Entity Setup
Entity Setup in Canada: Employee Ownership Trusts Become Permanent – What You Need to Know
Canada’s Autumn and Spring economic changes make Employee Ownership Trusts (EOTs) permanent – here’s how businesses and owners can leverage this tool for succession planning and tax savings.
By NomadicTax Research Team • 5-8 min read • May 5, 2026
## 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](https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2023-made-canada-plan-strong-middle-class-affordable-economy-healthy-future/employee-ownership-trusts.html?utm_source=openai))
---
## 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](https://budget.canada.ca/update-miseajour/2026/report-rapport/chap1-en.html?utm_source=openai))
- With the **Spring Economic Update 2026**, the exemption is proposed to be made **permanent**, keeping conditions for qualifying businesses in place. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/chap1-en.html?utm_source=openai))
---
## 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](https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2023-made-canada-plan-strong-middle-class-affordable-economy-healthy-future/employee-ownership-trusts.html?utm_source=openai))
- 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.