Ottawa Makes $10-million EOT Exemption Permanent

This article was originally published in Finance et Investissement.

In its Spring Economic Update, released on April 28, the federal government delivered welcome news for business owners and their advisors: the capital gains tax exemption of up to $10 million on the sale of a business to an employee ownership trust (“EOT”) is now permanent.

Initially, the exemption only applied to transfers completed between January 1, 2024, and December 31, 2026. By removing the sunset clause, the government is demonstrating its commitment to the long-term viability of collective ownership models and employee succession strategies.

For financial planners, tax advisors and succession business advisors, this is a meaningful addition to the business succession planning toolkit. As more business owners approach retirement age, business continuity is increasingly top of mind, and the EOT structure offers an attractive alternative when a third-party sale or family transfer is not the right fit.

In practice, an EOT enables employees to indirectly acquire the business without having to personally finance the purchase of shares. Those shares are held in trust on behalf of current and former employees, subject to the specific rules set out in tax legislation.

Key eligibility requirements

To qualify for the $10-million capital gains exemption, an EOT must meet a number of technical conditions:

• The trust must be resident in Canada and established exclusively for the benefit of current or former employees.
• Beneficiaries’ interests must be determined equitably, typically based on hours worked or compensation received.
• Trustees must not favour some beneficiaries over others.
• At least one-third of the trustees must be employees of the business.
• The trust must have substantially all of its assets attributable to shares in the qualifying business.
• The qualifying business must generally be actively operating in Canada.

The EOT rules also include provisions to make the transaction more financially manageable:

• Sellers can defer recognition of capital gains by spreading the reserve over up to 10 years (double the standard maximum).
• Loans made to the trust by the qualifying business can be repaid over up to 15 years before triggering income inclusion.
• The trust is exempt from the 21-year deemed disposition rule that normally applies to trusts, provided it continues to meet the qualifying conditions.

A structure that has yet to catch on

Despite these substantial tax benefits, EOTs remain relatively rare in practice. The technical complexity of the rules, governance and control constraints, and the previously uncertain lifespan of the program have all played a role in limiting uptake.

The government’s decision to make the $10-million exemption permanent could change this. Greater long-term certainty could prompt more entrepreneurs and their advisors to seriously consider the EOT model, particularly in industries where maintaining operational stability, retaining key employees, and preserving company culture are priorities.

An EOT will not be the right answer for every situation, but it has now earned a place as a viable option that deserves consideration in any serious succession or exit planning process.

Thinking about an EOT for your business succession plan? While the permanence of the $10-million exemption opens new doors, the structure remains technically complex and every situation is different. Miller Thomson’s Tax Lawyers can help you determine whether an EOT is a good fit for your transition strategy, guide you through the eligibility requirements, and structure the transaction in the most effective way.