Frequently Asked Questions
Answers to some of Employee Ownership Canada’s most frequently asked questions
Understanding Employee Ownership
What options do I have for employee ownership?
Common Canadian options include: an Employee Ownership Trust (EOT) (a trust buys a controlling stake and holds it for all employees), direct share plans/ESOPs (employees buy/receive shares), stock options, employee share purchase plans, phantom/synthetic equity (cash-settled, no shares), and worker co-operatives. You can learn more about these options in our resource center and in this downloadable comparison chart.
What is an Employee Ownership Trust (EOT)?
An EOT is a trust that buys and holds company shares for the benefit of employees, letting them become owners as a group without each person needing to buy shares. It’s designed for succession—selling a majority (51%+) of the company to the trust at fair market value and keeping the business independent.
How is an EOT different from an ESOP/share plan?
EOT: the trust is the buyer and owner on behalf of all employees.
ESOP/share plans: employees directly buy or receive shares (or options) in their own name. Many firms use hybrid structures to suit their needs (e.g., EOT plus a small direct-share or bonus plan).
How is an EOT different from a worker co-op?
An EOT is trust-based, so the trust owns the shares for everyone; day-to-day operations continue under normal management. A worker co-op is direct, member-owned and governed democratically (one member, one vote). Different goals and company cultures suit different models. You can learn more about worker co-ops by visiting The Canadian Worker Co-Op Federation
What is a Worker Co-op?
A worker co-operative is a business owned and democratically controlled by its worker-members.You can learn more about worker co-ops by visiting The Canadian Worker Co-Op Federation.
What is phantom or “synthetic” equity?
A cash-settled plan that mirrors share value or performance without issuing shares. It’s useful where owners want to share upside but not change the cap table.
What are stock options and employee share purchase plans?
Options give the right to buy shares later at a set price; purchase plans let employees buy shares (often at a discount) via contributions over time. Both are recognized in CRA guidance.
How do direct ESOP/share purchase plans work (non-EOT)?
Employees acquire shares directly—by buying through payroll, receiving share bonuses, or exercising options later. These plans are often used for minority employee ownership or alongside an EOT.
Selling Your Business to an EOT
How does an EOT benefit business owners?
An EOT lets you sell control at fair market value, keep your company independent, and protect the culture you built. It can also provide a targeted tax incentive (up to $10M in eligible gains tax-free for 2024–2026, if conditions are met).
Is selling to employees “still a sale”?
Yes—you’re transferring control at fair market value, usually with staged payments from future profits. The difference is who you sell to and how value is shared going forward.
Do I have to sell a majority (51%+)?
Yes. To qualify, the trust must acquire control (majority). Many owners sell 100%, but the minimum is 51%..
Will my sale price be fair market value?
Yes. EOT sales are done at fair market value with arm’s-length requirements and control transfer. Independent valuation and due diligence are standard.
Can the original owner still be involved in the business after selling to an EOT?
Yes. You can stay on in management and keep a minority stake. The EOT must still have majority control, and governance is structured so you can contribute without controlling decisions.
Where can I learn how an EOT transaction works, step by step?
See “How does an EOT transaction work?” for the parties involved and timeline from feasibility to closing and post-sale stewardship.
Eligibility and Fit
What businesses are a best fit for EOTs?
Typically profitable CCPCs with steady cash flow, a capable management team that will continue post-sale, and an owner who is ready to transfer control (51%+) at fair market value. Rules also require that the company is an active business (not mainly investment assets) at sale.
What businesses are not eligible for EOTs?
If the company is not a CCPC, if the trust doesn’t acquire control (51%+), if the seller isn’t at arm’s length after closing, or if the company fails the active-business test (e.g., value mainly from passive/investment assets), the sale generally won’t qualify. There are also ongoing “disqualifying event” rules.
How is “active business” tested for EOT eligibility?
At the time of sale, all or substantially all (generally ~90%+) of the company’s value must relate to assets used principally in an active business (look-through applies to wholly-owned subsidiaries).
What if I only want to sell a minority stake today?
By design, EOTs are for majority succession. For minority employee ownership, consider direct share purchase, options, or phantom equity instead.
If my business isn’t a fit for an EOT, what other options do I have?
You can still share value and continuity through direct ESOP/share purchase plans, stock options, phantom/synthetic equity, or a management buyout/third-party sale—whichever best meets your goals for price, timing, and legacy.
Can unionized or multi-site companies use an EOT?
Yes—eligibility turns on EOT rules, not union status: CCPC, majority sale to the trust, active-business test, beneficiary and trustee fairness rules, and ongoing compliance.
Employee Participation and Benefits
Will employees have to invest their own money in an EOT?
No. The trust is the buyer and employees don’t have to put in cash; the purchase is funded by a mix of vendor financing and future company profits under the EOT structure.
How are profits shared with employees in an EOT?
After the sale, profits can be shared with beneficiaries via trust distributions based on a fair, pre-set formula. Employees report distributions as income; undistributed income is taxed in the trust.
Who benefits under an EOT?
Generally all employees (within plan rules) are beneficiaries. The trust distributes value using fair formulas (e.g., service, hours, or pay within limits) designed to avoid concentrating benefits in a few hands.
What employee-voice or governance guardrails exist in EOTs?
EOTs require trustees to act for all employees, equal trustee votes, specified employee representation in governance, and limits that prevent seller control after closing.
Tax, Legal, and Regulatory Details
Is there a tax incentive for selling to an EOT?
Yes. For qualifying share sales in 2024–2026, up to $10 million of capital gains can be exempt from tax (subject to conditions and no disqualifying event within the required period).
What other EOT tax features should I know?
Rules include a longer capital-gains reserve (spreading inclusion over years), relief on shareholder loans used to finance the purchase (longer repayment window), and technical guardrails on reorganizations and disqualifying events.
How does Canada’s recent capital-gains change interact with EOTs? What about the trust “21-year rule”?
Canada increased the general capital-gains inclusion rate in 2024; the EOT $10M exemption is a separate targeted measure for qualifying sales in 2024–2026. Owners should get tax advice to coordinate the two.
What filings apply after an EOT is set up?
EOTs are taxable trusts and must file T3 returns (with enhanced trust-reporting rules now in effect). Distributions are reported by employees; undistributed income is taxed in the trust.