Canada is facing a massive demographic shift as nearly 76% of small business owners plan to exit their companies over the next decade, representing a $2-trillion transfer of assets. Recent legislative changes have introduced a new pathway for these owners: the Employee Ownership Trust (EOT), a model designed to keep businesses in local hands while turning staff into owners.

This trend matters because traditional exit strategies, such as selling to competitors or private equity, often lead to the hollowing out of local economies and the loss of Canadian-owned legacies. For SMBs, the EOT provides a way to reward long-term staff, preserve company culture and access significant tax incentives that weren’t available until recently. As the baby boomer retirement wave accelerates, choosing the right succession model will determine the survival of thousands of businesses across the country.

Tax incentives spark interest in employee-led successions

The introduction of a temporary $10 million capital gains tax exemption for owners selling to an EOT has fundamentally changed the financial calculus of succession planning. Before this change, selling to employees was often considered a less lucrative option compared to a third-party sale. Now, the exemption makes the EOT model highly competitive, offering founders a tax-smart exit that prioritizes the people who helped build the business.

However, the clock is ticking for those looking to take advantage of these rules. The current tax incentive is set to expire at the end of 2026, creating a sense of urgency for owners to begin their transition plans early. Since the legislation took effect in 2024, early adopters like Brightspot have already made the switch and industry experts predict another 20 to 30 companies will become EOTs this year.

“The $10 million exemption is a significant catalyst that finally puts employee ownership on the table for SMB owners who previously thought it was financially out of reach,” says KJ Lee, CEO at Employment Hero Canada. “It’s about empowering the next generation of Canadian business leaders from within the existing workforce.”

In an EOT, the employees don’t have to put up their own capital or take on personal debt to buy the business. Instead, the trust finances the purchase, and the owner is paid back over time using the company’s future profits. This structure ensures that ownership remains broad-based rather than concentrated in the hands of a few senior managers, aligning the interests of the entire team with the long-term success of the firm.

Protecting local legacies through shared wealth models

Beyond the tax benefits, employee ownership is linked to tangible improvements in how businesses operate within their communities. When workers have a stake in the outcome, they’re more engaged and less likely to see their jobs outsourced or eliminated by a distant parent company. This resilience is particularly valuable for Canadian SMBs navigating an era of high interest rates and labour shortages, as the EOT model offers a unique way to build a more stable and loyal workforce.

For founders who are worried about their legacy, selling to staff ensures the business name and values stay intact. Many owners have spent decades building a culture that would likely be dismantled if sold to a competitor. By choosing an EOT, they can exit the business with the confidence that their employees are protected and the company remains a contributor to the local economy.

“Employee ownership isn’t just a feel-good story; it’s a strategic move that makes businesses more resilient to market shocks while keeping wealth within the community,” says KJ Lee, CEO at Employment Hero Canada. “When staff feel like owners, they act like owners and that’s the ultimate competitive advantage for any SMB.”

As the end of 2026 approaches, many in the business community are watching to see if the federal government will make these tax incentives permanent. For now, the focus remains on education and preparation. Transitioning to an EOT requires a shift in mindset, as founders must eventually step back from day-to-day control while ensuring their management team has the skills to lead an employee-owned entity.

The future of Canada’s SMB landscape will be shaped by those who act now to secure their legacy. By exploring the EOT model, business owners can ensure their companies remain Canadian-owned, their employees remain empowered and their hard work continues to pay off for generations to come.