What is an Employee Ownership Trust (EOT)
An Employee Ownership Trust is a legal structure where a trust holds shares of a corporation for the benefit of its employees. Used for business successions, it allows retiring owners to sell their company while employees gain ownership through the trust. (canada.ca)
What’s Changed: The New Permanent Exemption
- Introduced in the 2023 Autumn Economic Statement, a $10 million capital gains tax exemption was put in place for qualifying dispositions of shares to EOTs or worker cooperatives. Temporarily set for tax years 2024-2026. (budget.canada.ca)
- With the Spring Economic Update 2026, the exemption is proposed to be made permanent, keeping conditions for qualifying businesses in place. (budget.canada.ca)
Who Can Use It
- Business owners seeking succession, especially if wanting to transition ownership to employees while maintaining continuity.
- Worker cooperative corporations making qualifying acquisition/disposition.
- Qualifying businesses meeting criteria around earning shares, fair valuation, community of interest.
Tax Implications & Benefits
| Feature | Benefit |
|---|---|
| Capital gains exemption (up to $10 million) | Major tax savings when owner sells shares to EOT or cooperative—no or reduced tax on qualifying gain |
| Business continuity | Employees retain ownership; trust structure avoids outright transfer of control or need for external buyer |
| Flexibility in succession plans | Owners can partially transition, retain legacy, or phase out involvement |
Setting Up an EOT: Do’s and Don’ts
Do:
- Ensure your business qualifies: must be a QB (Qualifying Business) under rules.
- Define trust document to meet qualifying EOT conditions: residency, beneficiaries, trustee composition, income, and capital rights. (canada.ca)
- Get independent valuation: Fair market value of shares is critical for the exemption.
- Timing matters: transitions should be structured while exemption is available (or permanent, as now proposed).
- Coordinate with CRA and legal/tax professionals to set trust terms and ensure capital gains treatment is correct.
Don’t:
- Assume all employees share equally—trust rules require equitable determination based on criteria (hours, salary, etc.).
- Wait too long—if legislation or eligibility changes, better to plan early.
- Neglect other tax consequences: shareholder loans, interest benefits, or income attribution.
Example Scenario
Alice owns a small manufacturing company worth $8 million. She wants to retire and ensure her long-term staff benefit and stay with the business. She creates an EOT, transfers shares into the trust, and qualifies for the capital gains exemption. Because the gain is under $10 million and rules adhered, no capital gains tax is payable on the sale to the EOT.
Alternatively, if she transferred shares to a traditional buyer, she’d pay standard capital gains tax (approx. 50% inclusion times her marginal rate)—potentially hundreds of thousands of dollars in tax.
Action Steps for Business Owners
- Review your current business structure with EOT feasibility.
- Get current financial statements and valuations.
- Draft EOT deed and ensure trustees meet composition requirements.
- Engage with CRA for guidance or ruling if needed.
- Use this exemption in tax planning now that it is (proposed to be) permanent—avoid missing window.
Bottom line: Making the capital gains exemption permanent for EOTs is a game-changer for business succession. Proper setup brings big savings, employee morale, and long-term stability—you get tax savings, employees get ownership.