The first question most owners ask about an employee ownership trust is how much tax they save. The second, usually asked a week later, is better: who is writing the cheque? The employees are not. The trust is a new entity with no assets. The bank may lend some of the price, but rarely most of it.
The business buys itself, and you lend it the money to do so.
The basic structure: you become the lender
On closing, the trust (or a corporation it wholly owns) acquires control of the company. The price should be fair market value, and is usually supported by an independent valuation. A small part may be paid in cash from the company’s surplus or a bank loan. The rest is a promissory note — a vendor take-back — owed to you and repaid over time from the company’s profits.
From that moment you are a creditor of the business you used to own. You no longer control it, and the statute makes sure of that: a seller cannot keep rights that would let them control the company or the trust. What you can keep is security for the note, covenants and information rights. The seller protections that stay onside are set out in detail elsewhere; this piece is about the money.
Getting cash from the company to you
The company earns the profit. You are owed by the buyer. Something has to move the cash between them without being taxed twice on the way.
The purchaser corporation route. Section 110.61 allows the shares to be sold to a corporation wholly owned by the trust. That purchaser corporation owes you the note. The operating company pays dividends to the purchaser corporation, which are generally received free of tax between Canadian corporations, and the purchaser corporation uses them to pay you. This is the more common route in practice.
The loan route. The trust buys the shares directly and the operating company lends it the money to pay you. Normally a loan from a company to its shareholder must be repaid within about a year or it is added to the shareholder’s income. Subsection 15(2.51) changes that for an EOT buying a qualifying business: if bona fide arrangements are made to repay the loan within 15 years, it is not included in the trust’s income, and paragraph 80.4(3)(c) switches off the deemed interest benefit for the same period.
Either way, the 15-year figure is a useful ceiling for planning. If the business cannot plausibly pay the price from its profits in 15 years, the price or the structure is wrong.
The arithmetic: how long until you are paid?
Picture a company valued at $12 million that produces about $1.5 million a year of after-tax free cash flow. The bank lends $2 million at closing and you take a note for $10 million.
| Assumption | Figure |
|---|---|
| Price | $12,000,000 |
| Cash at closing (bank loan) | $2,000,000 |
| Vendor note | $10,000,000 |
| After-tax free cash flow available each year | $1,500,000 |
| Share kept back for capital spending, bank payments and a cushion | about one-third |
| Available to pay you each year | about $1,000,000 |
| Years to repay the note, before interest | about 10 |
Those numbers are illustrative, but the shape is typical. Most of the price arrives over seven to ten years, and the bank is paid ahead of you, because banks insist on it. Interest on the note compensates you for waiting; it is taxed as ordinary income when received.
Two things shorten the wait. Taking less cash out of the business before closing leaves more to pay the note. And a buyer who can borrow more at closing reduces what you finance — at the cost of a bank that ranks ahead of you if things go badly.
The tax side: exemption first, reserve second
Up to $10 million of capital gains on a qualifying sale to an EOT can be exempt under section 110.61. The $10 million is per business, not per seller: where several shareholders sell, they agree on how to divide it, and the total cannot exceed $10 million. Exempt gains are partly included in the alternative minimum tax base, so a large exempt gain can still produce some AMT in the year of sale, recoverable against regular tax over the following seven years.
The capital gains reserve deals with the part of the gain the exemption does not cover — the gain above $10 million, or the whole gain for a seller who does not meet the exemption’s conditions. Normally, when the price is paid over time, a seller can spread the taxable gain over up to five years. For a qualifying sale to an EOT, subsection 40(1.3) stretches that to 10 years, with at least 10% of the gain included each year. The reserve keeps your tax bill roughly in step with the cash you actually receive.
| Ordinary share sale | Qualifying sale to an EOT | |
|---|---|---|
| Capital gains exemption | Lifetime capital gains exemption, about $1.25 million, if the shares qualify | Up to $10 million per business under s. 110.61 |
| Capital gains reserve | Up to 5 years | Up to 10 years |
| Company lending to the buyer | Generally taxed if not repaid within about a year | Up to 15 years under s. 15(2.51) |
What can go wrong with the money
The business has a bad few years. Your note is paid from profits, so a downturn slows your payments. A well-drafted note sets out what happens then — deferral, a step-up in interest, or a return of security rights — rather than leaving it to negotiation in a crisis.
The price was too high. Trustees, at least 60% of whom must generally deal at arm’s length with the selling group, have a duty to the employees not to overpay. A valuation that the company cannot service will be challenged by the trustees, by the bank, and eventually by the cash flow.
The trust stops qualifying. If a disqualifying event happens within 24 months of the sale, your exemption is deemed never to have applied. After that, for up to 10 years from the sale, the trust bears a deemed gain instead. The EOT explainer covers the 24-month tail.
Before you agree a price
Ask for three numbers early: a valuation, a realistic forecast of free cash flow, and the amount a bank will lend at closing. Together they tell you how much of the price is cash, how much is a note, and how many years the note will take. The EOT feasibility checklist is a good place to start, and the employee ownership trust service page explains how the firm runs these transactions.
A sale to an EOT can be the best tax result available to a Canadian owner. It is also, for most of a decade, a loan to your former employees secured on the business you built. Price it as both.
Common questions
Who pays the purchase price in an employee ownership trust sale?
In most cases the company pays it, out of future profits. The trust or its purchaser corporation owes the seller a vendor note, and the operating company sends its after-tax cash up to the buyer to pay the note down. A bank may fund part of the price at closing.
Do employees have to buy shares in an EOT?
No. Employees are beneficiaries of the trust and do not pay for their interest. The purchase is funded by the business itself and any bank financing.
How long does it take to get paid in an EOT sale?
It depends on the price, the bank financing and the company’s free cash flow. Seven to ten years is common for the vendor note. The 15-year loan window in subsection 15(2.51) of the Income Tax Act is a practical outer limit.
What is the 15-year rule for employee ownership trusts?
Subsection 15(2.51) lets a qualifying business lend money to an EOT to buy its shares without the loan being included in the trust’s income, provided bona fide arrangements are made to repay it within 15 years. Paragraph 80.4(3)(c) removes the deemed interest benefit for the same period.
How does the 10-year capital gains reserve work on an EOT sale?
When the price is paid over time, a seller in a qualifying business transfer can spread the taxable portion of the gain over up to 10 years, including at least 10% each year, instead of the usual five. It applies to gains not sheltered by the $10 million exemption.
Is the $10 million EOT exemption per seller or per business?
Per business. Where several shareholders sell, they agree how to divide the $10 million, and the total cannot exceed $10 million.
Is the EOT capital gains exemption still available after 2026?
Yes. Bill C-30 received Royal Assent on 18 June 2026 and made the $10 million exemption permanent. It had been set to apply only to dispositions before 2027.
Can the seller take security for the vendor note?
Yes, within limits. A seller can take security, covenants and information rights, but cannot keep rights that would let them control the company or the trust after the sale.