Entity Setup
Succession Planning with Employee Ownership Trusts: How to Secure the \$10M Capital Gains Exemption
Explore how the Employee Ownership Trust (EOT) capital gains exemption works, why making it permanent matters, and how small business owners should act now to benefit from this major tax shift.
By NomadicTax Research Team • 5-8 min read • August 13, 2026
## What is the EOT Capital Gains Exemption?
An **Employee Ownership Trust (EOT)** is a vehicle that allows business owners to transition ownership to employees via a trust. Under current policy, owners can exclude up to **\$10 million in capital gains** when selling to an EOT (or qualifying worker cooperative corporation), for dispositions after 2023 and through the end of 2026. This is known as the Employee Ownership Capital Gains Exemption (EOCGE). ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/chap1-en.html?utm_source=openai))
## What’s Changing: Making It Permanent
The Spring Economic Update 2026 proposes to make this exemption **permanent**, removing uncertainty about the deadline. That means business owners can plan without pressure to complete transfers by December 31, 2026. ([canada.ca](https://www.canada.ca/en/department-finance/news/2026/04/spring-economic-update-2026-key-measures.html?utm_source=openai))
## Why It Matters: Key Benefits
- **Succession certainty**: Principals can sell to an EOT without rushing or risking losing the exemption.
- **Employee empowerment**: Workers gain ownership stakes, long-term incentives, and shared governance.
- **Tax savings**: Owners avoid large capital gains tax liabilities on qualifying sales.
## How to Qualify and Structure your Transition
| Condition | What you need to do |
|-----------|----------------------|
| Eligible buyer | Must be an EOT or a qualifying worker cooperative. |
| Qualifying shares | Often small business corporation shares/farming/fishing property meeting specific criteria under ITA. |
| Timing | If permanent is enacted, post-2026 dispositions also eligible. Before that, meet rules in force during 2024-2026. |
| Governance & conditions | Certain restrictions on voting rights, who qualifies as beneficiaries, and ensuring no undue influence from previous owners. |
## Strategic Actions Before & After Permanency
- If disposing **before end-2026**, confirm eligibility, gather valuations, and structure sale documents now.
- Review business operation to ensure it meets criteria for worker cooperative or EOT buyer.
- After permanency enactment, revisit your tax planning: adjust capital gains estimates, cash flow, and timing of sale.
- Ensure you coordinate with your financial and legal advisors to meet both tax and corporate requirements.
## Example Scenario
Sarah owns a small manufacturing business. She intends to sell it to an EOT at the end of 2027. Under current temporary rules, sales after 2024 through 2026 get the exemption. If made permanent, Sarah’s 2027 sale qualifies. If not, her 2027 sale would lose that benefit—underscoring why permanence is so important. By planning ahead Sarah might negotiate contracts or transitional ownership in ways that maximize the exemption regardless of the legislative timeline.
## Key Risks & Considerations
- Legislation may still require conditions that complicate eligibility (governance, valuation, cooperative structure).
- Some owners may prefer traditional sale to third parties—evaluate if EOT structure aligns with financial goals.
- Be aware of interplay with Lifetime Capital Gains Exemption and other tax credits.
## Bottom Line
This proposed permanent change for the EOT tax exemption is a major opportunity for business owners looking for succession solutions, especially in sectors dominated by small and medium enterprises. If you're considering a sale or transition, now is the time to evaluate whether an EOT structure makes sense—under existing temporary rules or under the permanent framework once passed.