Entity Setup
Setting Up an Entity in Canada: Using Employee Ownership Trusts (EOTs) Permanently
Canada is making the Employee Ownership Trust (EOT) tax exemption permanent, offering a novel structure for business succession and employee wealth sharing.
By NomadicTax Research Team • 5-8 min read • July 3, 2026
## What Is an Employee Ownership Trust (EOT)?
An EOT is a trust that owns a controlling interest in a business; employees are the beneficial owners via the trust, while day-to-day governance remains in place. Canada now offers a **tax exemption** for EOTs permanently. ([canada.ca](https://www.canada.ca/en/department-finance/news/2026/04/spring-economic-update-2026-key-measures.html?utm_source=openai))
## What Has Changed
Previously a temporary measure, the **Employee Ownership Trust Tax Exemption** has been made **permanent** as part of the Spring Economic Update 2026. This move empowers employees and supports businesses through succession without the turmoil of selling vertically. ([canada.ca](https://www.canada.ca/en/department-finance/news/2026/04/spring-economic-update-2026-key-measures.html?utm_source=openai))
## Advantages to Business Owners and Employees
• **Smooth succession**: business founders can transfer ownership to an EOT without selling to outside owners.
• **Employee incentive and retention**: employees gain indirect ownership, boosting morale and potentially productivity.
• **Tax benefits**: profits going through the EOT structure may enjoy preferential tax treatment (exemptions) under Canadian law.
## Implementation Steps
1. Establish an EOT that meets the legal criteria under the Income Tax Act—identify beneficiaries, trustee(s), and ensure structure aligns with legislative rules.
2. Transfer shares or interest from the selling shareholders to the EOT. Must ensure the EOT controls a majority interest and meets control test.
3. Document governance: set parameters on how decisions are made and profits allocated to the trust for employees.
4. Ensure financial reporting: profits allocated to employees vs reinvested must be clear. Seek professional legal and tax advice.
## Example Scenario
Imagine a business owner nearing retirement wants to transition ownership to employees. Using an EOT, they transfer control to the trust. The trust owns 60% of the shares; 40% remain under management control. Employees share in profits via trust distributions. The business continues under continuity, and the EOT qualifies for the now-permanent tax exemption. Employees may receive payments as trust distributions rather than wages.
The business must comply with CRA’s conditions regarding EOTs and retain the exemption by maintaining required control structures and reporting.
## Things to Consider & Next Steps
- Get legal & tax advisers involved early to structure properly and ensure all documentation is sound.
- Monitor how provinces treat EOTs—provincial tax treatment may vary.
- Examine how distributing profits vs reinvesting may affect tax status.
**Bottom line:** The permanent EOT tax exemption offers a powerful tool for business succession, aligning owner exit strategies with employee benefit and incentive. Well-structured, it can deliver lasting value.