Case Studies
Entity Setup Case Study: Using Employee Ownership Trusts for Succession
Permanent capital gains exemptions for dispositions to Employee Ownership Trusts are now in effect—here’s how businesses can structure succession to benefit from them fully.
By NomadicTax Research Team • 5-8 min read • August 9, 2026
## What has changed?
Under Canada’s Spring Economic Update 2026, the **$10 million capital gains exemption** for qualifying share dispositions to Employee Ownership Trusts or worker co-ops has been made **permanent**. Previously, this measure was temporary. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
## What’s an Employee Ownership Trust (EOT)?
An EOT is an entity that owns a business for the benefit of its employees. Owners can sell their shares to the EOT and receive capital gains treatment under certain conditions. The trust then holds shares for employees’ benefit. This mechanism supports business succession, local economies, and worker engagement.
## How to structure your setup
### 1. Ensure your company qualifies
To use this exemption, your business must meet certain conditions: sold to an **Employee Ownership Trust or worker co-operative**, the shares disposed of must be “qualified dispositions” occurring in or after 2024, and compliance with other legal and regulatory tests. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
### 2. Plan timing of the disposition
Because this measure is now permanent, you can confidently plan dispostion timing. If you expect to exit in coming years, selling to an EOT before the exemption deadline becomes irrelevant. Gives flexibility and certainty for long-term planning.
### 3. Tax calculations and cash flow analysis
- Estimate capital gain: purchase price vs sale price; apply the exemption up to $10 million.
- Consider liabilities of the EOT; payments to employees; trust structure costs.
- Understand trust income taxation; ensure legal and governance compliance.
## Hypothetical example
Imagine **Sunrise Bakery Ltd.**, a sole proprietorship incorporated, owner wants to exit by 2028. Sale of shares to an EOT qualifies for $10 million exemption. If the gain is $8 million, no tax is owed on that capital gain federally. Owner can use proceeds tax-efficiently: reinvest, retire, or gift. Employees benefit from ownership and shared profits. Sunrise must ensure EOT documents meet statutory criteria.
## Risks and considerations
- Valuation disputes risk from CRA if criteria not met.
- Provincial tax considerations; provinces may have different rules or additional tax.
- Continuous governance obligations: trust must benefit employees and meet fiduciary duties.
- Cash flow: owner needs paid consideration and may need to finance sale to EOT.
## Actionable takeaways for businesses
- Engage legal counsel early to draft EOT bylaws, trust deeds.
- Update corporate structure to ensure sale is “qualified”.
- Plan for employees’ roles and how distributions will be made.
- Coordinate with tax advisor to map both federal and provincial implications.