The federal government is adding a $10-million incentive to encourage business owners to sell their companies to an employee ownership trust.

The 2023 federal budget introduced tax rules to facilitate the creation of employee ownership trusts (EOTs), which allow groups of employees to purchase a business over time.

However, some advocates said the rules wouldn’t drive significant uptake without additional incentives. Business owners get paid out over time when they sell to an EOT, as opposed to getting a lump sum, and may not receive multiple bids.

In its fall economic statement on Tuesday, the government proposed exempting from taxation the first $10 million in capital gains realized on the sale of a business to an EOT.

The incentive would be in effect for the 2024, 2025 and 2026 tax years and is expected to reduce federal revenues by $52 million over the 2023–24 to 2026–27 period. The government said further details would be provided in the coming months.

EOTs own shares in a business on behalf of employees, giving workers a greater role in business decisions and profits.

“The trusts can also provide an alternative business succession option for retiring business owners, especially since more than 75% of small business owners plan to exit their business in the next decade,” the economic statement said.

The government introduced draft legislation on EOTs for consultation in August.