Entity Setup
Planning Around Canada’s Capital Gains Exemption for Employee Ownership Trusts
A new permanent $10 million capital gains exemption is coming for business owners selling to employee ownership trusts or worker co-ops — here’s how to make the most of it.
By NomadicTax Research Team • 5-8 min read • July 7, 2026
## What’s Changing: Permanent Capital Gains Exemption
The **Spring Economic Update 2026** proposes to make permanent the \$10 million capital gains exemption currently available for individuals (other than trusts) who sell their business to an employee ownership trust (EOT) or a worker cooperative. This measure, introduced temporarily and applicable for dispositions after 2023 up to the end of 2026, would now launch into permanence. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
## Who Qualifies?
- **Individuals**, **not trusts**, must sell shares of a business to a qualifying EOT or a worker cooperative corporation. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
- Shares disposed of should **occur in the period after 2023** (already met) and under this proposal, for any time **after 2026** as the exemption becomes permanent. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
- Certain conditions apply regarding the business being sold, the trust or co-op structure, and compliance with technical requirements in the Tax Acts. Always verify eligibility with a tax professional.
## Practical Benefits of the Exemption
- **Lower capital gains tax exposure:** By exempting up to \$10 million, sellers can retain more proceeds from a sale. For example, selling a qualifying business for \$15 million — where \$10 million of recognized capital gain qualifies — only gains above that will be taxable.
- **Support for Employee Ownership Models:** Encourages business owners to transfer ownership in ways that support worker participation and can help with succession planning.
- **Predictability:** Permanence means long-term business planning can incorporate this benefit without worrying about expiry.
## Actionable Steps for Business Owners
- **Review your ownership structure:** Ensure your business entity permits a sale to an EOT or cooperative. The legal form, share classes, and governance matter.
- **Document the qualifying transaction:** Because the terms of the sale, co-op or trust rules, and compliance documentation will be essential. Missed deadlines or incomplete filings might disqualify the exemption.
- **Talk with valuations experts early:** To assess old cost base vs fair market value, understand how much gain falls under personal vs corporate scenario, and project tax owed.
- **Consider timing:** If finishing disposition in late 2026, ensure all action steps are completed before year-end. Since exemption now being made permanent, those steps apply for future dispositions too.
## Example Scenario
*Jane* owns an eligible small business. She plans to sell to an EOT in 2027. The business is worth \$12 million, with \$10 million capital gain qualifying under the new rules. Under the new permanent exemption, Jane pays no capital gains tax on that \$10 million, only paying normally on the \$2 million above. This could translate into saving over \$2 million in tax at a 25-30% rate compared to a fully taxable sale.
## Caveats and Considerations
- Exemption **does not apply** if the seller is a **trust**.
- For co-ops and trusts, beyond sale timing, **structural compliance** (definitions, share distribution, control, etc.) must be satisfied.
- Tax planning costs (legal, accounting) could be non-trivial; sometimes perceived savings need to be weighed.
## Bottom Line
With this exemption becoming permanent, there’s a powerful new tool for business succession and sale planning. Sellers should assess eligibility immediately, ensure the transaction structure qualifies, and take advantage of this policy to minimize tax exposure while embracing employee participation and ownership models.