What is an Employee Ownership Trust (EOT)?
An Employee Ownership Trust is a structure where a corporation’s shares are held in trust for the benefit of its employees, allowing employees to participate in ownership as prior owners exit or retire. Canada introduced a temporary Employee Ownership Capital Gains Exemption (EOCGE) in Budget 2024, which applies to qualifying dispositions to EOTs or worker cooperatives. (canada.ca)
Key Recent Change – Permanent Exemption
In the Spring Economic Update 2026, the Canadian government has proposed to make the EOT exemption permanent. Previously temporary for the 2024–2026 tax years, eligible individuals can now shelter up to $10 million in capital gains from tax when selling a business to an EOT or worker cooperative. (budget.canada.ca)
Why It Matters for Tax Planning
Succession Planning Relief: For retiring business owners, this offers a tax-efficient exit path, allowing sale to employees without incurring capital gains tax (up to the $10M exemption).
Employee Engagement & Ownership: Unlocks a way to transition ownership while retaining institutional knowledge and community roots, incentivizing employees with shared ownership.
Sector Opportunities: Available for private corporations in most sectors; notably includes farming, fishing, and SMEs. Effectively excludes corporations already public. (canada.ca)
Example Scenario
Jane, owner of a tech SME, wants to retire. Her business is valued at $8 million. She transfers ownership to an EOT. Because of the EOCGE, she pays $0 capital gains tax (assuming qualifying structure). Her employees now own the business; Jane may retain transition consulting if desired.
If business was worth $12 million, she would shelter $10 million under exemption and pay capital gains tax only on the remaining $2 million.
What Conditions Must Be Met
- The sale must be a qualifying business transfer: shares go to an Employee Ownership Trust or a worker cooperative. (fin.canada.ca)
- Must satisfy types of eligible businesses (not public, certain sectors) and hold-for-period requirements.
- The exempted gain must be reported per sections 110.61 & 110.62 of the Income Tax Act. (canada.ca)
Action Steps
- Consult legal & tax advisors early to assess structure setup and tax compliance.
- Valuate your business to see if it stays within the $10 million threshold.
- Set up EOT or cooperative conversion properly, ensuring trust formation meets specific legal criteria.
- Plan your timing, since the exemption must happen during the eligible years—though now proposed permanent, confirming through legislation is key.
Bottom Line
Converting to employee ownership via EOTs is now a durable tax planning strategy. For qualifying business owners, it delivers capital gains relief, succession flexibility, and community-focused ownership. With the 2026 announcement, this tool is becoming foundational for ethical wealth transfer.