Employee ownership is gaining momentum in Canada as an alternative succession strategy that keeps businesses locally rooted while rewarding the people who helped build them. One of the most exciting developments in this space is the Employee Ownership Trust (EOT)…a structure designed to make ownership transitions smoother and more tax efficient.
WHAT IS AN EOT?
An EOT is a trust that holds shares of a business on behalf of its employees. Instead of employees buying shares individually, the trust becomes the shareholder, and employees are the beneficiaries. This model ensures continuity and stability without employees being required to take on personal risk.
THE $10 MILLION CAPITAL GAINS EXEMPTION
A significant incentive for business owners considering an EOT is the capital gains exemption legislation introduced in 2024. Here’s what you need to know:
- Amount: Up to $10 million in capital gains from the sale of a qualifying business to an EOT is capital gains tax-exempt.
- Timeline: This opportunity applies to transactions completed in 2024, 2025, and 2026.
- Expiry Date: The exemption ends December 31, 2026, (Employee Ownership Canada is advocating for the exemption to be made permanent, but there is nothing confirmed yet).
- Eligibility: The business must meet qualifying conditions, and the EOT must acquire a controlling interest (a minimum of 51%) in the company.
This exemption can significantly reduce the tax burden for owners, making EOTs an attractive alternative to third-party sales.
OTHER ADVANTAGES
Beyond the capital gains exemption, EOTs offer additional benefits:
- Extended Capital Gains Reserve: Sellers can spread the tax on remaining gains over 10 years, instead of the usual five.
- Flexible Financing: EOTs can borrow from the business to fund the purchase, with repayment terms of up to 15 years.
- Exemption from Certain Rules: Relief from deemed interest-benefit rules and the 21-year deemed disposition rule for trusts.
- Alternative Minimum Tax Relief: Gains eligible for the $10 million exemption are not subject to AMT.
IF YOU ARE INTERESTED, NOW IS THE TIME TO ACT
Succession planning takes time…often years. With the exemption set to expire at the end of 2026, owners should start planning now. Waiting too long could mean missing out on substantial tax savings. Advisors recommend:
- Allow a minimum of 6-9 months for the process.
- Begin discussions early to allow for valuation, financing, and legal structuring.
- Explore phased or hybrid transitions if a full sale isn’t immediately feasible.
- Stay informed…Employee Ownership Canada is pushing for permanence, but nothing is guaranteed yet.
Employee ownership isn’t just a tax strategy; it’s a way to preserve legacies, empower employees, and strengthen communities. If you’re a Canadian business owner considering succession, the current tax incentives make now the perfect time to explore an EOT…and Tallgrass can help.