Rollover Provisions Under Section 85: Tax-Deferred Transfers Explained

By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA

Business owners in Mississauga, the GTA, and across Ontario frequently face situations where they need to transfer assets between entities without triggering immediate tax consequences. Whether you’re incorporating a sole proprietorship, restructuring your corporate group, or implementing an estate planning strategy, understanding Section 85 rollover provisions is essential for tax-efficient business transitions.

Section 85 of the Income Tax Act provides powerful tax-deferral opportunities for Canadian business ownersbut it comes with strict technical requirements and potential pitfalls. This comprehensive guide explains how Section 85 rollovers work, when they make sense, and how to execute them properly.

What is a Section 85 Rollover?

A Section 85 rollover allows a taxpayer to transfer property to a Canadian corporation at an elected amount between the tax cost and fair market value. This election defers capital gains that would otherwise be triggered when property is transferred for consideration exceeding its adjusted cost base (ACB).

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Key Features of Section 85 Elections
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Tax Deferral, Not Elimination: A Section 85 rollover doesn’t eliminate taxit defers it until the shares or property received are eventually disposed of. The tax liability is preserved through adjustments to the cost base of shares received.
Elected Amount Flexibility: Transferors can elect any amount between the property’s ACB and fair market value (FMV), giving flexibility to crystallize capital gains when beneficial (for example, to utilize capital gains exemptions).
Consideration Types: The transferee corporation can provide consideration through shares, debt (promissory notes), or a combination, with specific tax implications for each type.
Joint Election Requirement: Both the transferor and corporation must file Form T2057 (or T2058 for partnerships) within certain deadlines to have the election recognized by the CRA.

For Ontario businesses navigating corporate reorganization scenarios, Section 85 rollovers are often an essential planning tool.

Eligible Property for Section 85 Rollovers

Not all assets qualify for Section 85 treatment. The Income Tax Act specifies eligible property types:

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Qualifying Property
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1. Capital Property: Real estate, equipment, goodwill, and other capital assets used in business
2. Inventory: Business inventory can be rolled over, though special rules apply
3. Resource Property: Certain resource-related assets
4. Shares: Shares of other corporations (subject to specific conditions)
5. Partnership Interests: Interests in partnerships where the partnership carries on business in Canada

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Ineligible Property
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• Cash (already at face value)
• Accounts receivable (generally not capital property)
• Personal-use property
• Most debt obligations

When incorporating a Mississauga business or transferring assets between related Ontario corporations, identifying which assets qualify for Section 85 treatment is the critical first step.

Common Section 85 Rollover Scenarios

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1. Incorporation of a Sole Proprietorship or Partnership
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One of the most common uses of Section 85 is when a sole proprietor or partnership incorporates their business. Assets like equipment, inventory, and goodwill can be rolled into the new corporation without immediate tax consequences.

Example: Maria operates a successful consulting practice in Toronto as a sole proprietor. She wants to incorporate to access the small business deduction and income splitting opportunities. Using Section 85, she can transfer her business assets (computer equipment, client list, goodwill) to MariaCo Inc. at elected amounts equal to their ACB, receiving shares in exchange. No immediate capital gains are triggered, and the tax cost of assets is preserved in the corporation.

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2. Estate Freeze Transactions
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Business owners planning succession often use Section 85 as part of an estate freeze strategy. The owner exchanges common shares for preferred shares with a fixed redemption value, while new common shares (with growth potential) are issued to the next generation.

Example: John owns 100% of a Mississauga manufacturing company worth $5 million. He wants to transfer future growth to his children while retaining current value. Using Section 85, he exchanges his common shares for preferred shares with a redemption value of $5 million. His children subscribe for new common shares at nominal value. Future growth accrues to the children’s shares, while John’s preferred shares remain fixedfreezing his estate value for tax purposes.

Our guide to succession planning for family businesses explores how Section 85 fits into comprehensive transition strategies.

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3. Corporate Reorganizations
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Section 85 facilitates tax-efficient corporate group restructuring, allowing assets to move between related corporations without triggering capital gains.

Example: ABC Holdings owns operating company OPCo and real estate company RECo. To simplify the structure, they want to transfer OPCo’s real estate to RECo. Using Section 85, OPCo can transfer the property to RECo at an elected amount equal to its ACB, receiving shares or debt from RECo, deferring any capital gains.

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4. Transferring Appreciated Assets
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Shareholders may want to extract appreciated capital property from a corporation without liquidating it, using Section 85 to transfer the property while managing tax timing.

For GTA business owners considering any of these scenarios, working with an experienced CPA in Mississauga ensures the technical requirements are met and optimal tax outcomes achieved.

How the Section 85 Election Works: Mechanics and Calculations

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The Elected Amount
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The elected amount is the key variable in a Section 85 rollover. It determines:

• The proceeds of disposition for the transferor
• The ACB of shares received
• The ACB of property to the transferee corporation

Safe Harbor Rule: The elected amount must be between the greater of:

• The ACB of the property transferred, and
• The FMV of non-share consideration (boot) received

And the lesser of:

• The FMV of the property transferred

Formula:

“`

ACB of Property Elected Amount FMV of Property

FMV of Boot Elected Amount

“`

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Consideration Structure and Tax Consequences
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Share Consideration: Shares received can be common or preferred, voting or non-voting. The ACB of shares is generally equal to the elected amount minus any boot received.
Boot (Non-Share Consideration): Boot includes cash, promissory notes, or assumption of liabilities. Boot up to the elected amount doesn’t trigger immediate taxation, but boot exceeding ACB creates an immediate capital gain.
Example Calculation:

Property transferred: Equipment with ACB of $100,000 and FMV of $250,000

Consideration received:

• Preferred shares: FMV $200,000
• Promissory note (boot): $50,000

Elected amount: $100,000 (equal to ACB)

Tax consequences:

• Transferor’s proceeds: $100,000 (elected amount)
• Capital gain: $0 (proceeds = ACB)
• ACB of preferred shares: $100,000 – $50,000 (boot) = $50,000
• Corporation’s ACB of equipment: $100,000

The transferor has deferred $150,000 of capital gains ($250,000 FMV – $100,000 ACB), which will be realized when the shares are eventually sold.

Filing Requirements and Deadlines

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Form T2057: Election on Disposition of Property
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Both the transferor and corporation must complete and sign Form T2057, specifying:

• Description of property transferred
• ACB and FMV of property
• Elected amount
• Details of consideration received

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Filing Deadlines
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General Rule: The election must be filed by the earlier of:

• The transferor’s filing deadline for the year of transfer, or
• The corporation’s filing deadline for its taxation year in which the property was acquired

Late-Filed Elections: The CRA allows late-filed Section 85 elections with penalties:

• Penalty: $100 per month (to a maximum of $8,000)
• Elections can be filed up to 3 years late

Amended Elections: If an error is made, amended elections can be filed with CRA approval and payment of a penalty.

For Mississauga businesses executing Section 85 rollovers, timely and accurate filing is criticalmistakes can result in unintended tax consequences and significant penalties.

Advanced Considerations and Planning Opportunities

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Utilizing the Capital Gains Exemption
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Business owners selling qualified small business corporation (QSBC) shares can claim the lifetime capital gains exemption (currently $1,016,836 for 2026). Section 85 elections can be used strategically to crystallize gains and utilize this exemption.

Strategy: Instead of electing at ACB (which defers all gains), elect at an amount that triggers a capital gain equal to the available exemption amount. This essentially “purifies” the tax basis with no net tax cost.

Our comprehensive guide to capital gains tax strategies explores when crystallizing gains makes sense.

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Price Adjustment Clauses
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When fair market value is uncertain (common with private company shares or specialized assets), taxpayers can include a price adjustment clause in the transfer agreement. This allows the elected amount to be adjusted if CRA successfully challenges the valuation, preventing unintended boot or other adverse consequences.

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Integration with Other Rollover Provisions
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Section 85 often works in conjunction with:

• Section 85.1: Share-for-share exchanges
• Section 86: Capital reorganizations (share exchanges within one corporation)
• Section 51: Convertible property exchanges

Understanding how these provisions interact is essential for complex corporate reorganizations.

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Avoiding Attribution Rules
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When assets are transferred to a corporation controlled by a spouse or related minor, attribution rules may apply, taxing income or gains back to the transferor. Proper structuring (including use of prescribed rate loans and fair market value consideration) can avoid these traps.

Common Pitfalls and How to Avoid Them

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1. Excessive Boot
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Problem: Receiving boot exceeding the ACB of property transferred triggers an immediate capital gain, defeating the purpose of the rollover.
Solution: Structure consideration to ensure boot doesn’t exceed the elected amount. If cash is needed, plan for a phased extraction through dividends or salary post-rollover.

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2. Missing the Filing Deadline
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Problem: Failing to file Form T2057 by the deadline means the rollover is invalid, and the transfer is deemed to occur at FMV, triggering full capital gains.
Solution: Implement a tracking system for Section 85 elections. Even if the deadline is missed, file a late election to preserve the rollover (subject to penalties).

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3. Incorrect Valuation
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Problem: If the CRA challenges your FMV determination and finds the elected amount exceeds FMV, the elected amount is automatically reduced to FMV, potentially creating unexpected boot.
Solution: Obtain professional valuations for significant assets. Include price adjustment clauses where valuations are uncertain.

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4. Shareholder Benefit Issues
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Problem: If consideration is insufficient or the transaction isn’t structured at FMV, the CRA may assess a shareholder benefit under subsection 15(1), taxed as income (not capital gains).
Solution: Ensure all transfer agreements and elections reflect arm’s length principles, with documentation supporting FMV determinations.

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5. Inadequate Documentation
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Problem: Lack of written transfer agreements, board resolutions, or supporting valuations weakens your position if CRA audits the transaction.
Solution: Prepare comprehensive documentation including:

• Written asset purchase agreements
• Corporate resolutions authorizing transfers
• Independent valuations
• Signed T2057 forms

For Ontario businesses, working with a CPA experienced in corporate tax minimizes these risks and ensures compliant, effective Section 85 rollovers.

Section 85 vs. Other Rollover Provisions

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Section 85 vs. Section 85.1 (Share-for-Share Exchange)
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Section 85.1 provides an automatic rollover (no election required) when a taxpayer exchanges shares of one corporation for shares of another, subject to strict conditions:

• Only shares can be transferred (not other assets)
• Only shares can be received (no boot)
• Specific ownership thresholds must be met

Section 85 offers more flexibility:

• Can transfer various types of property
• Can receive boot
• Elected amount can be chosen strategically

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Section 85 vs. Section 86 (Share Reorganization)
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Section 86 applies to reorganizations within a single corporation (e.g., exchanging common shares for preferred shares). It’s often used in estate freezes but requires all old shares to be exchanged.
Section 85 can be used for similar purposes but allows partial exchanges and transfers to a different corporation.

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Section 85 vs. Subsection 97(2) (Partnership Property Transfers)
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Subsection 97(2) provides rollover treatment when transferring property to a Canadian partnership in exchange for a partnership interest. It operates similarly to Section 85 but applies specifically to partnership contexts.

Understanding when each provision appliesor when multiple provisions might be combinedis critical for complex business restructurings in the GTA.

Provincial Considerations for Ontario Businesses

While Section 85 is federal legislation, Ontario business owners should consider provincial implications:

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Land Transfer Tax
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When real property is transferred to a corporation using Section 85, Ontario land transfer tax may still apply, even though income tax is deferred. Certain exemptions exist for transfers to wholly-owned corporations.

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Ontario Business Corporations Act
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Corporate law requirements must be satisfied in addition to tax elections. Ensure:

• Proper shareholder and director resolutions
• Share certificates are issued
• Corporate records reflect the transaction

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Professional Corporation Rules
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Ontario professional corporations (PCs) face specific restrictions on share ownership and asset holdings. Section 85 rollovers involving PCs must comply with professional regulatory requirements.

Our guide to tax-efficient compensation for professional corporations addresses PC-specific planning considerations.

When to Use Section 85: Strategic Decision Framework

Section 85 rollovers make sense when:

1. Incorporating a business: Transferring assets from sole proprietorship/partnership to a corporation without triggering tax
2. Implementing estate freezes: Crystallizing current value while passing future growth to next generation
3. Restructuring corporate groups: Moving assets between related corporations for operational or tax efficiency
4. Accessing small business deduction: Transferring active business assets to a corporation to benefit from lower tax rates
5. Asset protection: Separating operating assets from vulnerable business risks
6. Preparing for sale: Restructuring ownership before a business sale to optimize tax outcomes

Section 85 may NOT be appropriate when:

1. Capital losses exist: If you have capital losses to offset gains, triggering gains may be beneficial
2. Lifetime capital gains exemption is available: Consider crystallizing QSBC gains to utilize the exemption
3. Transaction costs exceed tax savings: Simple structures may be preferable for small-value transfers
4. Future sale is imminent: Deferring tax only to pay it shortly after may not justify complexity

For Mississauga and GTA business owners evaluating restructuring options, consulting with a strategic tax planning CPA ensures Section 85 elections align with your broader business and tax objectives.

Working with CRA: Audit and Dispute Considerations

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What CRA Examines in Section 85 Elections
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During audits, the CRA scrutinizes:

1. Valuation accuracy: Are FMV determinations reasonable and supportable?
2. Shareholder benefits: Was consideration adequate, or did shareholders receive a benefit?
3. Boot compliance: Does boot exceed ACB, triggering unintended gains?
4. Filing compliance: Were forms filed on time and accurately completed?
5. Commercial substance: Is there a genuine business purpose, or is it tax avoidance?

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Documentation Best Practices
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Maintain comprehensive records including:

• Independent valuations from qualified appraisers
• Written agreements detailing all transaction terms
• Board and shareholder resolutions
• Contemporaneous memos explaining business rationale
• Copies of all filed elections and supporting schedules

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Advance Income Tax Rulings
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For complex or high-value transactions, consider requesting an advance income tax ruling from CRA to obtain certainty on tax treatment before executing the rollover.

Integration with Broader tax planning Strategies

Section 85 rollovers rarely exist in isolation. They typically form part of comprehensive tax planning strategies:

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Income Splitting
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After rolling assets into a corporation, income splitting through family trusts or spousal shareholdings becomes possible (subject to TOSI rules).

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Pension Income Splitting
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For professional corporations, rollovers can facilitate retirement compensation arrangements (RCAs) and individual pension plans (IPPs).

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Multiplication of Capital Gains Exemptions
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By reorganizing ownership among family members using Section 85, multiple family members may eventually claim capital gains exemptions on QSBC shares.

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Cross-Border Planning
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For businesses with US operations or shareholders, Section 85 elections must be coordinated with US tax rules to avoid double taxation or treaty conflicts. Our guide to cross-border tax planning explores international considerations.

The Role of Professional Advisors

Section 85 rollovers involve complex tax, legal, and valuation considerations. A successful implementation requires a coordinated team:

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CPA/Tax Advisor
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• Determine optimal elected amounts
• Prepare and file Section 85 elections
• Model tax consequences under various scenarios
• Ensure integration with broader tax strategy

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Legal Counsel
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• Draft transfer agreements and share provisions
• Prepare corporate resolutions
• Ensure compliance with corporate law
• Address shareholder agreement implications

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Business Valuator
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• Provide independent FMV opinions
• Support elected amounts and consideration structure
• Document valuation methodology for CRA

At Insight Accounting CPA, our Mississauga-based team coordinates with legal and valuation professionals to deliver seamless Section 85 planning and execution for GTA businesses.

Real-World Case Study: Section 85 in Action

Background: David and Sarah own a successful Mississauga software development company operated through a partnership. The business is valued at $8 million. They want to:

• Incorporate for tax efficiency
• Implement an estate freeze
• Bring their adult children into ownership

Solution: A multi-step Section 85 rollover strategy:
Step 1: David and Sarah transfer partnership assets to Newco using Section 85, electing at ACB ($2 million). They receive:

• Preferred shares: $7.5 million redemption value
• Promissory note: $500,000

Step 2: A family trust subscribes for new common shares at nominal value. Future growth accrues to the trust (beneficiaries: children).
Tax results:

• No immediate capital gains (elected at ACB)
• David and Sarah’s estate frozen at $8 million current value
• Future $10+ million growth accrues to children via trust
• Small business deduction now available
• Income splitting opportunities created

Documentation: Professional valuation obtained, comprehensive transfer agreements executed, T2057 filed within deadline, legal and tax advisors coordinated throughout.

This structure demonstrates how Section 85 enables sophisticated tax planning for growing Ontario businesses.

Conclusion: Maximizing Value Through Strategic Tax Deferral

Section 85 rollover provisions represent one of the most powerful tax planning tools available to Canadian business owners. When properly executed, they enable tax-efficient business incorporations, corporate reorganizations, estate planning, and succession transitionspreserving capital for reinvestment and growth rather than immediate tax payments.

However, the technical complexity and strict compliance requirements mean that mistakes can be costly. Incorrect elections, missed deadlines, or inadequate documentation can result in unintended tax consequences, penalties, and disputes with CRA.

For business owners in Mississauga, Toronto, and across the GTA navigating business transitions, working with experienced tax professionals ensures Section 85 elections are structured optimally, filed correctly, and integrated into your comprehensive business and tax strategy.

Take the Next Step

Considering a business incorporation, corporate reorganization, or estate freeze? The team at Insight Accounting CPA brings deep expertise in Section 85 rollovers and strategic tax planning for Ontario business owners.

Contact us today for a consultation:

(905) 270-1873

admin@insightscpa.ca

www.insightscpa.ca

Let us help you navigate Section 85 rollovers with confidence, preserving capital and positioning your business for long-term success.

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Frequently Asked Questions

Q: Can I use Section 85 to transfer personal-use property to a corporation?

A: No. Section 85 only applies to property that produces income or is used in business. Personal-use property like your personal residence or vehicle doesn’t qualify.

Q: What happens if I miss the Section 85 filing deadline?

A: If you miss the deadline, the transfer is deemed to occur at fair market value, potentially triggering capital gains. However, you can file a late election (up to 3 years) with penalties of $100/month to a maximum of $8,000.

Q: Can I elect an amount higher than ACB to utilize my capital gains exemption?

A: Yes. You can elect any amount between ACB and FMV. Electing higher than ACB crystallizes a capital gain, which may allow you to utilize the lifetime capital gains exemption if the shares are qualified small business corporation shares.

Q: Is Section 85 only for transferring assets to a corporation I control?

A: No. While most Section 85 rollovers involve transfers to controlled corporations, the provision can also apply to transfers to non-controlled corporations, though this may trigger different tax consequences.

Q: Do I need to pay land transfer tax when using Section 85 to transfer real estate?

A: Section 85 defers income tax, but provincial land transfer tax may still apply when real property is transferred. Ontario offers exemptions in certain circumstances, such as transfers to wholly-owned corporations.

Q: How does Section 85 interact with the lifetime capital gains exemption?

A: Section 85 can be used strategically with the exemption. By electing at an amount that triggers a gain equal to your available exemption, you can “purify” the cost base of shares tax-free, deferring only gains exceeding the exemption amount.

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*Insight Accounting CPA serves businesses throughout Mississauga, Toronto, Brampton, Oakville, and the Greater Toronto Area with expert tax planning, corporate reorganizations, and strategic advisory services. Our team stays current with evolving tax legislation to deliver proactive, compliant solutions tailored to your business objectives.*