What is the Employee Ownership Trust Tax Exemption?
Canada’s Spring Economic Update 2026 proposed a permanent exemption from capital gains tax when a business is sold to an employee ownership trust or worker cooperative, up to $10 million in gain. This was previously a temporary incentive. (budget.canada.ca)
Why this matters for business owners
- If you're planning an exit—selling your shares—this can reduce your capital gains tax burden significantly.
- For family businesses or founders, this offers a path to sell the business without losing control immediately, transferring ownership into a trust for employees.
- Worker cooperatives can use this to attract investment, improve morale, and structure ownership more equitably.
Tax planning strategies to leverage the exemption
- Sell to an Employee Ownership Trust (EOT): Ensure your share sale qualifies—ownership, structure, and trust rules matter. Documenting the trust properly ensures the full exemption applies.
- Stagger your exit: If part of the $10 million limit remains, consider partial sales or multiple tranches that spread the gain.
- Review corporate structure: Ensure there’s no impediment via complex holding companies or affiliations that might invalidate the exemption.
Examples in practice
- Example A: Founder owns shares worth $8 million in a small software company. Sells whole business to an EOT. Because it’s under $10 million, no capital gains tax payable.
- Example B: Founder anticipates $15 million gain. Could sell $10 million worth of shares to the EOT now (exempt) and the rest later or via different structure, possibly reinvesting proceeds.
Actionable steps before year-end 2026
- Assess whether your business qualifies as a “qualifying disposition” to an EOT or worker co-op.
- Hire a tax specialist to draft or review the trust documents.
- Time your sale: Exemption currently applies for dispositions after 2023 and through end of 2026. Permanent status just announced, but any sale in 2026 still benefits under temporary rules. (budget.canada.ca)
- Project future capital gain amounts—stay within $10 million if you want full exemption.
Takeaway: This is a rare window to plan for a tax-exempt exit. A sale to employees can preserve legacy and reduce tax – but planning must be precise before the sunset of previous temporary provisions.