What Is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) is a trust that holds shares of a corporation for the benefit of its employees. It offers business owners a structured, tax-advantaged path to sell their company to employees or a worker cooperative. Originally introduced temporarily, EOTs included a capital gains exemption up to $10 million for qualifying dispositions.(budget.canada.ca)
Key Policy Change: Permanent Exemption
With the Spring Economic Update released April 28, 2026, the Government of Canada has proposed to make this $10 million exemption permanent, removing its expiry at the end of 2026.(budget.canada.ca) This change supports long-term planning and gives businesses and employees confidence in using EOTs for ownership transitions.(budget.canada.ca)
Benefits and Use Cases
- Owners approaching retirement may transfer ownership to employees while reducing or eliminating capital gains taxes on up to $10 million.
- Employee-owned business models often lead to increased employee engagement, retention, and continuity of leadership.
- Cooperative structures can combine with EOTs to align social mission with tax-efficient ownership.
Eligibility and Conditions
To qualify:
- Disposition must be to an Employee Ownership Trust or worker cooperative corporation.(budget.canada.ca)
- Prior versions applied for tax years 2024-2026; after changes, applies permanently.(budget.canada.ca)
- Proper valuation and legal setup of the EOT are required. Trustees must act in employees’ interest.
Strategic Planning Suggestions
- Begin conversations with legal and tax advisors now, if you expect to use this measure in the next few years—don’t wait till late 2026.
- Factor this into your exit strategy: compare selling to third parties vs selling to employees via EOT.
- Ensure you have proper governance structures for the EOT, stakeholder communication, financial projections, and employee education.
Example
Owner of a private manufacturing business forecasts a $12 million gain on a sale. Selling to a third party incurs capital gains tax on full amount; selling to an eligible EOT allows $10 million exemption, thus only $2 million is subject to capital gains tax, potentially saving hundreds of thousands in taxes depending on province.
Risks and Considerations
- Must ensure compliance with CRA regulations and valuation guidelines; poor setup can negate benefits.
- Cash flow must be managed, as the owner often receives payment via the trust over time rather than lump sum.
- Employees need clarity on their rights and returns as beneficiaries of the trust.
- EOT structure may affect company decision-making and profit allocations.
Making this exemption permanent marks a shift: employee ownership is moving from pilot to principle in Canadian tax policy. For business owners, this opens a path to exit with purpose; for workers, an opportunity to be real stakeholders.