Is there a capital gains exemption for selling to an employee ownership trust?

Section 110.61 applies to an individual, other than a trust, where shares are disposed of to a trust (or to a purchaser corporation wholly owned by the trust) after 2023 under a qualifying business transfer, and conditions (a) to (e) are met. All of those conditions are required. The CRA says a taxpayer disposing of shares under a qualifying business transfer generally disposes of them to a trust that is an Employee Ownership Trust at the time of the disposition, provided certain conditions are met.

The conditions

No individual may have sought a deduction under s.110.61 or s.110.62 before the disposition time for shares deriving their value from the same active business. Throughout the 24 months before the disposition time, the shares must not have been owned by anyone other than the individual or a related person or partnership, subject to a rule for substituted shares. Immediately before the disposition, the corporation and its affiliated corporations must not be professional corporations. At the disposition time the individual must be at least 18 years of age. The individual or the individual’s spouse or common-law partner must have been actively engaged on a regular, continuous and substantial basis in the business’s activities throughout any 24-month period ending before the disposition time.

The election and the deadline

The trust, any purchaser corporation, the individual and any other eligible individual must jointly elect in prescribed form. The election states an elected amount, subject to a cap set in the Act. If more than one individual is eligible, the election states the percentage of the elected amount assigned to each. It is filed on or before the trust’s filing-due date for the taxation year that includes the disposition time. The CRA names the form T24EOT and says it must be submitted before the deduction is claimed.

When the deduction can be lost

If a disqualifying event occurs within 24 months of the disposition time, the deduction in subsection (2) is deemed never to have applied. If one occurs within eight years of the day that is 24 months after the disposition time, the trust is deemed to have a gain equal to the elected amount. Despite the rest of the section, the deduction in subsection (2) does not apply if it is reasonable to consider that one of the purposes of any transaction or series of transactions is a purpose listed in paragraphs (a) and (b) of s.110.61(5). Where the shares also qualify as QSBC shares, the CRA says a taxpayer may also claim a deduction under s.110.6 if all requirements are met.

Ask a lawyer or accountant whether a particular sale meets each condition. For how the gain can be spread, see How long can I spread the gain on a sale to an employee ownership trust?.