The $10 Million Employee Ownership Trust Exemption Just Became Permanent

Selling a business to its own employees has always sounded better in principle than in practice, employees rarely have the personal capital to buy a company outright, and a departing owner rarely wants to wait a decade to get paid. Canada's Employee Ownership Trust rules were built specifically to solve both problems at once, and a policy change this spring just removed the biggest reason owners were hesitating to use them[1].

What An EOT Actually Is

An Employee Ownership Trust is a Canadian-resident trust that acquires and holds a controlling interest, at least 51% of shares, in a company for the collective benefit of its employees[2]. Rather than employees individually financing a purchase, the trust typically borrows from the company itself, repaying the loan over time out of future profits. The departing owner receives payment over an extended period rather than a single closing-day cheque, and the business itself, its culture, its name, its independence, continues largely as it was[2].

The $10 Million Exemption

First introduced in the 2023 Fall Economic Statement and legislated in 2024, the EOT incentive exempts the first $10 million in capital gains realized on a qualifying sale to an EOT[3]. Several conditions must be met throughout the two years before the sale and at the time of sale, and the exemption is shared in an agreed-upon manner where multiple owners sell shares as part of the same transfer[4]. Because it stacks on top of the Lifetime Capital Gains Exemption, a single seller could realize more than $11 million in tax-free proceeds combining both, worth roughly $2.5 million or more in tax savings at typical top marginal rates[3].

Why "Now Permanent" Actually Matters

The original legislation limited the $10 million exemption to qualifying business transfers occurring in the 2024, 2025, and 2026 tax years only[5]. That sunset clause meant any owner considering an EOT sale was working against a hard deadline, and it meant EOT planning could never be evaluated purely on its succession merits, timing pressure was always part of the calculation. The April 28, 2026 Spring Economic Update removed that constraint entirely, allowing EOT conversions to be assessed as part of a genuine long-term succession strategy rather than a transaction that had to close before a specific date[6].

The Conditions That Still Apply

Permanence does not mean the exemption is unconditional. To qualify, the qualifying business transfer generally needs to meet the following throughout the two years leading up to the sale and at the time of sale[7]:

• The seller must be an individual (or certain personal trusts), age 18 or older, effectively excluding a holding company as the vendor.
• The seller must have been actively engaged in the business on a regular, continuous basis for at least 24 months before the sale.
• At least 51% of the shares must be sold to the EOT, and the exemption applies only to the first qualifying transaction.
• At least 75% of the trust's beneficiaries must be Canadian residents at the time of transfer.
• A joint election between the EOT and the seller must be filed with CRA before the EOT's tax return filing deadline.

A disqualifying event, the trust ceasing to be an EOT, or the business falling below 50% active-business asset use at the start of two consecutive tax years, can reverse the tax benefits already claimed[7].

Three Rules That Make The Financing Work

Beyond the headline exemption, three technical changes specifically address how an EOT sale actually gets financed[8]:

Is This The Right Exit For Your Business

An EOT tends to fit best for businesses in the roughly $5 million to $75 million EBITDA range with 30 or more employees, where the owner values continuity, culture, and legacy as much as maximizing the final sale price, and where no clean family successor or third-party buyer is the obvious answer[4]. It is not a fit for every business, the financing still depends on the company's own future profitability supporting the buyout, and the 24-month active engagement and share majority requirements need to be planned for well in advance, not decided the year of sale.