Entity Setup
Entity Setup & Succession: Permanent Employee Ownership Trusts in Canada
How Employee Ownership Trusts (EOTs), now permanently tax-exempt, offer powerful options for business owners considering succession while supporting employees.
By NomadicTax Research Team • 5-8 min read • June 23, 2026
## 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](https://budget.canada.ca/update-miseajour/2026/report-rapport/pdf/update-miseajour2026-eng.pdf?utm_source=openai))
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## 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](https://budget.canada.ca/update-miseajour/2026/report-rapport/chap1-en.html?utm_source=openai))
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## 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](https://www.canada.ca/content/dam/fin/publications/taxexp-depfisc/2026/taxexp-depfisc-26-eng.pdf?utm_source=openai))
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## Steps to Set Up an EOT Structurally
1. **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](https://www.canada.ca/content/dam/fin/publications/taxexp-depfisc/2026/taxexp-depfisc-26-eng.pdf?utm_source=openai))
2. **Establish the Trust:** Legal setup of trust agreement, terms of employee benefit, governance.
3. **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](https://budget.canada.ca/update-miseajour/2026/report-rapport/chap1-en.html?utm_source=openai))
4. **Notify CRA and file necessary forms:** Include documentation in your tax return, ensure you meet deadlines and audit requirements.
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## 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.
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## 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.
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## 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.