit to that?
There seems to be a logical progression in management
style. What we're asking you for are some more tools
for our tool box to build better organizations. We
start off with employees who are on fixed salaries,
with fixed responsibilities, and then they say, I'd
like a little incentive to do some other things over
and above what I'm assigned. So you build in a larger
compensation package where some of it's at risk—if
they can't achieve, they don't get paid as much.
Then management comes along and says, we need to
borrow money to buy some stock. So the company has to
lend the money to buy the stock, because they didn't
make any money when they were building the company.
Then you come back and say, we have to have a
plan—like the one we set up with Crocus—where we can
give all the employees stock if we're successful, and
that begins to get everybody thinking like owners.
Then you get into these high-tech people who say,
we've got to have options, because we're putting in 23
hours a day building Internet software, and if this
things goes, we want to get a big spike with it. So
you introduce options, but you are limited in the
number of options you can give out, or even want to
give out, because it dilutes ownership so quickly.
Mrs. Sue Barnes: It dilutes your shareholder
Mr. Nick Logan: And then why would you give
someone new coming into the company so much benefit?
Hence, employees come along and they're just as they
are with John and me all the time—I just inherited
some money, I'd like to buy some stock, why can't we
buy some stock in the company we know something about?
So you've moved all the way down the scale, until
you've got a lot of clients. It's very difficult to
administer them, but it's very much a logical,
methodical progression, until you get people who are
very sophisticated at dealing with ownership issues
within their company.
Mrs. Sue Barnes: Just like people who own their
companies—they can buy other people's shares, but they
can't invest in their own corporation out of their own
retirement savings self-directed plan.
Mr. Graham also raised an issue in the same letter
about a problem with a major trust firm which was
unwilling to act as the trustee for the shares, and
that just surprises me. Is there something unusual
about that particular situation? Trust law is pretty
Mr. Sherman Kreiner: It's the nature of the
details of the ownership plan and the legality of the
plan, the framework for the plan, how that plan is
legitimized, that raised some of the concerns. We've
been able to circumvent that by using a non-trust
But the problem is that there's no framework for
employee ownership, there's no public policy support
for employee ownership. So I think there's just some
general uncertainty that companies have, and all
potential stakeholders in a transaction, about whether
this transaction is going to withstand scrutiny, what
risks and liabilities there may be for somebody playing
a particular role, because there's no framework that
defines that within our legislation right now.
Mrs. Sue Barnes: But this isn't a problem in other
jurisdictions that have legislation in place.
Mr. Sherman Kreiner: That's right, because they
define what's in the trust document, who can be
trustees, what the scope and responsibilities are for
trustees in administering an employee benefit plan like
Mrs. Sue Barnes: Okay, that's all for right now.
The Chair: Dr. Bennett.
Ms. Carolyn Bennett: I have an interest in
family-owned businesses and transition with the baby
boomers. Is that something your organization helps
people with? Obviously, most family-owned businesses
are private and no one knows what's happening. How do
you help founder companies move into this? Does the
Canadian Federation of Independent Business have an
opinion on this? If you're going to try to share the
wealth, how do you move into that area?
Ms. Julia Markus: It's an interesting subject,
because we have just started to see more interest in
that. In fact, we're right in the middle of a period
of putting on half-day seminars on management and
employee buyouts for business succession with an
accounting firm, a law firm, a trust company, and a
Some of the approaches to potentially selling the
business to the employees start with the management and
either finance the transaction at a fairly high cost of
equity, generally speaking, or have the owner carry
back some of the cost.
Once enough control
has shifted, then the new manager owners can do a share
offering to the employee group, which they use to pay
down the high cost of money.
There are a lot of emotional and psychological issues
in that transition as well, but we don't really get
involved in that. There's a whole industry of
counselling that does that.
There is one new aspect to the British Columbia tax
incentives from employee ownership, though. The way
they were typically structured was employees could only
invest up to $10,000 a year and get a 20% tax credit
for a maximum of five years. Specifically for business
succession, they modified the rules so that an employee
could invest up to $50,000 all at once and still get
that same 20% tax credit, although they would draw it
out over the five-year period. So there really was no
negative impact on the province, but it had a really
positive effect on buying out company owners.
Ms. Carolyn Bennett: For companies that weren't
public to begin with, who ran the company as a family
business, there must be a huge transition in terms of
transparency and in terms of how these people aren't
used to sharing information.
Ms. Julia Markus: Yes, sometimes there is.
Sometimes there are younger generation members in the
business as well. But the founding owner or the current
senior shareholder needs to recover some of their
investment for their own retirement, so they consider
bringing the employees in as shareholders.
There are a lot of issues, such as when do we give up the
company truck and those sorts of things. There tends
not to be ultimate financial transparency, at least in
the succession buyouts I've seen. The law in
British Columbia requires that employee shareholders be
entitled to see annual financial statements—income
statement and balance sheet.
Ms. Carolyn Bennett: Who requires that?
Ms. Julia Markus: B.C. company law. They work up
from there. There isn't an immediate sharing of
compensation data or retirement plans or whatever it
may be. I think the transition is a little more gentle
Ms. Carolyn Bennett: As you know, our chair is
obsessed with productivity. It's this word that comes
down from the ceiling. In any presentation that includes
the word, you just watch his pupils dilate.
The Chair: It's the spelling that's the hard part.
Ms. Carolyn Bennett: Is the Canadian Federation of
Independent Business interested in working with you and
helping their companies become more productive, if indeed the
numbers...say what they are?
Ms. Julia Markus: As I said, we've only started
down this road and we're discussing with the Canadian
Association of Family Enterprise, because they're
the most logical target.
I would like to just take the beginning of
that question about productivity and dangle it here. As
opposed to simply sharing company-wide financial
information and being concerned about the impact of
that on employees, generally the stages of employee
development are to have them work on budgets for their
Sharing financial information for profit centres is
really what's important, the numbers they can have an
impact on. Employees don't have much impact as a whole
on revenues. What they do have an impact on is their
own productivity and profitability. In fact, it's a
huge industry in the United States, called the great
game of business, where employees view this as going
into huddles and meeting their targets. They set goals
and see how they meet them. They learn an enormous
amount about how business runs without endangering the
confidentiality of whatever the owner's financial
arrangements are. We would never suggest that they
should endanger them.
The Chair: Is that it, Dr. Bennett?
Ms. Carolyn Bennett: Yes, thank you, Mr. Chair.
The Chair: I want to thank you very much for
your presentation. Without actually talking about
productivity, it's extremely important if we as a
country want to maintain our standard of living. It's
a serious issue. Any sort of creative way to enhance
that we'd of course look at very seriously.
I think you made great points on a number of issues.
First of all, with regard to the productivity issue, the
competitiveness issue, the issue of profits, profit is
not a bad word. The more profitable firms are in a
country, then the greater wealth you generate.
For those who are concerned about
social programs in this country, that's the way to do
it, not the other way around. You first have to create
wealth before you can redistribute it.
With regard to the whole issue of the number of
jobs and the type of
incomes, incomes tend to rise if productivity gains
occur, not to mention that just in general greater
opportunities arise. This can be a very important part
of the productivity standard of living puzzle. That's
why I think it was important to have this round table.
I want to thank Roy Cullen, because he actually
suggested we have a round table on this
Mr. Roy Cullen: And Reg.
The Chair: Yes, Reg Alcock also asked for it.
So it was worthwhile.
Mr. Cullen, do you have another comment?
Mr. Roy Cullen: Just briefly, Mr. Chairman, if I
We were talking about succession planning. One of
the ideas, Perry, you'll recall, that we kicked around
was if a Canadian-controlled private corporation
wanted to do succession planning with employees,
they could transfer shares under some arranged schemes
and it would not trigger a capital gain. Right now if
you transfer shares to employees under some scheme,
you're going to have a capital gain. It will be
an actual deemed disposition. I think there are
ways of trying to facilitate putting the shares
in the hands of employees.
Mr. Chairman, I just want to come back to one
point. Mr. Epp talked about risk and challenges, and
some of those were laid out.
We can learn from what they've done in the United
States. There have been some abuses, and some risks have
What can we learn from the U.S.
experience, and how can we manage that situation here in
Canada? How can we adapt it to our own circumstances
to make it work better?
Perry, do you have any wisdom on that?
Mr. Perry Phillips: Well, I've been
involved with ESOPs for about 10 years now, and closely
involved in the U.S. ESOP association. What they
keep telling me is that if you're going to do any
legislation in Canada, keep it simple.
I've seen small companies spend upwards of a couple
$100,000 trying to extract themselves from an ESOP
situation because of the number of laws in the United
States. It's very important that it be streamlined
legislation. I think it can be. I think we can
achieve the U.S. model by not taking the more onerous
implications into account and adapting it to Canada. I
don't think you can just holus-bolus take a U.S. model
and put it into Canada. We have very special concerns
and needs here. But it's a good base model to start
Mr. Roy Cullen: Mr. Chairman, just one quick one.
In looking at the federal tax policy, there are some
provinces that have legislation now. One of the
concerns always is that the federal government comes in
with measures, and that basically creates room for the
provinces to back out and say, well, the federal
government is doing it now.
Would there be a need to
look at harmonizing so that you have a
roughly comparable situation? How do you see
that playing out?
Mr. Sherman Kreiner: I think it would be valuable
to have as many different tools as possible available
in as many different places as possible. I think you
asked a question earlier about whether people have to
pay out of their own pockets or not, in order to have a
particular outcome. While I have an opinion about
that, everybody has an opinion about that, and that
means the owners of businesses have opinions about that
as well. I think some different structures are going
to be more comfortable for people, either from a
philosophical perspective or from their particular
circumstances and the outcomes they wish to derive. I
think it would be beneficial and valuable to have as
many options as are possible to meet the many different
missions and objectives and concerns that people have,
rather than trying to harmonize into a single
I think if there's any weakness in the U.S. model,
notwithstanding all the benefits that have been
outlined there, the ESOP structure is so pervasive that
it's very challenging to implement other models that
may meet other specific needs. There are challenges
from complexity to cost to other concerns.
There are issues around voting control, for example, in
ESOPs. While the U.S. has been moving more and more
towards passing through voting rights to the
beneficiaries of the trust to have them act like real
shareholders, even though they are inside of the trust
structure. That progress has been slow. It's been very
challenging. I think it's been a cause for some
opposition from unions from time to time.
In the absence of alternatives structures, it's either
this or nothing.
Mr. Roy Cullen: Julie, did you want to add to
that? Or I'll do it for you.
Ms. Julia Markus: We're competing.
The Chair: It's part of our productivity.
Ms. Julia Markus: I think
it's important to try very hard to introduce programs
on a federal level that are complementary to any
provincial programs that may go on, as opposed to
trying to replicate them or bring them along. I've talked
to quite a few companies that spend a lot of time with
lawyers, because they're trying to conform to the
different securities legislations in each province and
all those different regulatory environments. It would
be useful to try to build something on a federal level
that would address that. Then, if the individual
programs were there, companies could take advantage or
not take advantage, if they had employees in different
Mr. Roy Cullen: Thank you.
The Chair: Thank you, Mr. Cullen.
And thank you to the panel. It was very interesting.
We also use this material during our pre-budget
consultations. This creates a base of knowledge for
members of Parliament. Members of the committee who are
not here will also receive your presentations so that
they may examine the benefits of ESOPs.
Once again, thank you very much, and on behalf of the
committee, we look forward to seeing you, I'm sure,
during the pre-budget consultation hearings somewhere in
this country. Take care.
The meeting is adjourned.