Canada’s $2 Trillion Succession Problem Has a Solution Most Business Owners Haven’t Heard Of
Employee Ownership Trusts give founders a tax-advantaged exit that keeps businesses Canadian, rewards employees, and preserves what they’ve built.
Written by: Andrew Lawlor, Director
Three out of four Canadian business owners plan to exit their companies within the next decade. That represents more than $2 trillion in business assets changing hands, according to the Canadian Federation of Independent Business. Yet only 9% of those owners have a formal succession plan in place.
The risks of inaction go well beyond business closures. BDC research shows that owners planning an exit stop investing in their businesses, with 71% becoming reluctant to take risks. This “pre-exit drift” erodes company value, suppresses productivity, and weakens the businesses before they transition. In many cases, the absence of a clear succession path leads to fire-sale acquisitions, often to foreign buyers, or forces business owners to accept terms that undervalue what they have built.
The Hidden Crisis: Canada’s $2 Trillion Succession Gap
For an economy where SMEs account for roughly half of GDP and approximately 64% of private sector employment, getting succession wrong at scale would compound a productivity challenge Canada is already facing.
The standard succession playbook is limited. Most business owners have four options:
- Sell to a competitor who may strip the brand and consolidate
- Sell to private equity and lose operational control
- Transfer to family
- Close the doors
What most owners do not know is that a fifth path now exists, one that did not exist in Canada until June 2024.
What is an Employee Ownership Trust (EOT)?
An Employee Ownership Trust (EOT) is a structure in which a trust acquires and holds a controlling interest (at least 51%) of a company’s shares on behalf of its employees. Employees become indirect owners without investing any of their own capital.
The Financial Incentive: Saving $2.5M+ in Capital Gains Tax
The purchase is typically funded through a combination of bank debt and a vendor take-back note (i.e., loan from the seller). The critical policy incentive is a capital gains tax exemption: the first $10 million in capital gains realized on a qualifying sale to an EOT is exempt from taxation. Depending on province, this represents approximately $2.5 million to $3.5 million in real tax savings. When combined with the existing Lifetime Capital Gains Exemption, a single seller could realize more than $11 million in tax-free capital gains. The exemption is currently available for qualifying transactions completed between January 1, 2024, and December 31, 2026.
Canada’s EOT regime is young. The first transaction closed in January 2025. The largest to date is Taproot Community Support Services, with 750 employees across three provinces. Employee Ownership Canada expects another 20 to 30 companies to complete transitions in 2026. These numbers are modest, but so were the early UK numbers. The UK now sees approximately 300 new EOTs per year, a decade after introducing its framework with similar incentives.
How CBGF Supports EOT Transitions
At the Canadian Business Growth Fund, we are positioning to back EOT transactions with minority equity alongside bank debt and vendor take-back notes. We will explore further on how that works, and why it matters, next week.
