An employee ownership trust can be a genuine exit for an owner who wants continuity over the highest price. Before you build one, here is what the Act actually requires — and what unwinds it.
Key takeaways
STEP 01 OF 10
ITA s. 110.61(1) applies to a disposition of shares to a trust, or to a purchaser corporation wholly owned by the trust, “that occurred after 2023 and before 2027 under a qualifying business transfer.” That window is fixed in the statute itself, enacted by 2024, c. 17, s. 80 and amended by 2026, c. 3, s. 36 — confirm the actual disposition date lands inside it before building anything else around this structure.
A transaction closing in 2027 or later does not get this deduction at all under the current text, whatever else about the deal looks identical to one that closed a year earlier. Sequence the closing date deliberately if the window is tight.
STEP 02 OF 10
Section 110.61(1)(b) requires that, throughout the 24 months before the disposition, the shares were owned only by the individual or related persons or partnerships, and that more than 50% of their fair market value derived from assets used principally in an active business. Both halves of that test must hold for the full 24 months, not merely on the disposition date — a corporation that only recently became majority-active-business after a period of holding passive investments will not qualify yet.
Build the timeline backward from the intended closing date and confirm both conditions held continuously for the full two years, with contemporaneous evidence if the business mix changed at any point in that window.
STEP 03 OF 10
Section 110.61(1)(c) requires that, immediately before the disposition, neither the subject corporation nor an affiliate in which it holds shares is a professional corporation, and that the trust does not control a corporation whose employees are beneficiaries of that exclusion in a way the section is designed to prevent. A law, medical, accounting or similar professional corporation structured around a licensed practitioner needs a different exit mechanism entirely — this route is not available to it.
STEP 04 OF 10
Section 110.61(1)(d) requires that, at the disposition time, the individual is at least 18; that the individual or their spouse or common-law partner was “actively engaged on a regular, continuous and substantial basis” in the business throughout any 24-month period ending before the disposition; and that at least 75% of the beneficiaries of the trust are resident in Canada.
The joint election itself — trust, purchaser corporation and every claiming individual electing together in prescribed form, stating the elected amount and each individual’s percentage — must be filed on or before the trust’s filing-due date for the year that includes the disposition. Miss that date and the deduction is not available for that transfer, regardless of how well the substantive tests were met.
STEP 05 OF 10
ITA s. 248(1) defines an “employee ownership trust” as an irrevocable trust resident in Canada, held exclusively for the benefit of all employees of the qualifying businesses it controls (with a probationary period capped at 12 months), where each trustee is a licensed Canadian trust corporation or an individual, each trustee has an equal vote, and at least one-third of the trustees must be employee beneficiaries.
A further condition bites on how the trust replaces its own trustees over time: where a trustee is appointed other than by a beneficiary election in the last five years, at least 60% of all trustees must deal at arm’s length with every person who sold shares of the qualifying business to the trust. That is designed to stop the selling owner from quietly controlling the trust’s board indefinitely through appointed allies.
STEP 06 OF 10
The elected amount in the joint election cannot exceed $10,000,000 under s. 110.61(1)(e)(ii)(A) — and unlike the lifetime capital gains exemption, this figure does not appear anywhere in the Act’s indexation list, so it stays fixed at $10,000,000 rather than rising with inflation. It is also a cap shared across everyone claiming on the one transfer: where more than one individual qualifies, the election assigns each a percentage, and the total assigned across all individuals cannot exceed 100%.
If several family members or long-time partners are each disposing of shares in the same transaction, model the percentage split before filing — the cap does not multiply per person.
STEP 07 OF 10
Section 110.61(3)-(4) sets two different consequences depending on when a disqualifying event happens. Within 24 months of the disposition, the deduction “is deemed to have never applied” — the seller’s original tax position is unwound entirely. Within the following eight years (measured from the day that is 24 months after the disposition), the trust itself is deemed to have a capital gain equal to the elected amount, for the year the disqualifying event occurs.
That second consequence is easy to miss: after the first two years, the exposure shifts from the seller to the trust, which means the employees who now control the trust inherit a real tax liability if the business later fails the active-business test.
STEP 08 OF 10
A disqualifying event occurs at the earlier of the trust ceasing to be an employee ownership trust, or the start of a taxation year in which less than 50% of the fair market value of the qualifying business’s shares derives from assets used principally in an active business the trust controls — with a carve-out where the business ceased only because all its assets were sold to satisfy creditors.
That means an EOT-owned business that drifts toward holding passive investments, or that lets its trustee composition slip below the one-third employee-trustee floor, can trigger the clawback without any sale ever happening. Monitor both tests annually, not just at the point of any future transaction.
STEP 09 OF 10
Under s. 248(1)(c), the capital and income interests of each employee beneficiary must be determined the same way for everyone, based solely on some combination of hours of service, remuneration — capped at twice the first dollar amount referred to in s. 117(2)(e), as adjusted by s. 117.1 — and length of service. Trustees may not exercise discretion “to act in the interest of one beneficiary… to the prejudice of another.”
That rules out a discretionary bonus-style allocation entirely. If the owners want to reward specific individuals differently, that has to happen through compensation outside the trust, not through an uneven capital allocation inside it.
STEP 10 OF 10
ITA s. 110.62 mirrors the EOT rule for a disposition of shares to a purchaser corporation “that occurred after 2023 and before 2027 under a qualifying cooperative conversion” — the same 24-month ownership and greater-than-50%-active-business tests, the same professional-corporation exclusion, and its own s. 248(1) definitions for “qualifying cooperative business” (a CCPC where not more than 40% of directors come from the pre-conversion owner group) and “qualifying cooperative worker” (holds a membership share, is an employee, and with related persons does not represent more than 50% of the members).
This is a genuinely under-covered exit option in Canada — a business whose employees would rather run a worker-owned co-operative than sit as beneficiaries of a trust structure has a real, sourced statutory path, and almost nothing is written about it.
Read the s. 248(1) checklist as a build order, not a description: an irrevocable trust, resident in Canada; trustees who are each either a licensed Canadian trust corporation or an individual (never another trust); an equal vote for every trustee regardless of role; at least one-third of trustees drawn from employee beneficiaries; and — where a trustee arrives other than through a beneficiary election held within the last five years — at least 60% of the full trustee body must deal at arm’s length with everyone who sold shares to the trust.
That last test is the one that actually stops a retiring owner from running the trust indirectly through hand-picked appointees. A trust deed drafted before this checklist is fully understood tends to need amendment later, at exactly the point an amendment is hardest to negotiate — after employees already hold beneficial interests and have their own expectations about how the trust is governed.
A trust or a purchaser corporation wholly owned by the trust is acquiring shares of the qualifying business under a qualifying business transfer — and the Canada Small Business Financing Program cannot finance a share purchase, full stop, under the same rule that constrains every other MBO-shaped deal in this hub. See selling to the management team for the financing-stack mechanics that apply here almost unchanged.
The Act gives EOT sellers one real offset: s. 40(1.3) extends the reserve mechanism in s. 40 to a full ten years — not the ordinary five — for a disposition of a share where the EOT conditions are met, meaning a genuinely deferred purchase price can spread the resulting capital gain over twice the normal window. That materially changes what a workable vendor-financed EOT sale can look like compared with a sale to an ordinary outside buyer.
Two founders, A and B, each own 50% of a corporation whose shares are together worth $14,000,000 of fair market value at the disposition date, both meeting the ownership and active-engagement tests independently. The elected amount on the joint election cannot exceed $10,000,000 in total — not $10,000,000 each — so the two founders agree to split the election 50/50: $5,000,000 elected against A’s gain, $5,000,000 against B’s, together summing to the 100% the Act allows across all claiming individuals.
The remaining $4,000,000 of value transferred is still a real capital gain to the founders; it simply falls outside the s. 110.61 election and is taxed under the ordinary capital-gains rules, with whatever LCGE room each founder has left available against it in the normal way. Running this arithmetic before the joint election is filed — not after — is what avoids a dispute between co-founders about whose gain the cap actually covers.
The Act treats them as separate provisions with their own tests and caps, but check both against the same disposition carefully — using the ordinary LCGE room first, where available, before relying on s. 110.61 for the balance is a common sequencing question worth modelling with an advisor.
By year six, the trust itself is deemed to have the capital gain equal to the elected amount, not the original selling shareholder — which is why the employees who by then control the trust have a direct financial stake in keeping the active-business and structural tests intact.
That's a separate compensation question from the trust's own structural tests, but keep it clean and at arm's-length market rates — an owner who continues to control decisions in substance, rather than merely advise, risks undermining the arm's-length assumptions the whole structure depends on.
It carries the same active-business and CCPC tests as the EOT route — it is a genuine alternative vehicle within the same statutory window, not a workaround for a business that fails the EOT's own conditions.
That is governed by the trust deed itself within the s. 248(1) framework, not by a separate statutory rule — build the leaver mechanics into the trust document at formation, since the Act does not supply default terms for it.
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