Employee Ownership Trusts

Budget 2023 proposed amendments to the Income Tax Act (“ITA”) to allow for the sale of a “qualifying business” to an Employee Ownership Trust (“EOT”). The rules are effective as of January 1, 2024.


There must be a qualifying business transfer to the EOT, which occurs when a taxpayer disposes of shares of a subject corporation to an EOT (or a Canadian-controlled private corporation (“CCPC”) wholly owned by the EOT) and the following conditions are met:


  • immediately before the disposition, the subject corporation carries on an active business;
  • at the time of disposition:
    • the taxpayer deals at arm’s length with the trust and any purchaser corporation,
    • the trust acquires control of the subject corporation, and
    • the trust is an EOT, and
  • at all times after the disposition, the taxpayer deals at arm’s length and does not have any right or influence to control the subject corporation, EOT and any purchaser corporation.


In order for a trust to qualify as an EOT, the following conditions must be met:


  • The trust holds a controlling interest in the shares of one or more qualifying businesses. All or substantially all of the EOT’s assets must be shares of qualifying businesses.
  • The EOT’s beneficiaries are comprised of qualifying employees only. Qualifying employees generally include all individuals employed by qualifying businesses controlled by the trust and former employees (including Estates).  Employees on probation or who own a significant interest in the qualifying business are excluded.
  • All trustees of the EOT generally must be Canadian residents. If any trustee is appointed (other than by an election within the last five years by the beneficiaries of the EOT), then at least 60 per cent of all trustees must be persons that deal at arm’s length with each person who has sold shares of a qualifying business to the trust. Also, more than 50 per cent of the current employee beneficiaries of the EOT must approve of certain decisions affecting the qualifying business (e.g. change of control, wind-up, amalgamation).


The proposed EOT rules carry the following tax benefits:


  • EOTs are not subject to the 21-year deemed disposition rule (which deems a trust to dispose of its capital property every 21 years).
  • The repayment period to avoid an income inclusion under the shareholder loan rules would be extended to 15 years (from one year) for amounts loaned to an EOT from a qualifying business to purchase shares in a qualifying business.
  • Shareholder loans made by the qualifying business to the EOT are excluded from subsection 80.4(2)’s deemed interest benefit rules.
  • On a sale of a qualifying corporation to an EOT, the existing capital gains reserve would be extended to up to 10 years (from five years) so that a vendor could defer recognizing part of the capital gain for up to 10 years.