The $10 Million Question: Why Canada’s EOT Tax Incentive Should Be Made Permanent
The single largest risk to Canada’s EOT ecosystem isn’t structural, it’s political.
Written by: Andrew Lawlor, Director
The $10 million capital gains exemption for qualifying sales to Employee Ownership Trusts expires on December 31, 2026. This is the single largest risk to the Canadian EOT ecosystem. As experts at the Canadian Tax Foundation have argued, if the exemption lapses, sales to EOTs will likely dwindle or, given that succession planning takes years, may never reach meaningful scale.
Business owners who sell to an EOT accept more complexity, longer payout timelines, and more structural risk than they would in a straightforward sale to a third party. The tax incentive is what makes that trade-off rational. Without it, the economic case for choosing an EOT over a conventional sale weakens materially.
That trade-off is also why the current policy uncertainty matters so much right now. This post publishes on the eve of the federal government’s Spring Economic Update. That update may or may not address the EOT exemption. If it is silent, the consequence will be further deterioration of the pipeline of owners exploring employee ownership as an option. With EOT transactions typically taking nine to twelve months from feasibility to close, any business owner starting the process today is unlikely to complete a qualifying transfer before the December 31, 2026 deadline. The top of the funnel has already thinned. Advisors report owners pausing or shelving EOT conversations pending clarity, and every week without a decision compounds the problem.
The UK’s experience is directly relevant. A predecessor structure to the UK’s EOT existed before 2014, but saw minimal usage due to the absence of a capital gains exemption. Once the tax incentive was introduced, adoption accelerated and the UK introduced an uncapped capital gains exemption, compared to Canada’s $10 million cap. Canada’s three-year window is too short to fairly evaluate the potential. The Department of Finance projected a fiscal cost of just $52 million over three years for the exemption; a small amount relative to the $2 trillion in business assets changing hands through Canada’s succession transition. We believe the exemption should be extended and, ultimately, made permanent. Without it, Canada will have introduced a promising framework and then pulled the rug out before it could take hold.
The bigger picture reinforces the urgency. Canada is facing a generational transition in business ownership at a moment of economic vulnerability. Trade tensions with the United States are increasing pressure on Canadian businesses, and the risk of valuable mid-market companies being acquired by foreign buyers is real and growing. As discussed last week, employee-owned businesses are more resilient to market volatility and uncertainty. EOTs offer a mechanism to keep viable Canadian businesses in Canadian hands, distribute wealth more broadly to employees, and preserve the jobs and community ties that these businesses support.
This is not an appropriate solution for every business. EOTs are best suited for established companies with stable cash flows, strong management teams, and owners who care about legacy alongside liquidity. The ecosystem of advisors, lenders, legal specialists, and equity partners needs to develop further – but the foundation is strong.
At CBGF, we invest in growing Canadian businesses and help them stay independent and Canadian-owned. As a certified B Corp, we measure success not just by financial returns, but by the impact we create for employees, communities, and the broader economy. Employee Ownership Trusts align directly with that mission. We are committed to being an active participant in building this ecosystem as an equity partner.
If you are a business owner thinking about succession, or an advisor working with one, we welcome the conversation.
