Entity Setup
Tax Planning Event: Using the Employee Ownership Trust Exemption to Succession Plan
Starting in 2026, the Employee Ownership Trust capital gains exemption becomes permanent, offering an appealing tool for business owners planning exits or selling to worker co-ops.
By NomadicTax Research Team • 5-8 min read • June 14, 2026
## What Is the Employee Ownership Trust (EOT) Exemption?
The **Employee Ownership Trust Tax Exemption** allows business owners to realize up to **CAD 10 million in capital gains**, when transferring business ownership to an Employee Ownership Trust or qualifying worker cooperative. Originally a temporary measure (2024-2026), the Spring Economic Update 2026 proposes making this exemption **permanent**. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/chap1-en.html?utm_source=openai))
## Why It Matters for Business Owners
- **Succession without selling to strangers**: Owners can transition businesses to trusts benefitting employees, preserving legacy and loyalty.
- **Major tax relief**: Avoid capital gains tax on amounts up to CAD 10 million, possibly saving **hundreds of thousands** or more depending on valuation.
- **More options, more stability**: Being permanent removes uncertainty around expiry of the measure in 2026.
## How It Works: Key Requirements
To qualify:
- The business must be sold to an **Employee Ownership Trust (EOT)** or worker cooperative.
- The sale must happen **after 2023**. Exemption applies to eligible dispositions in 2024, 2025, 2026 — and will continue thereafter under proposed permanent status. ([budget.canada.ca](https://budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
- It should meet definitions: Canadian controlled, certain residencies, governance standards. Refer to the Income Tax Act (sections 110.61,110.62) for details. ([canada.ca](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/whats-new.html?utm_source=openai))
## Practical Example
**Scenario:** Jane owns a manufacturing business valued at CAD 12 million. She wants to hand it off to employees through an EOT.
- She qualifies for a CAD 10 million exemption; capital gain on first CAD 10 million is exempt.
- Remaining CAD 2 million taxed under normal rules.
- After creating a trust meeting all conditions, employees benefit from profit distributions and involvement.
## Actionable Steps If You’re Considering This Path
1. **Assess your business structure**: Are you a Canadian controlled private corporation? Do share control conditions qualify?
2. **Engage legal and tax advisors**: To structure documents so that the trust qualifies, ensuring governance, trustee roles, and shareholder control requirements are met.
3. **Valuation**: Get a professional appraisal to verify gains.
4. **Plan early**: Since exemptions apply from 2024 onward, making sure your sale aligns with rules.
5. **File properly**: Use correct schedules and report under the relevant sections of the Income Tax Act.
## Risks & Considerations
- If the trust fails to meet conditions (e.g., control or trustees), you may lose the exemption.
- Employees will inherit ownership responsibilities; good governance and trusts administration are essential.
- One must still manage tax exposure on portion above CAD 10 million.
Make this tool part of your **tax planning** strategy if considering exit options in the next few years—especially for small-to-medium sized businesses looking toward employee ownership. Permanent status means stability for planning ahead.