What is an employee benefit trust (EBT)?
In the simplest terms, an employee benefit trust (EBT) is a corporate entity created by a company that is legally bound to hold and manage assets for the eventual benefit of employees. Companies use EBTs to provide their employees with incentives like shares in the company, annual bonuses, retirement account top-ups, and much more. Think of it as an investment account where the company’s performance dictates the value of everything held in the account, only to be disbursed to specific beneficiaries (in this case, employees), often when certain targets or performance milestones are reached. In other words, the company cannot legally empty the account and take the money for its own purposes–it is designated solely for employees participating in the trust.
Many business owners find that EBTs are a great way to keep employees motivated and aligned to their business’ overall goals. Since the success of the trust is entirely based on your company’s success, implementing an EBT is a great way to allow your employees to feel a sense of pride and engagement in their day-to-day work. As long as the goals you wish to reach are shared among the team and they are kept apprised of how they are doing throughout the year, EBTs can also provide clarity to employees on their–and the company’s–performance.
Employee benefit trust example
The first step in setting up an employee benefit trust is hiring competent legal and financial professionals to help draft the trust’s terms, conditions, limitations, and objectives. While much of this process will be out of your hands (unless you happen to be a legal professional yourself), it’s important to remain on top of the creation of the trust in the early stages. This way, you avoid complicated (and potentially expensive) legal and financial fees associated with making late-stage changes.
Once you have created a trust deed that spells out how the trust will operate as well as any administrative details, it’s time to start contributing assets to the fund. Normally, this takes the form of cash and/or shares in the company but can also expand to even include physical and real assets like property, equipment, or vehicles. Whatever you choose to include in the trust, it’s vital that it gets a full accounting of its value. This is because when it’s time to disburse the assets to beneficiaries, for the sake of taxes on capital gains or losses in Canada, you need to know whether the value has increased or decreased since adding it to the trust.
Next, you will need to find and appoint trustees to manage the EBT. Since the trustees will have a fiduciary role–meaning they are legally required to act in the best interests of your employees–you should consider appointing the absolute best people for the job. Now is not a time to put something so important in the hands of someone you have a relationship with, but who lacks financial and/or legal know-how. Some companies choose to delegate this task to an external board of directors, or more often, a law or accounting firm that specializes in business or employment law.
Finally, the trust is launched and the benefits are disbursed to employees according to the trust deed you created earlier. Many companies find it’s easiest to disburse benefits either on the basis of seniority (whether it’s time spent at the company or upon reaching a certain level of management or executorship) or on the basis of performance (such as by reaching financial targets or securing coveted accounts/clients). Depending on how you structured the trust deed, the specific amount of benefits an employee receives can either continuously scale in step with their seniority or performance or remain at pre-defined amounts for each level of seniority reached or performance achieved.
Potential benefits of EBTs
EBTs are quickly emerging as an employee retention and engagement tool, as the labour market remains in flux and top talent is continuously on the hunt for better compensation. Even though you may have your own reasons for establishing an EBT, there’s a whole suite of benefits that come with it.
EBTs are effective retention tools. Your employees will put more into their work when they’re aligned with your business goals. As opposed to creating a company culture statement and hoping your employees agree with it, establishing an EBT with defined goals can really unite your employees. Everyone’s success matters a lot more, and when times are tough, they will work together to pull through. It’s a great way to foster motivation, commitment, and a sense of ownership among your employees. For all the same reasons, EBTs are also great recruitment tools. Most candidates would rather work for a company that offers a more fulsome compensation package that includes EBTs than a similar one that doesn’t.
There are also numerous financial, legal, and tax benefits that apply to EBTs, since legally, they are considered a corporate entity. Contributions to the trust may be tax-deductible, and employees may enjoy tax advantages on the benefits received, especially when it comes to shares or other forms of equity. They allow for more effective long-term planning, because you can tie company performance with benefits received and give employees something to stick around and strive for. A loyal employee working toward long-term benefits offered by your company will be less incentivized to job-hop and remain invested in your success.
Finally, establishing an EBT can give you more control and flexibility when it comes to managing your company. If you have a family business and do not have a formal succession plan in place, EBTs can offer a chance to pass the company and its assets on to the next generation. This helps ensure continuity in company operations and minimizes the disruption associated with leaving this important decision up to others.
Potential drawbacks of EBTs
Overall, EBTs are mostly beneficial for the businesses establishing them. Much like any major operational business decision, though, there are potential drawbacks to EBTs that you must consider before investing the time and effort into creating one. Not having a plan to address these issues if and when they arise can lead to tremendous wastes of time and money through compliance, legal, and tax work that should have been handled at the outset. It is therefore important to make sure your decision to create and implement an EBT is assisted by skilled legal and/or financial compliance professionals. This is especially true if your business operates in Quebec, which has its own unique laws and tax code relative to the rest of Canada.
You must fully commit to the financial health of the EBT and make sure your employees are not only aware of its existence but also their role in it. Hold informational sessions for existing employees and include the EBT in your onboarding process to ensure everyone is on the same page. You will also need to determine how much financial information about your company you are comfortable sharing with employees. One of the reasons employers establish EBTs instead of stock purchase plans is the level of involvement is dramatically different.
Employees that join a stock purchase plan are entitled to attend shareholder meetings, receive information about earnings and executive decisions by your company, and may even receive a more fulsome financial accounting of the company’s books than you’re comfortable with sharing. With an EBT, the trustees handle all of this on behalf of your employees, so you are able to ultimately share less information. This can be a double-edged sword, though: your employees won’t know how close the company is to achieving its goals or meeting its targets as defined by the EBT if you don’t share any financial information with them. You will also need to get a full and fair evaluation of assets in the EBT, such as share prices, so when it comes time to pay out benefits, employees will get a proper amount. This, along with hiring lawyers, accountants, and/or any trustees or board of directors all contribute to administration costs, which are largely unavoidable unless you have these staff in-house and already under your payroll. No matter how you choose to proceed, you will need to budget for these costs as well as a one-time sizeable time commitment to get the trust established and running properly.
