What’s an Employee Ownership Trust (EOT)?
An Employee Ownership Trust is a legal trust structure that holds shares of a business for the benefit of employees, allowing a gradual or complete transfer of ownership while preserving ongoing operations. Canada introduced a special tax exemption for these under certain small-business transfers. (budget.canada.ca)
Recent Policy Change
Under the Spring Economic Update 2026, the government has proposed making the existing ETOT‐capital gains tax exemption permanent. Previously, this $10 million exemption on capital gains for qualifying business transfers to EOTs (and expanded to worker cooperatives) was temporary—in place only for the 2024-2026 tax years. Now, it will no longer expire. (budget.canada.ca)
Implications for Owners and Entities
Succession planning: Retiring owners can sell to employees without incurring large capital gains taxes, preserving legacy and avoiding disruptive ownership sales.
Employee engagement: Ownership share fosters increased loyalty, productivity, retained profits, and smoother transitions.
Corporate vs Cooperative: Expansion to worker cooperatives means cooperatives are now on similar footing to EOTs under this exemption. (canada.ca)
Steps to Set Up an EOT Structurally
- Qualify as a Qualifying Business Transfer (QBT): Must meet criteria under section 110.61 and 110.62. Assets, business structure, and continuity of operations reviewed. (canada.ca)
- Establish the Trust: Legal setup of trust agreement, terms of employee benefit, governance.
- Rollover/Sale of Shares: Owner sells shares to the trust. Capital gains realized are exempt up to $10 million for transfers in relevant years. Now this lifetime limit will be permanent. (budget.canada.ca)
- Notify CRA and file necessary forms: Include documentation in your tax return, ensure you meet deadlines and audit requirements.
Example Scenario
- Case: Alice, sole owner of a family-run manufacturing firm valued at $5 million. She wants to retire in 2027.
- Option: She sells 100% of shares to an EOT in 2026. Since value per share is within $10 million exemption, no capital gains tax on the sale for Alice.
- Result: Employees become owners through trust; Alice exits with value; business continues smoothly; tax liability for Alice minimized.
Pitfalls & Considerations
- Valuation must be defensible; CRA can audit sales to EOTs or cooperatives heavily.
- Trust must be structured properly: legal, governance, eligibility rules.
- Ongoing compliance: reporting, trust accounting, employee benefits.
- Provincial tax treatment: may vary; federal exemption doesn’t always remove provincial taxes.
Take-Away
Making the EOT capital gains exemption permanent is big news for small-business owners eyeing succession. If you own a private business and are considering options to sell, explore EOT or cooperative transfer—get professional valuation and structure it right to capture full benefit.