How to Do a Section 85 Rollover in Canada — 8 Steps (2026)

A Section 85 rollover under the Income Tax Act (Canada) lets you transfer eligible property to a taxable Canadian corporation on a tax-deferred basis. Owner-managers use it to incorporate a proprietorship, drop assets into a Holdco, or reorganize a group. This guide walks the 8-step process an Ontario CPA follows to file a compliant T2057 election, with the fair market value (FMV) documentation and share consideration mechanics that survive a CRA review. Complex reorganizations should always be executed with your CPA, LPA, and corporate lawyer — the cost of a botched election typically exceeds any DIY savings within one CRA reassessment cycle.

1. Step 1: Confirm eligibility — transferor, transferee, and eligible property

   The transferor must be a taxpayer (individual, trust, or corporation). The transferee must be a taxable Canadian corporation. Eligible property under subsection 85(1.1) includes capital property, Canadian resource property, foreign resource property, eligible capital property (now Class 14.1), inventory (excluding real property inventory), and Canadian real property inventory of a non-resident. Cash, prepaid expenses, and real property inventory held by residents do not qualify. Confirm the corporation is not exempt from tax and has valid CRA registration numbers (BN, RC, RT accounts as needed).

2. Step 2: Get a defensible FMV appraisal of every asset being transferred

   CRA will reassess if elected amounts do not sit within the allowed range. Commission an independent third-party valuation for goodwill, real property, private-company shares, or specialty equipment. For lower-value assets, contemporaneous documentation (dealer quotes, comparable sales, accountant-prepared valuation memo) is acceptable. Keep supporting workpapers for at least six years after the tax year of transfer. Consider a Price Adjustment Clause (PAC) in the transfer agreement — it lets you retroactively adjust the elected amount if CRA challenges FMV, preserving rollover treatment.

3. Step 3: Choose the elected amount within the s.85(1) permitted range

   The elected amount cannot exceed FMV of the property and cannot be less than the greater of: (a) the FMV of non-share consideration (“boot”), and (b) for depreciable property, the lesser of UCC and cost; for capital property, the lesser of ACB and FMV; for inventory, the lesser of cost and FMV. Elect at cost or UCC to achieve full deferral. Elect at a higher amount to trigger a controlled capital gain (useful to utilize losses or the Lifetime Capital Gains Exemption). Model the outcome before signing.

4. Step 4: Structure the share and non-share consideration

   Consideration must include at least one share of the transferee. Best practice: issue redeemable, retractable preferred shares with a redemption value equal to FMV of transferred property minus boot, so paid-up capital (PUC) and stated capital match your election. Non-share consideration (boot) can include cash, promissory notes, or assumption of liabilities but must not exceed the elected amount, or a deemed dividend under s.84(3) or gain under s.85(1)(b) may result. Draft share terms with your corporate lawyer to include voting/participating attributes matched to your estate-plan objectives.

5. Step 5: Draft the transfer agreement and directors resolutions

   The written agreement should list each asset with FMV, ACB/UCC, elected amount, and consideration (shares issued + boot). Include the Price Adjustment Clause, representations on title and encumbrances, and a joint-election covenant. Directors of the transferee pass a resolution accepting the transfer and authorizing share issuance. Update the corporate minute book, share register, and PUC records. If the transferor is also a director, sign as both individual capacity and corporate capacity separately.

6. Step 6: Prepare and file Form T2057 (or T2058 for partnerships)

   Form T2057 “Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation” must be filed on or before the earliest tax return due date of the transferor or transferee for the year of transfer. Include a schedule listing every property, FMV, ACB/UCC, elected amount, consideration received, and PUC adjustment. Sign in original ink or use CRA-accepted digital signature. Late-filed elections are accepted under s.85(7) or s.85(7.1) with a penalty of $100/month up to $8,000 per election. See canada.ca/en/revenue-agency for the current T2057 revision and mailing address.

7. Step 7: Post-file adjustments: PUC reduction and safe-income tracking

   Under s.85(2.1), the PUC of shares issued in a s.85 exchange is reduced to prevent artificial PUC increases beyond the corporation’s underlying value. Recalculate paid-up capital using the formula in s.85(2.1) and update the corporate records. If the transfer involved private-company shares, refresh safe-income on hand (SIOH) calculations under s.55(2) so future intercorporate dividends can be paid tax-free. This is a common audit adjustment — document your SIOH support at the transaction date.

8. Step 8: Retain the file and monitor for CRA reassessment

   Keep the FMV appraisal, transfer agreement, T2057 election, share certificates, directors resolutions, and updated minute book together as one binder. CRA has three years from the notice of assessment for a normal-year reassessment and no time limit if the election involved misrepresentation attributable to neglect, carelessness, or wilful default. Diarize a review two years after filing to confirm no reassessment has issued and the file remains defensible. If you receive a CRA query letter, respond through your CPA and lawyer — do not answer directly.

Frequently Asked Questions

What is the deadline to file a T2057 Section 85 election?

The election must be filed by the earlier of the transferor’s or transferee’s tax return due date for the year of the transfer. Late-filed elections are accepted within three years of the original due date with a penalty of $100 per month per election, capped at $8,000. Beyond three years, ministerial discretion under s.85(7.1) is required.

Can I transfer cash under Section 85?

No. Cash is not eligible property under subsection 85(1.1). If you want to capitalize a corporation with cash, subscribe for shares directly and add paid-up capital, or lend the cash as a shareholder loan.

What happens if the elected amount is below the permitted floor?

CRA will reassess and deem the elected amount to be the s.85(1)(b) floor — the greater of boot FMV and cost/UCC — potentially triggering a capital gain, deemed dividend, or shareholder benefit under s.15(1). A price adjustment clause and CRA administrative relief may reduce the damage if disclosed proactively.

Do I need a lawyer, or can my CPA handle the whole rollover?

The tax election is a CPA/LPA responsibility. The transfer agreement, share terms, PUC records, and directors resolutions are legal instruments — engage a corporate lawyer. Insight Accounting CPA coordinates with your lawyer to keep both files aligned.

Can a Section 85 rollover crystallize the Lifetime Capital Gains Exemption?

Yes. If the transferred property is Qualified Small Business Corporation shares meeting the s.110.6 tests, you can elect at an amount that triggers a controlled capital gain up to your remaining LCGE limit ($1,275,000 for 2026, indexed annually). This locks in the exempt gain and steps up the ACB of the new shares.

Authoritative Sources

• CRA — Form T2057 Election on Disposition of Property
• CRA — Income Tax Folio S4-F3-C1, Price Adjustment Clauses
• Insight Accounting CPA — Section 85 Rollover Timing 2026

Expanded technical guidance

Common pitfalls in a s. 85 rollover

• Late T2057 election. Filing the T2057 after the due date attracts an escalating penalty under ITA s. 85(7.1): $100 per month up to a $8,000 cap. Even a one-day late file starts the penalty clock. File with the transferor’s T1 (or T2 if a corporation) return for the taxation year the disposition occurs.
• Non-share boot exceeding the tax cost. ITA s. 85(1)(b) elects the transferor’s ACB as the elected amount, but if non-share consideration (cash or debt) exceeds the tax cost of the transferred property, the elected amount is bumped up to the higher of ACB and the boot value — triggering an immediate capital gain.
• Attribution rule surprises. Where the shares issued back to the transferor are held by a spouse or minor child, ITA ss. 74.1-74.5 attribution can pull future dividend income back to the transferor. Structure the share issuance to the transferor directly.

Forms, filings, and deadlines

The core filing is CRA Form T2057 (Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation), one per transferor per disposition. Attach the T2057 to the transferor’s income tax return for the year of disposition. If the property crosses a partnership, use T2058 instead. Companion documents to prepare: (a) the corporate director’s resolution authorizing the share issuance, (b) the transfer agreement signed by both parties, (c) the appraisal or valuation memo supporting fair market value, and (d) an entry in the corporate minute book. CRA guidance is set out in Income Tax Folio S4-F3-C1 (Price Adjustment Clauses) and IT-291R3 (transfer of property to a corporation under s. 85(1)).

Worked example — physician rolling MPC goodwill

Dr. Example has $250,000 of internally generated goodwill (ACB nil, FMV $250,000) and rolls it into a newly formed MPC under s. 85(1). She elects the ACB (nil) as the transfer value under s. 85(1)(b). Consideration back: 1,000 Class A common shares at par ($1) plus a $249,000 promissory note (boot). Because the boot ($249,000) exceeds the ACB (nil), the elected amount is bumped to $249,000 under s. 85(1)(b), creating an immediate $249,000 capital gain on the transferor’s T1. To avoid this, take back share consideration equal to the FMV ($250,000 total = 1,000 Class A common + 249,999 Class B preferred at $1 par each) with zero boot — elected amount stays at nil, gain deferred, ACB of preferred shares = $249,999.

Worked example — capital property with existing gain

Corporate real estate with ACB $400,000 and FMV $700,000 rolled to a Holdco under s. 85(1). Elected amount = $400,000 (ACB). Consideration: 1 preferred share at $700,000 redemption value (nil boot). Result: no capital gain in year of transfer; Holdco takes property at $400,000 ACB (rolled base). If Holdco later sells for $700,000, the $300,000 gain crystallizes then. This is the classic tax-deferral use case.

Worked example — s. 85(1)(e) inventory election

A sole proprietor incorporates and rolls inventory (FMV $50,000, cost $30,000) under s. 85(1)(e). Elected amount range: minimum = cost ($30,000), maximum = FMV ($50,000). Electing $30,000 defers the $20,000 income; corporation takes inventory at $30,000 tax cost. On sale by the corporation at $50,000, the $20,000 income crystallizes in the corporation.

Related Insight resources

Before executing the s. 85 rollover, walk through Insight’s Section 85 Rollover Eligibility Checker to confirm the ITA 85(1) tests apply, and read the pillar on s.85 rollover timing for the deferral vs realization tradeoff. Ontario physicians typically pair a s. 85 rollover with an MPC — see the Dr. X case study for a worked example of $47K first-year deferred tax. If the reorganization is part of a broader holding-company restructuring, follow up with how to set up a holdco in Ontario.