Entity Setup
Using Employee Ownership Trusts for Business Succession in Canada: A Strategic Case Study
The Employee Ownership Trust (EOT) tax exemption offers retiring business owners a powerful succession plan — this case study shows how to deploy it strategically before the 2026 deadline.
By NomadicTax Research Team • 5-8 min read • September 2, 2026
## What Is an Employee Ownership Trust (EOT)?
An **EOT** is a structure through which a business owner transfers shares to a trust that holds them for the benefit of company employees. The federal government introduced a **tax exemption** allowing individuals (other than trusts) to exclude up to **$10 million in capital gains** on the sale of a business to an EOT or worker cooperative subject to qualifying rules. This temporary measure currently applies to qualifying dispositions sometime after 2023 through December 31, 2026. ([budget.canada.ca](https://www.budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
## Case: Succession Planning Before the End of 2026
**Scenario:** Alice owns a family business and wants to retire in **2027**. She’s considering selling to an EOT to transfer ownership to employees and benefit from the capital gains exemption.
**Planning steps:**
1. **Ensure the sale falls before December 31, 2026** — the exemption is currently **temporary and set to expire end-of-2026** unless made permanent. ([budget.canada.ca](https://www.budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai))
2. **Qualifying business transfer requirements:**
- The shares must be owned by Alice and/or related persons for the 24 months preceding the sale.\
- During that period, more than 50% of fair market value must come from active business assets.\
- Alice must meet other conditions under sections 110.61 and 110.62 of the ITA. ([fin.canada.ca](https://fin.canada.ca/drleg-apl/2025/ita-lir-0825-n-eng.pdf?utm_source=openai))
3. **Life after the sale:**
- If the EOT structure later fails any qualifying condition (e.g., disqualifying event), a capital gain may be triggered at that moment for the trust. ([fin.canada.ca](https://fin.canada.ca/drleg-apl/2024/nwmm-amvm-0424-n-2-eng.pdf?utm_source=openai))
**Outcome:** If Alice completes sale by end-2026 under the qualifying conditions, she may exclude up to **$10 million of capital gains**, providing a powerful succession strategy and tax relief.
## What the Spring Economic Update 2026 Proposes
The government proposes to **make the $10 million capital gains exemption permanent**, removing the current sunset date of December 31, 2026. ([budget.canada.ca](https://www.budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html?utm_source=openai)) This means that business owners planning future exits after 2026 may also benefit, provided the conditions are satisfied.
## Actionable Tips
- **Start transitions early**: business owners aiming to use the exemption must plan ahead to meet all eligibility criteria and ensure agents (trustees etc.) comply.
- **Comply with ownership and active business tests**: avoid shortfalls in the 24-month holding condition or insufficient business-asset exposure.
- **Structure sales properly**: ensure the trust qualifies, the trust controls the business, and that employees’ roles meet “beneficiary” definitions.
- **Monitor proposed changes making the exemption permanent** and consider delaying or structuring part of the transaction if deadlines are uncertain.
## Why This Case Matters
For small and medium business owners, especially those wanting to hand off control to employees, the EOT structure blends succession with tax planning. With the potential permanence of the exemption, this is a high-impact moment to strategize a sale or cooperative conversion in a tax-efficient manner.