How do I claim the capital gains deduction on a sale to an employee ownership trust?

This page covers the federal return-side steps, not whether a particular sale qualifies. CRA’s capital gains guide says you can claim the deduction if certain conditions are met when shares of a corporation are disposed of to a trust, or to a corporation wholly owned by the trust, under a QBT. To find out if your QBT qualifies, the guide points to “Additional information” on Form T24EOT.

The conditions in the Income Tax Act

Under s. 110.61(1), the deduction applies to an individual (other than a trust) on a disposition after 2023 of shares to a trust, or to a purchaser corporation wholly owned by the trust, under a qualifying business transfer, if the listed conditions are met. The listed conditions include, at the disposition time, the individual’s age and the residence in Canada of the trust’s beneficiaries.

The election on Form T24EOT

Form T24EOT is titled “Joint Election for Capital Gains Deduction in Respect of a Qualifying Business Transfer”. If the other conditions in s. 110.61(1) are met, paragraph (e) has the election made in prescribed form by the trust, any purchaser corporation owned by the trust, the individual and any other individual entitled to the deduction. It states an elected amount, being the total capital gains the parties agree may be eligible, subject to a cap set in the paragraph. If more than one individual is eligible, it assigns each a percentage of the elected amount, and the percentages assigned to all individuals are capped in the paragraph. For the deduction to apply, the election must also be filed with the Minister on or before the trust’s filing-due date for the taxation year that includes the disposition time.

On your return

CRA lists line 25395 as the line for the capital gains deduction for a qualifying business transfer or qualifying cooperative conversions. The guide describes a proposed ordering rule: under proposed changes, a QBT deduction on line 25395 is claimed before a line 25400 deduction for the same disposition. The line 25400 deduction is claimed after Form T657 is completed, up to the maximum allowable amount. A QBT deduction may also apply to a reserve brought into income in 2025 from a disposition in a preceding year of shares to a trust under a QBT. Where shares are disposed of under a QBT, a taxpayer may also claim a section 110.6 deduction if the shares also qualify as qualified small business corporation shares or qualified farm or fishing property and all requirements are met.

If the trust stops qualifying

Under s. 110.61(4)(a), if a disqualifying event occurs within 24 months of the disposition time, the deduction is deemed never to have applied. A listed disqualifying event is the time when the trust ceases to be an employee ownership trust. Under s. 110.61(4)(b), if a disqualifying event occurs within eight years of the day that is 24 months after the disposition time, the trust is deemed, in computing its income, to have a gain equal to the elected amount for the year of the event.

See also how long the gain on a sale to an employee ownership trust can be spread.