What is the Employee Ownership Trust (EOT) Capital Gains Exemption?
Under recent tax changes in Bill C-30, the federal government has made permanent the exemption for up to CA$10 million in capital gains realized when a qualifying business is sold to an Employee Ownership Trust or a worker co-operative. Previously, this was a temporary incentive expiring at the end of 2026. (budget.canada.ca)
Who qualifies?
To use this exemption, certain conditions must be met:
- The business being sold must be a Qualifying Business (QB) — for example, a Canadian-controlled private corporation (CCPC) meeting the criteria under subsection 248(1). (canada.ca)
- The buyer must be an Employee Ownership Trust (EOT) or a worker cooperative corporation. The trust must be irrevocable, resident in Canada, and established for the benefit of current/former employees. (budget.canada.ca)
- Distributions from trusts and governance structures must meet criteria for fair treatment, minimum employee votes, etc. (canada.ca)
Key tax planning strategies for business owners
- Timing the sale: Since the exemption is now permanent, sellers can plan transfers after 2023 without worrying about expiry at end-2026. However, it's ideal to assess when the corporate entity qualifies and all structure requirements are in place. (budget.canada.ca)
- Structuring ownership: Use trusts or cooperative ownership models, but ensure compliance with all conditions (e.g. irrevocable trust, benefit eligibility, fair voting rights, minimum employee beneficiary ratios). Non-compliance can result in clawbacks. (canada.ca)
- Loan arrangements for share purchase: If the EOT or coop borrows to purchase shares, there may be tax-beneficial rules under subsection 15(2.51) if it's a loan solely to facilitate the business transfer, repaid within 15 years. (canada.ca)
Examples
- A family business owner sells their company (QB) to an EOT in 2026, realizes CA$8 million in capital gains. Instead of being taxed on that entire gain, none of the capital gains is taxed up to the CA$10 million exemption. The employees now own the business through the trust.
- If a cooperative wants to buy the business, and meets coop-ownership criteria, that also qualifies.
Important implications & takeaways
- Permanence reduces urgency—owners can now plan well in advance rather than rush before a deadline.
- Financial, legal, and advisory costs for structuring must be weighed against tax savings and value of keeping business ownership within employees.
- Workers including current/former employees gain access to value and benefit from the growth they helped create.
Actionable steps for businesses
- Review your corporate structure: Is your business a CCPC? Is it eligible as a QB under current definitions?
- Evaluate EOT or cooperative format: Work with legal and tax advisors to set up governance, eligibility, and trust terms correctly.
- Consider loan terms: If you plan to finance via trust, ensure repayment arrangements meet rules (e.g. 15-year repayment for certain trust loans).
- Check other tax policies: Combine this exemption with other incentives (e.g. immediate expensing of eligible greenhouse buildings, see article on green investment).
Establishing a business sale to employees can be a win-win: reward founders, align employee interests, and unlock tax savings.