January 22, 2026 · Estate, Financial and Succession Planning

Exploring Employee Ownership Trust As A Way For Succession Planning

An image of a small business owner in Oakville who is discussing Employee Ownership Trusts (EOTs) with his staff

Every business owner’s deepest desire is to see their business outlive them by growing into a brand that carries its own legacy. For a business to outlive its founder, a robust and well-thought-out succession plan is required. Who will take forward your business and brand after you’ve retired? Who will prove to be a good and trustworthy successor?  While most family-owned businesses see the owner’s children take up the mantle, there is yet another option when it comes to choosing a worthy successor – your employees. The very employees who have worked so hard to make the company what it is today can also become their successors, creating a mutually beneficial arrangement through an Employee Ownership Trust (EOT).

An EOT not only ensures your business has rightful successors but also prevents foreign companies from taking over, safeguarding its Canadian ownership and contribution to the Canadian economy. From January 1, 2024, Employee Ownership Transfers have been granted special tax advantages to encourage more companies to adopt this model of succession planning.

How Does Employee Ownership Trust Work?

The main purpose of setting up an EOT is to bestow longevity and sustainable growth to the business you have so painstakingly established by selling 51% or more of the company’s shares to an employee benefit trust in a phased manner, which will represent the interests of your employees. Thus, EOT will become the majority shareholder of your company, and your employees will be the owners. This approach not only serves as an incentive for employees to continue working for the company’s success but also provides the company with certain tax benefits.

Also, unlike in some cases where succession by family members can give rise to conflict or disruption within the company, the transition by EOT is smoother and more favourable to employees.

However, EOT has to meet certain terms and conditions to qualify for tax benefits. For instance, the laws of the EOT must be such that they benefit all employees equally. Also, the trustees representing the employees’ share of the company must be Canadian citizens or Canadian licensed trust companies with equal voting rights. At least one third of the trustees must be active employees of the company.

Tax Advantage of Employee Ownership Trusts

The January 1, 2024, EOT tax rules offer a temporary tax exemption on the first $10 million capital gain from selling the business to the EOT for the years 2024, 2025, and 2026. So, you still have a year to take advantage of this opportunity. Moreover, Employee Ownership Trusts are also exempt from the 21-year deemed disposition rule, under which any trust is dissolved and thereafter taxed under regular tax rules after 21 years. 

While such tax benefits are obviously attractive, not all businesses can qualify as EOTs. 

How To Qualify as an Employee Ownership Trust

For a trust to be eligible as an EOT, it must adhere to certain requirements:

  • Residency: The trust must be Canadian, with its core administrative control being physically located in Canada.
  • Ownership: A minimum of 90% of the trust’s property should come from EOT’s shares in the eligible companies.
  • Business Control: The EOT must hold a majority or controlling interest and effective business control of the qualifying businesses. Moreover, a minimum of 60% of the business’s directors must be independent of previous controlling shareholders and their affiliates and must act at arm’s length from them.

Apart from this, the employees should have a say in major decisions. For example, more than 50% of the employee beneficiaries have to approve of any mergers, closures, sales, or amalgamations of the qualifying businesses. The same stands true for any decision that could lead to 25% of the active employee beneficiaries losing their job.

All these decisions are made through the trustee elected by the employees.

There are more detailed eligibility requirements for EOT, which a professional consultant can help you with.

Who Are the Beneficiaries of Employee Ownership Trusts?

While EOTs aim for equality and inclusivity for all current employees of a company, there are certain criteria that even employees must fulfil to enjoy the benefits the EOT offers. An employee cannot be part of an EOT if they –

  • directly or indirectly hold 10% or more of the fair market value (FMV) of any class of shares in the eligible companies.
  • hold 50% or more of the FMV of any class of shares, either individually or together with related or associated individuals.
  • held 50% or more of the FMV of all shares or loans of the qualifying company before the organization became EOT.
  • are still on probation, which is not more than 12 months. 

How Do Employees Benefit From EOT

Following the above considerations, the employees who are eligible as the EOT’s beneficiaries can receive capital and income bonuses based on:

  • Tenure: The Longer the tenure served at the company, the higher the rewards might be
  • Salary: Those in the higher salary range, i.e., those in a more senior position, could get more benefits
  • Hours put in: Those who work longer hours might be awarded accordingly.

With the EOT succession structure, employees get to enjoy ownership status without having to use up their personal savings or take loans to buy shares in the capacity of individual investors. On the contrary, it is you, the owner, upon whom the onus of transferring the majority share to the EOT lies. Employees enjoy bonuses and a share in profits.

How Do Business Owners Benefit From EOT?

While the EOT succession method benefits all active employees of a profitable company, what is in it for the business owner?

The business owner secures reliable, motivated successors to continue the business in a way that benefits its employees. Moreover, the business owner can spread the tax over multiple years as they gradually transition shares. The CRA has also extended the EOT’s time to build a capital gain reserve from five years to 10 years, giving the business owner flexibility to spread the capital gain over a longer term.

The business can accumulate the EOT reserve from business profits, avoiding raising debt to fund the purchase of shares. This succession helps the business avoid the burden of debt. However, the long term also exposes you to the period of downturn and losses.

Hence, EOT is ideal for businesses with a robust business model, sustainable profits, and that can be profitably run by employees. This is where a professional trustee can help.

Contact Glenn Graydon Wright LLP in Oakville to Help You Build Employee Ownership Trust

A professional business consultant can help you strengthen your business model for employee ownership and help you prepare a well-thought-out EOT structure. At Glenn Graydon Wright LLP, our accountants and business consultants can help plan succession and set up EOT. To learn more about how Glenn Graydon Wright LLP can provide you with the best succession planning expertise, contact us a call today at 905-845-6633, or connect with us online, to schedule an initial consultation.