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) 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)
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.