Entity Setup
Entity Setup: Using Employee Ownership Trusts Under Canada’s Spring Economic Update 2026
Learn how Employee Ownership Trusts (EOTs) offer capital gain exemptions and what conditions must be met to use them in selling your business.
By NomadicTax Research Team • 5-8 min read • August 15, 2026
## What Is an Employee Ownership Trust (EOT)?
An Employee Ownership Trust is a structure where a business is sold to a trust that holds shares on behalf of employees or a worker cooperative. Under Canada’s Spring Economic Update 2026, **dispositions of shares to an EOT** made after 2023 may qualify for an individual capital gains exemption on up to **$10 million** in gains. ([budget.canada.ca](https://www.budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
Originally introduced temporarily, the government has proposed making this exemption **permanent** beginning in the defined period. ([budget.canada.ca](https://www.budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
## Eligibility Criteria and Conditions
- Seller must be an **individual** disposing of shares to an EOT or worker cooperative. ([budget.canada.ca](https://www.budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
- Must follow specific rules for ownership percentages and operations of EOTs or worker co-ops. Consulting drafts or regulations is important.
- Only dispositions **after 2023 up to end-of-2026** are covered under existing rules, with permanence proposed in Spring Economic Update. ([budget.canada.ca](https://www.budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
## Pros & Cons for Business Owners
**Pros**:
- Potentially huge tax savings on capital gains—up to \$10 million per qualifying disposition.
- Promotes employee engagement and ownership, potentially boosting stability.
**Cons**:
- Complex trust administration and ongoing governance requirements.
- Must ensure all conditions met, or risk denial of exemption.
## Example
Imagine Jane owns shares in her tech company worth \$12 million. Selling to an EOT meeting all conditions: she can apply the capital gains exemption on the first \$10 million and pay capital gains tax on \$2 million under the standard inclusion rate. This reduces her tax bill significantly compared to selling to third parties without using an EOT.
## Implementation Tips
- Work with legal and tax professionals to draft trust documents that comply.
- Monitor legislative developments—this exemption is currently proposed permanent but final details may evolve.
- Assess cash flow & payout structure—EOTs may require deferred payments or unique payout schedules.
**Actionable takeaway**: If you're considering selling a business and want to preserve value for employees, explore EOTs now—get ahead of regulatory changes, establish structures that satisfy the conditions, and lock in advantage under current rules. In many cases, beginning the conversation in late 2026 or early 2027 will be critical.