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REQUIREMENTS for the EOT Capital Gains Tax Incentive
The Canadian government offers a tax incentive for business owners who sell their company to employees through the new EOT structure. When selling at least 51% of their company’s shares, owners can get up to C$10,000,000 in capital gains tax relief and may retain influence over the business after the sale is completed.
Most Canadian business owners are likely to qualify, though there are specific rules. You can learn more about the new trust here, but here’s a quick summary of the requirements to help you decide if it's worth exploring further.
Owner
requirements
Key
CONSIDERATIONS
Business Requirements
Eligible Individuals
Individual owners are eligible. Even if shares are held through a personal trust or holding company, you may still qualify. Discuss with your advisor. Companies that sell other companies they own do not qualify.
Active Business Assets
Over 50% of the company’s fair market value must come from assets used primarily in an active business. Companies that hold primarily passive assets, such as real estate, are ineligible.
Incentive Allocation
The C$10,000,000 incentive is per transaction, so owners must decide how to divide it among themselves.
Active Involvement
The owner (or their spouse) must have been actively involved in the business for at least two years, either currently or previously. Passive shareholders do not qualify.
Ineligible Companies
Professional corporations, as defined by the Federal Income Tax Act, do not qualify. This includes accountants, dentists, lawyers, medical doctors, veterinarians, and chiropractors.
Combined Benefits
The C$10,000,000 EOT incentive can be combined with the lifetime capital gains exemption of C$1,250,000 to increase the total benefit.
Age Requirement
Owners must be at least 18 years old.
Employee Beneficiaries
At least 75% of employee beneficiaries in the new EOT must be Canadian residents.
AMT Exemption
The EOT tax incentive is exempt from Alternative Minimum Tax (AMT) and will not be reduced by AMT calculations.
For more details on rules and requirements, consult the official CRA page.
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