Canada Makes Employee Ownership Trust Tax Incentive Permanent

In 2024, Canada enacted legislation that exempts the first $10 million (Canadian) in gains from the sale of a business to a qualifying employee ownership trust (EOT). The exemption was set to be available only until the end of 2026. The government’s proposed 2026 budget would have eliminated the incentive, but after a campaign by supporters of the new law, the spring 2026 government budget update will make it permanent. 

EOTs were first developed in the UK and were not intended to convey an equity ownership interest to employees. Instead, dividends on the shares held in the trust are paid to participants. If the company is sold, however, the employees would normally divide up the proceeds. In the Canadian model, companies can design their EOT to provide an equity stake.

The EOT must meet a variety of rules:

• At least 51% of the stock must be sold to the EOT. The exemption applies only to the first transaction.
• All current and future employees must be named as beneficiaries of the trust.
• The allocation of dividends and any proceeds from a sale paid to employees can be based on relative pay, seniority, hours worked, or a combination thereof. Companies can have a “look-back” provision to provide some of the sale proceeds to employees covered by the trust before the sale, providing an equity stake for current and former employees. A concern with EOTs has been that after the acquisition debt is repaid, employees might decide to cash in by selling the company, even though some of them may not have been around when the debt was being paid off. This would provide more fairness in any such sale.
• At least one-third of the trustee board and company board members must be employees.