Entity Setup
Entity Setup and Succession: Making the Employee Ownership Trust Permanent
Employee Ownership Trusts (EOTs) are now a permanent part of Canada’s tax framework—what that means for business succession and tax planning.
By NomadicTax Research Team • 5-8 min read • June 2, 2026
## What is an Employee Ownership Trust (EOT)?
An **Employee Ownership Trust** is a structure where a trust holds shares of a business for the benefit of employees. Introduced under Budget-2024 and expanded in subsequent statements, EOTs offer a **capital gains tax‐exemption of up to $10 million** for eligible sales to EOTs or worker cooperatives under certain conditions. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/chap1-en.html?utm_source=openai))
## Recent Change: Making the Tax Exemption Permanent
As part of the **Spring Economic Update 2026**, the Canadian government has proposed to make the EOT capital gains tax exemption permanent. Until now, it was temporary for the 2024-2026 tax years. Businesses considering succession planning or sale to employees should consider this when timing transactions. ([canada.ca](https://www.canada.ca/en/department-finance/news/2026/04/spring-economic-update-2026-key-measures.html?utm_source=openai))
## Why Businesses Should Consider EOT Now
- **Succession Planning**: Owners who want to transition ownership can sell to an EOT while benefiting from favourable tax treatment.
- **Employee Retention & Culture**: More motivation and alignment when employees are owners through the trust.
- **Capital Gains Savings**: Up to $10 million capital gain may be exempt for eligible transactions—this can result in substantial tax savings for business owners.
## Steps to Set Up an EOT Correctly
1. **Evaluate your business structure**: Need to be a Canadian-controlled private corporation; shares must be eligible.
2. **Ensure timing alignment**: Since the exemption was previously temporary, take care with the timeline. With permanence, more flexibility but still verify all other eligibility.
3. **Adopt a trust structure**: Trustees, legal documents, benefit allocation plan.
4. **Valuation**: Precise valuation of the business at the time of sale is essential.
5. **Consult tax advisors**: For structuring, compliance, and ensuring capital gains exemption applies correctly.
## Example Scenario
Suppose **Smith’s Machine Works Ltd.** has a retiring owner wanting to sell to its 80 employees. An EOT is formed; the owner sells shares to the EOT. If the transaction qualifies (meets all criteria), the owner can exempt **up to $10 million** in capital gains under the exemption. The EOT holds the shares for employee benefit, dividends are paid through trust distributions.
## Considerations and Pitfalls
- **Valuation** disputes with CRA if not properly documented.
- **Operational control** and governance arrangements of the EOT must meet criteria.
- **Funding the buy-out**: sellers may need financing; cash flow of the corp must support obligations.
- **Long-term commitments**: employees assume roles as beneficiaries; ensure succession and trust structures are well understood.
This entity setup option now sits at the intersection of tax planning and business succession. Making the exemption permanent signals government commitment—so for business owners and advisors, it's time to assess EOTs for real long-term strategy.