Entity Setup
Making Employee Ownership Trusts Permanent: What Business Owners Need to Know
Canada’s 2026 Spring Economic Update proposes to make permanent a capital-gains exemption for sales to Employee Ownership Trusts or worker cooperatives—earnings up to $10M can be sheltered. Here’s how it works and what you should plan now.
By NomadicTax Research Team • 5-8 min read • May 15, 2026
## What is the Employee Ownership Trust (EOT) Exemption?
The Employee Ownership Capital Gains Exemption (EOCGE) is a tax incentive allowing business owners to shelter up to **$10 million** in capital gains when they sell qualifying shares **to an Employee Ownership Trust or a worker cooperative**. Originally introduced as a **temporary measure** for the 2024–2026 tax years, this exemption was part of efforts to promote employee ownership and smoother business succession. ([canada.ca](https://www.canada.ca/content/dam/fin/publications/taxexp-depfisc/2026/taxexp-depfisc-26-eng.pdf?utm_source=openai))
## 2026 Policy Change: Permanent Status
According to the Spring Economic Update 2026, the federal government proposes to **make the exemption permanent**, removing the sunset clause that had limited it to 2026. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/chap1-en.html?utm_source=openai))
Key details include:
- Applies to qualifying dispositions of shares **after 2023**, including sales to EOTs or worker cooperatives. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/chap1-en.html?utm_source=openai))
- $10 million cap per eligible individual on capital gains exempted. ([canada.ca](https://www.canada.ca/content/dam/fin/publications/taxexp-depfisc/2026/taxexp-depfisc-26-eng.pdf?utm_source=openai))
- To get full benefit, the transaction must meet specific criteria under sections 110.61 & 110.62 of the Income Tax Act. ([canada.ca](https://www.canada.ca/content/dam/fin/publications/taxexp-depfisc/2026/taxexp-depfisc-26-eng.pdf?utm_source=openai))
## Why It Matters: Impact & Planning Strategies
**High impact** for businesses considering ownership transition. Key reasons:
- **Succession planning made easier**: Owners nearing retirement can shift ownership to employees without triggering large capital gains tax liabilities.
- **Boost to worker cooperatives and employee-owned firms**: Encourages alternative business models, which may aid employee motivation and retention.
- **Long-term certainty**: Permanence removes doubts about dealing before expiry.
## Actionable Steps for Business Owners
| Scenario | What You Should Do Now |
|----------|--------------------------|
| Owner planning exit within next 1-3 years | Start evaluating if your business qualifies: size, sector, structure, share class. Ensure it meets definitions for “qualifying business transfer.”
| Considering sale to employees/co-op | Plan early: set up governance structures and EOT or cooperative legal framework so transaction timing aligns with capital gains cutoff.
| Unsure eligibility | Consult tax professionals for eligibility under Sections 110.61 & 110.62. Review ITA rules, cooperative status documents, and trust terms.
| Reporting & reserve rules | Be aware of reserve options: ITA permits spreading gain over up to 10 years under qualifying business transfer to EOT. ([fin.canada.ca](https://fin.canada.ca/drleg-apl/2024/ita-lir-0824-n-5-eng.pdf?utm_source=openai))
## Examples
- **Example 1**: Jane owns a manufacturing company and wants to sell it to an Employee Ownership Trust. She expects \$8 million in capital gain. With the permanent exemption, she could potentially **pay no federal tax** on that gain, subject to eligibility and provincial rules.
- **Example 2**: Alex is forming a worker cooperative in his tech startup. When they buy out shares from early founders in 2025, they can use this \$10 million exemption to make the buy-in more affordable for workers.
## Things to Watch Out For
- **Provincial tax treatment**: Provinces have their own tax systems—check whether this federal exemption is recognized locally.
- **Legal structure and documentation**: The trust or cooperative must meet all regulatory/legislative definitions and be properly established.
- **Reserved gains & timing**: The reserve regime requires that a portion of gain is recognized annually—planning around income years matters. ([canada.ca](https://www.canada.ca/content/dam/fin/publications/taxexp-depfisc/2026/taxexp-depfisc-26-eng.pdf?utm_source=openai))
- **Capital gains limits & other deductions**: If you’ve already claimed some EOCGE or similar exemptions, make sure you don’t exceed limits cumulatively.
## Bottom Line
Making the EOT exemption permanent turns something once viewed as niche into a mainstream option for business transfers. Whether you're an owner plotting an exit, employees buying in, or a cooperative forming, this change offers a powerful tax planning tool. But it rests on meeting specific legal criteria and aligning transactions with budget timelines. Planning early is key.