Entity Setup
Entity Setup: Making the Employee Ownership Trust Exemption Permanent
Canada proposes permanently exempting up to $10 million in capital gains for selling a business to employee ownership trusts or cooperatives—key details for business owners.
By NomadicTax Research Team • 5-8 min read • May 31, 2026
## What Is the Exemption?
Under the Spring Economic Update 2026, the Government proposes to make permanent a **capital gains tax exemption** on up to **$10 million** from the sale of a business to an **employee ownership trust (EOT)** or **worker cooperative corporation**, under certain conditions. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai)) Currently, this exemption applies to qualifying dispositions **after 2023 and up to the end of 2026**. The proposal would extend this beyond 2026. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
## Setup Conditions & Eligibility
Businesses must satisfy criteria such as:
- The buyer being an **Employee Ownership Trust** or **worker cooperative**.
- The seller being an individual (not through a trust or corporate entity) with qualifying shares.
- Qualifying the share disposition rules (ownership, prior income-earning period, controlling interest as required). Documentation and compliance regulations apply as per CRA guidelines.
## Strategic Benefits & Planning
- If you plan to exit your business in **2024-2026**, the temporary exemption applies; but if exit may occur later, structuring ahead to qualify could yield **significant tax savings**.
- Businesses considering transferring ownership to employees could benefit from this toward succession planning, providing financial incentive for employees and reducing tax burden for retiring owners.
- Having compliance structures in place (trust deed, governance, valuations) ensures you meet the conditions once the exemption becomes permanent.
## Possible Hurdles & Things to Consider
- Establishing an EOT or cooperative corporation involves legal costs, board/trustee structures, and ongoing governance requirements.
- Calculating capital gains requires accurate cost basis and valuation—any errors can trigger audit or unexpected tax liabilities.
- The exemption is limited to **$10 million** gain; gains beyond that remain fully taxable.
- Provincial taxes may still apply—federal exemption doesn’t erase provincial rate obligations.
## Example Illustration
Marie owns a manufacturing company valued at $8 million, with her basis and adjustments yielding an eligible capital gain of $7 million. She sells steering ownership to an Employee Ownership Trust in **2027**, after the measure is made permanent. Under federal rules, her entire $7 million gain is exempt from capital gains tax (up to the $10 million cap). If she were older trying to exit without this structure, she could face a large capital gains tax bill—this measure eases that burden.
## Action Steps for Business Owners
- Consult with legal and tax advisors to assess whether EOT or cooperative structure is viable and meets CRA definitions.
- If using this for succession, begin structuring early—compliance often involves share-valuation, trust documentation, and ensuring qualifying shares are in place.
- Monitor the legislative process to confirm when the proposal becomes law.
*Entity setup like this helps align business exit planning with tax optimization and ownership models.*