Employee Ownership Trusts: A New Succession Option for Owner-Operated GTA Businesses

An Employee Ownership Trust (EOT) is a purpose-built federal trust structure, added to the Income Tax Act for business transfers completed after 2023, that lets a business owner sell their shares to a trust rather than to an individual, a competitor, or a private equity buyer. The trust then holds those shares indefinitely for the benefit of the company's employees.

The mechanic is simpler than it sounds. The owner sells their shares to the EOT the same way they would sell to any purchaser — through a share purchase agreement, with representations, warranties, and a closing. The difference is who is on the other side of the table: a trust, governed by trustees, that becomes the company's shareholder going forward. Employees do not personally borrow money or write a cheque to buy in. They become beneficiaries of a trust that owns the business on their collective behalf, sharing in its value and profits according to rules set out in the trust deed.

This is distinct from an employee share purchase plan or a co-op conversion. The company itself does not change — it keeps its corporate structure, its name, its contracts, and (typically) its management team. What changes is who owns the shares and how that ownership is governed. For an owner weighing their exit options, an EOT sits alongside a third-party or competitor sale and a family succession as a genuine third path — one that is still new enough in Canada that many business owners have not yet considered it.

For many owner-operated businesses in the GTA, the traditional exit options are narrower than owners expect. There may be no child or family member willing or able to take over. A sale to a competitor can mean the buyer wants the customer list and the brand but not the staff, the location, or the culture the owner spent decades building. A sale to a private equity buyer often comes with an integration plan, a new head office, and management changes the founder has no say over.

An EOT sale addresses several of these concerns directly:

• Continuity of jobs and operations. Because the buyer is a trust created to hold the business for employees, there is no competitor absorbing operations or PE sponsor imposing a cost-cutting integration plan. The business generally continues operating much as it did before.
• Preservation of culture and local ties. For a business with deep roots in Oakville, Mississauga, or elsewhere in the GTA, an EOT keeps decision-making inside the company rather than moving it to a head office elsewhere.
• A structured, less adversarial sale process. There is no competitive auction, no strategic buyer trying to extract concessions, and no need to shop the business to outside parties — which some owners find both faster and more discreet.
• Potential tax benefits. As discussed below, a qualifying sale to an EOT can be eligible for a significant capital gains exemption, in addition to the Lifetime Capital Gains Exemption that may already be available on a sale of qualifying small business shares.

None of this means an EOT sale is simpler than a conventional one, or that it will produce the same price as an open-market sale. It is a different trade-off — generally a longer, more patient payout in exchange for continuity — and it should be modelled against your other options with your accountant before you commit to it.

The most common question owners ask once they understand the concept is the practical one: where does the trust get the money to buy the business?

In almost every EOT transaction, the trust does not have cash on hand to pay the full purchase price at closing. Instead, the sale is typically financed with a vendor take-back note: the owner sells their shares to the trust, and the trust (or, functionally, the company itself) pays the purchase price over time out of the business's future earnings, distributed up to the trust as dividends and passed through to the seller under the note. Payout periods commonly run several years, sometimes longer, depending on the size of the transaction and the company's cash flow.

This has two practical implications for a seller to plan around. First, you are unlikely to receive full liquidity at closing the way you might in a cash sale to a strategic buyer — your ongoing payments depend on the business continuing to perform after you have handed over control. Second, this makes cash flow strength one of the most important qualifying factors for whether an EOT sale is realistic for your business at all, which is why it is worth assessing early with your lawyer and accountant rather than after a deal is already being negotiated.

An EOT is not simply a shell that the former owner continues to run informally. The Income Tax Act imposes specific governance conditions on the trustees who administer the trust, designed to ensure the business is genuinely being run for the benefit of employees rather than as a continuation of the previous owner's control.

Based on the current federal rules, two governance requirements matter most for a selling owner:

• A minimum share of employee trustees. At least one-third of the trust's trustees must be beneficiaries who are current employees of the business.
• Independence from the former owner group. Unless every trustee was elected by the current employee beneficiaries within the last five years, at least 60% of the trustees must deal at arm's length with each member of the group that sold shares to the trust — meaning the former owner and related parties cannot structurally control the trustee body after closing.

The practical effect is that a selling owner can often stay involved with the business — as a trustee, an employee, or in a consulting capacity — but cannot be a beneficiary of the trust (the Act excludes anyone who, with related persons, held 50% or more of the business before the sale, and anyone who claimed, or is related to someone who claimed, the capital gains exemption discussed below) and cannot retain the kind of unilateral control over governance that they had as the sole shareholder. Trustees also owe fiduciary duties to the employee beneficiaries: the Act requires every beneficiary's interest to be set on the same basis (using only hours worked, pay and length of service), and trustees cannot favour one group of employees over another.

These are technical trust and tax rules with real consequences if the trust deed and trustee composition are not structured correctly at the outset, and the specific tests can turn on details of your existing ownership group. Confirm with your lawyer, working alongside your accountant, exactly how these rules apply to your ownership structure before relying on any particular trustee arrangement.

Alongside the trust rules, the federal government introduced a capital gains exemption specifically for qualifying sales of a business to an EOT, set out in section 110.61 of the Income Tax Act (a parallel exemption in section 110.62 covers qualifying conversions to a worker cooperative). On a qualifying business transfer, the individuals selling shares, together with the trust, can jointly elect to shelter up to $10 million of capital gains from tax — an amount the sellers agree to divide among themselves where more than one person is disposing of shares. This exemption is separate from, and can potentially be layered with, the Lifetime Capital Gains Exemption discussed in our guide to selling a business in Canada, subject to the specific rules governing each.

Here is where owners need to pay close attention to timing. When this exemption was first introduced, it was only available for qualifying transfers completed before 2027 — a hard sunset date. In 2026, the federal government moved to remove that sunset: Bill C-30, the Spring Economic Update 2026 Implementation Act, received Royal Assent on June 18, 2026, and its provisions amend section 110.61 to make the $10-million exemption permanent rather than letting it lapse for transfers after 2026.

That said, this is a genuinely recent legislative change in an area of federal tax policy that has already moved once. Before you rely on this exemption in pricing a sale or negotiating a purchase agreement, confirm its current status — and whether your specific transaction meets the qualifying conditions (which include 24-month tests before the sale on who owned the shares and how the company's assets were used, a requirement that you (or your spouse or common-law partner) were actively involved in the business for at least 24 months, at least 75% of the trust's beneficiaries being resident in Canada, and a clawback if the trust or the business stops qualifying after the sale — against the sellers within the first 24 months, and against the trust for eight years after that. The exemption is claimed by individuals, so shares sold by a holding company do not qualify) — with your tax advisor. This is not a fact to take on faith from a blog post, including this one.

An EOT sale tends to fit a specific profile of owner-operated business well, and fits others poorly. It is worth an honest look if:

• There is no family member positioned or willing to take over the business, and you would rather avoid a sale to a competitor or private equity buyer
• The business generates stable, predictable free cash flow — because that cash flow is what funds the vendor take-back payments to you after closing
• You have a capable management team or senior employees who can run day-to-day operations without your daily involvement
• Preserving jobs, culture, and the company's independence matters to you as much as, or more than, maximizing the headline sale price
• You are comfortable with a phased payout over several years rather than a single lump sum at closing

An EOT is a poor fit where the business needs full liquidity immediately (to fund retirement, pay down other debt, or resolve a shareholder dispute), where cash flow is inconsistent or thin, or where the business is too small to reasonably support the added governance and administrative structure a trust requires. For many owners, the honest answer only becomes clear after running the numbers alongside the alternatives — which is exactly the kind of comparison worth doing with your lawyer and accountant before you commit to a sale process in either direction.

It is worth being explicit about what an EOT is not. This is a corporate and commercial transaction — a share sale governed by a purchase agreement, a trust deed, and (typically) a vendor take-back note — not a will, a family trust, or any other testamentary or estate planning instrument. It does not replace your personal estate plan, and it should be evaluated as a business succession decision, alongside a conventional sale under Lamba Law's business transaction practice, rather than folded into estate planning conversations.

EOTs remain a genuinely underused option among Ontario business owners. Most sale processes still default straight to a competitor, a strategic buyer, or a private equity firm, without an EOT ever being raised as an alternative. For owners whose priority is keeping a GTA business, its jobs, and its culture intact, it deserves a place in that conversation.

At Lamba Law, we work with owner-operated businesses across Oakville, Mississauga, and the broader GTA on both sides of business transactions, and our corporate law practice can help structure the governing documents an EOT sale requires. If you are weighing an EOT against a conventional sale or a family succession, the right first step is a conversation — with us on the legal structure, and with your accountant on the tax modelling — well before you are under pressure to decide.