A section 85 rollover allows you to transfer eligible property to a taxable Canadian corporation and defer some or all of the immediate income tax by jointly electing a permitted transfer amount and receiving shares as part of the consideration. The accrued gain remains within the tax structure, with potential tax consequences when the corporation sells the property or you dispose of the shares received.
For an Ontario owner-manager, this tax deferral helps preserve cash when incorporating an existing business or changing corporate ownership. Section 85 of the Income Tax Act provides the mechanism; your asset values, tax costs and transaction documents determine how it applies.
We approach the planning by identifying what you want to accomplish and what you need to receive from the corporation. Taking back substantial debt, transferring mortgaged real estate or introducing family shareholders each requires additional analysis before assets change hands.
Who Qualifies and Which Property Can Be Transferred?
Eligibility requires a qualifying transferor, a taxable Canadian corporation as transferee, and property within the statutory categories. We assess each asset separately because one business transfer frequently includes assets with different tax treatment.
Who Are the Transferor and Transferee?
The transferor owns and transfers the property. An individual, corporation or trust is a potential transferor under subsection 85(1), subject to the applicable conditions.
The transferee is the taxable Canadian corporation receiving the property and issuing shares. The transferor and transferee make the election jointly.
We confirm legal ownership before drafting. Personally owned equipment and corporation-owned equipment require different parties to sign, even when the same owner controls the business.
What Makes the Receiving Company a Taxable Canadian Corporation?
A taxable Canadian corporation must meet the statutory definition of a Canadian corporation and must not be exempt from Part I income tax. Canadian incorporation and Canadian tax residence are central considerations.
An ordinary Ontario business corporation resident in Canada will commonly satisfy these requirements. A foreign-incorporated company, tax-exempt entity or corporation with cross-border residence issues needs closer review.
Our business structuring work includes confirming that the receiving entity supports the intended ownership and commercial arrangements. Incorporating a company alone does not establish that every proposed transfer qualifies.
Which Assets Are Eligible Under Subsection 85(1.1)?
Eligible property under subsection 85(1.1) includes several important categories:
- Capital property, including qualifying shares and investment land.
- Depreciable property, such as buildings and equipment.
- Inventory, subject to exclusions that include real property held as inventory.
- Canadian resource property and foreign resource property, subject to their statutory rules.
We check both the asset’s character and the transferor’s circumstances. Land held as capital property receives different treatment from land held for resale by a developer.
For non-resident transferors, additional restrictions apply to real or immovable property. Canadian real estate that is taxable Canadian property requires specific analysis; that classification alone does not establish rollover eligibility.
How Are Goodwill, Real Estate, and Partnership Transfers Treated?
Business goodwill falls within the Class 14.1 depreciable-property regime. Older records sometimes describe it as “eligible capital property,” reflecting the regime that applied before 2017.
Self-generated goodwill frequently has little or no tax cost. We identify its value separately because transferring a successful business without addressing goodwill creates an incomplete asset schedule.
Real estate requires separate values for land and buildings, together with a review of mortgages and provincial taxes. Where a partnership transfers property to a corporation, subsection 85(2) provides a separate election framework involving the partners and the receiving corporation.
How Do Elected Amounts and Consideration Affect Tax Deferral?
The elected amount determines the transfer’s income tax treatment within statutory limits, while the consideration determines what you receive commercially. We reconcile both before finalizing a rollover because a valid election alone does not guarantee full deferral.
How Is the Permitted Elected Amount Determined?
Under subsection 85(1), the transferor and corporation select an elected amount, also called the agreed amount, for each transferred property. That amount establishes proceeds of disposition and the corporation’s tax cost, subject to the Act’s specific adjustments.
The principal limits include:
- An upper limit based on the property’s fair market value (FMV).
- A lower limit based on the fair market value of non-share consideration.
- Additional property-specific limits tied to tax cost.
For non-depreciable capital property, adjusted cost base is central to the calculation. Depreciable property requires reference to original cost and undepreciated capital cost (UCC), including relevant class-level calculations.
We avoid applying a single “elect at cost” instruction across an entire business. Our tax-driven reorganizations work coordinates these asset-level calculations with the transaction’s legal steps.
Why Must the Consideration Include Shares?
Section 85(1) requires the consideration received to include shares of the receiving corporation. A transfer paid entirely through cash or debt does not satisfy that requirement.
Preferred shares are useful where the owner needs a fixed redemption value. Common shares carry different economic rights and are frequently used to hold future growth.
We review share rights alongside the ownership structure. The value issued to you must also be assessed against any benefit conferred on another shareholder, particularly when family members already own shares.
How Do Cash, Promissory Notes, and Assumed Liabilities Affect the Rollover?
Cash, a promissory note and an assumption of liabilities are forms of non-share consideration, commonly called boot. Their fair market value affects the minimum permitted elected amount.
If boot exceeds the relevant tax-cost threshold, full deferral is unavailable for that property. The resulting income might be a capital gain, recapture of depreciation or business income.
We allocate liabilities carefully when several assets move together. A mortgage associated with a building or debt assumed as part of a business transfer requires analysis even when you receive no cash at closing.
How Do Share Cost and Paid-Up Capital Differ?
Adjusted cost base measures your tax cost in the shares received. Paid-up capital (PUC) is a separate tax attribute relevant to distributions of corporate capital and share redemptions.
The share-cost rules allocate the elected amount after accounting for non-share consideration. Section 85 also contains a PUC adjustment, and other provisions impose further restrictions in particular transactions.
A preferred share with a high redemption value therefore does not automatically have equally high tax cost or PUC. We document these amounts separately so future redemptions and distributions receive the correct treatment.
Hypothetical Example: Transferring Appreciated Capital Property
Assume an Ontario-resident individual transfers non-depreciable capital property with:
Item | Assumed amount |
|---|---|
Fair market value | $500,000 |
Adjusted cost base | $100,000 |
Promissory note received | $20,000 |
Fair market value of preferred shares received | $480,000 |
Elected amount | $100,000 |
Assume the property qualifies, the corporation is a taxable Canadian corporation, the election is valid and timely, and no other provision changes the result.
On these assumptions, proceeds of disposition equal the $100,000 adjusted cost base, producing no immediate capital gain. The corporation acquires a $100,000 tax cost, while your aggregate share cost is $80,000 after deducting the $20,000 note.
The $400,000 accrued gain remains embedded in the transferred property. We use this example only to illustrate the mechanics; depreciable property, related-company shares and different consideration require additional calculations.
How Do You Implement and File the Election Correctly?
A successful implementation requires an effective legal transfer and a properly completed joint election filed within the applicable deadline. We coordinate the documents and tax reporting so they describe the same transaction.
Coordinate the Owner, Accountant, and Lawyer
You establish the commercial objective and identify assets, debts and ownership constraints. Your accountant supplies tax balances and models the elected amounts and resulting tax consequences.
The lawyer prepares the transfer documents and confirms that the corporation has the necessary share structure and approvals. A valuation professional contributes where the asset or business value needs specialist support.
At Beganyi Law, we provide integrated corporate and tax advice and work with your accountant on implementation. Our integrated tax and legal planning approach connects the financial model to the agreements you sign.
Document Valuation and Assess a Price Adjustment Clause
A supportable fair market value is essential even where the elected amount equals tax cost. Value determines the consideration and affects several anti-avoidance and benefit rules.
We recommend retaining valuation support appropriate to the asset. Private-company shares, intellectual property and real estate require different evidence.
A properly drafted price adjustment clause addresses a later determination that fair market value differs from the original estimate. CRA recognition requires conditions to be met, including a bona fide intention to transact at fair market value and an appropriate valuation method.
Giving effect to the clause also requires corresponding adjustments to consideration. An amended election is required where the elected amount must change.
Complete the Transfer Agreement, Share Issuance, and Corporate Approvals
The transfer agreement identifies the property, effective date and consideration. Its schedules should reconcile with the accountant’s working papers and election forms.
We also address share subscriptions or issuances, directors’ resolutions and updates to the securities register. Asset-specific steps include registrations, intellectual property assignments and third-party consents.
A bookkeeping entry does not establish that legal title has moved. For businesses preparing for future due diligence, complete records also help demonstrate who owns each material asset.
Prepare the Joint Election Using Form T2057 or Form T2058
CRA Form T2057 is the prescribed joint election for a taxpayer and corporation under subsection 85(1). Its use extends to qualifying corporate and trust transferors as well as individuals.
Form T2058 applies to qualifying partnership transfers under subsection 85(2). The partnership route has its own participation and filing requirements.
We reconcile the asset descriptions, values, elected amounts and consideration across the agreement and form. Filing the election with the Canada Revenue Agency (CRA) is a distinct task that needs an assigned person and retained submission evidence.
Determine the Filing Deadline and Options for Late or Amended Elections
The election deadline is the earliest income tax return filing deadline of any party to the election for the taxation year containing the transfer. This requires checking the relevant year-ends and filing obligations.
Subsection 85(7) permits a late election within three years after the original deadline when its requirements are met, including the applicable estimated penalty payment.
Beyond that period, subsection 85(7.1) gives CRA discretion to accept a late election where the circumstances are just and equitable. Amended elections also engage discretionary relief rules; acceptance should never be assumed.
We recommend calendaring the deadline when the transfer date is chosen. An amended election also does not automatically resolve every consequence of a CRA reassessment.
Check for Omitted Assets, Reporting Errors, and Ontario Land Transfer Tax
A final review should reconcile the signed documents, election schedules and opening corporate balances. Goodwill, assumed debts and assets recorded under outdated descriptions deserve particular attention.
We also check taxes and obligations outside section 85. GST/HST treatment requires a separate assessment, including whether a business-transfer election is available.
A federal section 85 election does not itself provide an Ontario land transfer tax exemption. Registered transfers and certain transfers of beneficial interests require provincial analysis, and Toronto property also raises municipal land transfer tax considerations.
Specific exemptions or deferrals have their own conditions. Their availability should be established before the real estate transfer closes.
When Does a Rollover Fit Your Business or Succession Plan?
A rollover fits transactions where ownership needs to change while preserving deferred tax treatment on eligible property. We assess the proposed structure against your financing needs and eventual ownership transition.
Incorporating a Sole Proprietorship
Business incorporation is a common application because an established sole proprietorship already owns assets with accrued value. Equipment, inventory and goodwill each need to be identified and priced.
We begin with an asset-and-liability schedule and a proposed effective date. Contracts, licences, employment arrangements and banking changes require attention alongside the tax election.
Section 85 does not make every business item eligible. Accounts receivable, for example, require a separate review, including whether a section 22 election is appropriate.
Transferring Assets or Shares to a Holding Company
A holding company, or holdco, is used to hold operating-company shares or other assets within a broader ownership structure. Section 85 is relevant when appreciated assets or shares are transferred into that corporation.
Your receiving company might be a controlled corporation or wholly owned corporation, although subsection 85(1) does not impose a universal control requirement.
Our holding company planning considers the proposed asset location and intended use of retained earnings. We also examine creditor issues and future distributions because a rollover does not independently establish asset protection.
Using an Estate Freeze to Transfer Future Growth
An estate freeze fixes the value of an owner’s existing interest while allocating future appreciation to new growth shares. Section 85 is one mechanism available within that planning.
A family trust or the next generation might subscribe for growth shares after the freeze. The arrangement requires defensible valuation and careful design of the founder’s preferred shares.
Our estate freeze planning also addresses voting control and continued owner involvement. Wider estate planning should coordinate the corporate structure with your will and anticipated liquidity needs.
Assessing Capital Gains Exemption Eligibility and Section 84.1 Risks
The lifetime capital gains exemption applies only where the shares and taxpayer meet the relevant requirements. A section 85 election does not establish that shares are qualified small business corporation shares.
We examine the asset-use tests, ownership history and effect of the proposed reorganization. Our capital gains exemption planning includes assessing non-business assets and whether purification steps are appropriate before a sale.
Section 84.1 requires particular care when an individual transfers shares to a non-arm’s-length corporation and the statutory conditions are met. It restricts PUC and, in applicable circumstances, produces a deemed dividend from non-share consideration.
An elected amount supported by adjusted cost base does not settle the section 84.1 analysis. Prior capital gains exemption claims and the provision’s special cost rules require separate review.
How Does a Section 85 Transfer Differ From a Section 86 Share Exchange?
Section 85 addresses eligible property transferred to a corporation, while section 86 addresses qualifying exchanges of shares within the same corporation during a capital reorganization. The transaction’s legal form determines which provision deserves consideration.
Feature | Section 85 | Section 86 |
|---|---|---|
Property involved | Eligible property | Shares held as capital property |
Receiving issuer | Transferee corporation | Same corporation |
Scope of share exchange | Transaction-dependent | All shares owned of a particular class |
Prescribed election | Required | No section 86 election |
We compare these routes when designing a freeze or ownership change. Section 86 has its own conditions and benefit rules, and receipt of non-share consideration requires additional analysis.
Align Your Rollover With the Transaction Before Transferring Assets
A rollover should follow a documented transaction plan supported by asset values, tax calculations and coordinated legal implementation. We recommend confirming the consideration and filing responsibilities before you transfer assets or issue shares.
Bring your proposed ownership structure, asset-and-debt schedule and recent financial statements to your advisors. Those materials support an initial assessment of whether section 85 fits the transaction and identify valuation work that needs to happen first.
For a corporate reorganization or ownership transition, we invite you to arrange a confidential consultation with Beganyi Law at +1 647-977-7749. We serve business owners throughout Ontario and coordinate legal implementation with your accountant.
We provide this material as general information, not legal or tax advice for your circumstances. Eligibility and tax results require transaction-specific advice from an appropriate tax professional.
Frequently Asked Questions
We recommend resolving the following practical questions before you approve the transfer documents.
Does a Section 85 rollover eliminate tax permanently?
A section 85 rollover provides tax deferral, with accrued gains remaining within the resulting tax structure. We assess potential tax on a later asset sale, share disposition or redemption as part of the initial planning.
Do I have to control the corporation receiving the property?
Control is not a general requirement under subsection 85(1). We confirm that the transferee is a taxable Canadian corporation and review the share consideration and other eligibility conditions, including transactions involving a controlled corporation.
Can I receive a promissory note instead of cash?
A promissory note is permitted as non-share consideration, provided the transfer also includes qualifying share consideration. We check its fair market value against the elected-amount limits because a note creates boot even before repayment.
What happens if I miss the T2057 filing deadline?
A late election is available within three years of the original deadline if the statutory requirements are satisfied, including the applicable penalty payment. For later filings or an amended Form T2057, we assess the grounds for discretionary CRA acceptance and the consequences if relief is refused.
Does a Section 85 election also exempt an Ontario property transfer from land transfer tax?
A section 85 election provides no automatic exemption from Ontario land transfer tax. We assess any provincial exemption or deferral separately and review municipal land transfer tax where the property is in Toronto.