Selling your business to your employees in Canada

By Succession Market. Last updated 4 November 2026.

What is an employee ownership trust?

An employee ownership trust, or EOT, is a trust that holds shares of a corporation for the benefit of the corporation's employees. The CRA says it can be used to buy a business without requiring the employees to pay directly for the shares. For owners, it is one more way to plan a succession.

To count as an EOT, the trust must be irrevocable and resident in Canada, exist for the benefit of the employees, and hold all or substantially all of its property, generally 90 percent or more, in shares of qualifying businesses it controls. A qualifying business has to be a Canadian controlled private corporation and pass some ownership tests as well.

How does a sale to an EOT work?

1. The trust is set up for the benefit of your employees.
2. The trust, or a company it owns outright, buys your shares.
3. Your company can lend the trust the money to pay you. The Income Tax Act lets that loan run up to 15 years if its only purpose is to make the sale happen and there are proper arrangements to repay it.
4. You and the trust file a joint election, in the prescribed form, by the trust's filing due date for the year of the sale.
5. After the sale the trust controls the company. You deal with it at arm's length, and you keep no right or influence that would let you control it.

What tax break does the owner get?

In a release dated 19 June 2026, Finance Canada says Bill C-30 received Royal Assent. Among its measures, Finance Canada lists making permanent the $10 million capital gains exemption for qualifying business transfers to employee ownership trusts and worker cooperatives. The Income Tax Act applies it to sales after 2023 and caps the elected amount at $10,000,000. The CRA's page on these trusts, last updated 1 May 2025, still says the exemption runs for the 2024, 2025 and 2026 tax years. The Act itself now sets no end date.

If you are paid over several years, a reserve lets you spread the gain. At least one tenth of it is counted each year, over up to ten years, instead of one fifth over five. Your lawyer papers the deal and your accountant advises on tax. Both are yours to choose.

Who can sell to an EOT?

The Income Tax Act sets the conditions. In plain terms:

• You are an individual selling shares of a corporation. A trust is not an individual, and a sole proprietorship has no shares to sell.
• You are at least 18.
• For the 24 months before the sale, no one but you or someone related to you owned the shares, and more than half their value came from assets used mainly in an active business.
• At the time of the sale, all or substantially all of the company's asset value comes from assets used mainly in an active business, not counting a partnership interest. The CRA says that generally means 90 percent or more.
• You, or your spouse or common law partner, worked in the business on a regular, continuous and substantial basis for at least one 24 month stretch before the sale.
• At least 75 percent of the trust's beneficiaries live in Canada.
• The company is a Canadian controlled private corporation.
• The company is not a professional corporation. If you practise through one, this exemption is not available.
• You and the trust elect jointly, in the prescribed form, for an amount of up to $10,000,000.

Ask your accountant to test your own shares against each condition.

What do I give up, and what can go wrong?

You give up control. After the sale you must deal at arm's length with the company, the trust and any company the trust owns, and you must not keep any right or influence that, if used, would let you control them. Staying on in a role that would let you control the company could break that test, so ask your lawyer first.

The trust has its own rules. At least one third of the trustees must be employees who benefit from the trust, and every trustee has an equal vote. More than half the employees must approve a winding up, amalgamation or merger of the company, and any change that would remove at least a quarter of them as beneficiaries, unless it is for cause.

The trust also has to keep qualifying. If it stops being an EOT, or the business stops being mainly an active business, within 24 months, your exemption is treated as never having applied. If either happens in the eight years after that, the trust is treated as having a gain equal to the amount you elected.

What does it mean for the employees?

They do not buy anything. Employees who have not finished a probation period of up to 12 months can be left out. Each person's share is set by a formula that uses only some mix of hours worked, pay up to a cap, and length of service. The CRA says employees may have more say in the business and may share in its profits.

The law also protects service. BC treats employment as continuous when a business is disposed of, and Alberta says an employee keeps all previous length of service when a business changes ownership. Our guides on selling a business in British Columbia and selling a business in Alberta cover what else changes hands.

How is the trust taxed?

The CRA describes an EOT as a taxable trust. Income it keeps is taxed in the trust at the top personal rate. Income it pays out to employees is taxed in their hands, and dividends keep their character, so they can qualify for the dividend tax credit.

When is a management buyout simpler?

When a few key people want to buy, a management buyout leaves out the trust's rules: the managers buy the shares as any buyer would. BDC's business purchase loan lists a management or employee buyout as a use. BDC's buyout article says to choose partners who share your values and vision, and that a good practice is to sell the key people a small share of the company early. It says handing over relationships with customers, suppliers and lenders often takes a few years. It also lists selling shares to employees as a way to finance a buyout, from a small stake for middle managers to shares for all employees. Our guide on how to pay for a business you buy covers your own money, BDC, the Canada Small Business Financing Program and seller financing.

The $10 million exemption is for sales to an EOT or a worker cooperative, so it does not cover a management buyout. The lifetime capital gains exemption may be available on qualified small business shares. The Canada Revenue Agency's 2026 table puts the limit at $1.275 million. Your accountant tells you the figure for the year you sell.

What should I do first?

1. Ask your accountant to test your shares against each condition above.
2. Ask your lawyer who the trustees would be and how the trust would pay you.
3. Get an outside number to compare. BDC says a valuation report can help in discussions about a family or management sale. Our guide on how many times profit a small business is worth shows how buyers count.

Questions owners ask

Sources

1. Employee Ownership Trusts (EOT), Canada Revenue Agency, page dated 1 May 2025, read 21 October 2026.
2. Legislation passes to implement measures from the Spring Economic Update 2026, Finance Canada, page dated 19 June 2026, read 21 October 2026.
3. Income Tax Act, section 248(1) (qualifying business transfer), Justice Laws, Government of Canada, current to 30 September 2026, read 21 October 2026.
4. Income Tax Act, section 110.61, Justice Laws, Government of Canada, current to 30 September 2026, read 21 October 2026.
5. Income Tax Act, section 40 (reserves), Justice Laws, Government of Canada, current to 30 September 2026, read 21 October 2026.
6. Income Tax Act, section 15 (loans to shareholders), Justice Laws, Government of Canada, current to 30 September 2026, read 21 October 2026.
7. Employment Standards Act, section 97, BC Laws, Government of British Columbia, current to 13 October 2026, read 21 October 2026.
8. Employment standards: termination and layoff, Government of Alberta, read 21 October 2026.
9. Business Purchase or Transfer Financing, BDC, read 21 October 2026.
10. How to execute a successful management buyout (MBO), BDC, read 21 October 2026.
11. How to sell your business, BDC, updated 4 October 2022, read 21 October 2026.
12. Productivity Mega Deduction backgrounder, Finance Canada, page dated 15 September 2026, read 21 October 2026.
13. Line 25400 Capital gains deduction, Canada Revenue Agency, page dated 5 February 2026, read 21 October 2026.
14. Definitions for capital gains, Canada Revenue Agency, page dated 5 February 2026, read 21 October 2026.
15. How the free sale plan works, Succession Market, sell page, read 21 October 2026.
16. Adjustment of personal income tax and benefit amounts, Canada Revenue Agency, page dated 12 March 2026, read 21 October 2026.

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