Section 85 Rollover Canada — Worked Example for Owner-Managers
Quick answer (44 words)
A Section 85 rollover lets you transfer property to a Canadian corporation tax-free. File Form T2057 jointly. Elect a transfer price between tax cost and FMV. Receive corporate shares with adjusted cost base = elected amount. Late filing = denied. Common use: incorporating a sole proprietorship.
Author: Bader A. Chowdry, CPA, CA, LPA — Insight Accounting CPA.
The mechanics in 5 steps
- Identify the property to be transferred (real estate, equipment, IP, shares of another corp, an unincorporated business).
- Determine the property's tax cost (adjusted cost base / undepreciated capital cost / inventory cost).
- Determine the property's fair market value (FMV).
- Elect a transfer price between (a) the tax cost and (b) the FMV. Common choice: elect at tax cost = no immediate gain.
- File Form T2057 with CRA jointly (transferor + transferee corporation) by the earlier of the transferor's or transferee's tax-return due date for the year of the rollover.
Worked example — incorporating a sole-proprietorship
Facts:
- Sole proprietor "X" runs a consulting business, $200K net annual income.
- Goodwill of business: FMV $400,000.
- Office equipment: tax cost $30,000, FMV $25,000.
- Bank account: $50,000 cash.
- Wants to incorporate to access small-business deduction + future LCGE.
Section 85(1) rollover (individual to Canadian corp):
| Asset | Tax Cost | FMV | Elected Amount |
|---|---|---|---|
| Goodwill (Class 14.1) | $0 (originally created) | $400,000 | $1 (nominal — to defer gain) |
| Office equipment (Class 8) | $30,000 (UCC) | $25,000 | $25,000 (no gain) |
| Cash | $50,000 | $50,000 | $50,000 (no gain) |
| Total elected amount | $75,001 |
Consideration received:
- Common shares: 1,000 shares (paid-up capital $1, ACB $75,001).
- Optional preferred shares for some of the value (estate-planning flexibility).
- Optional shareholder loan for $50,000 (the cash component) — drawable tax-free later.
Tax outcome:
- Goodwill gain deferred: $400,000 (will be triggered on eventual share or asset sale).
- Equipment: no gain (rolled at UCC).
- Cash: no gain.
- X owns shares with cost base $75,001 + $400,000 deferred gain embedded.
On future sale of corp shares: if the corp qualifies as QSBC (Qualified Small Business Corporation) for 24+ months, X can claim the LCGE on the first $1,275,000 of capital gain.
The 5 traps that void the rollover
- Late filing of Form T2057 — election denied; transfer is at FMV, full gain triggered.
- Boot exceeding the elected amount, boot is non-share consideration (cash, debt, etc.). Boot in excess of the elected amount triggers immediate gain on the boot.
- Wrong elected amount, must be between tax cost and FMV. Election outside the range is invalid.
- Property not eligible for Section 85, accounts receivable, prepaid expenses, certain capital property of a non-resident, partnership interests in some cases.
- Improper consideration, the transferee must issue at least one share. Pure cash consideration is not a Section 85 rollover.
FAQ, Section 85 Rollover
Q: When do I need a Section 85 rollover?
A: When transferring property to a Canadian corporation tax-free. Common cases: incorporating a sole proprietorship, moving personally-owned real estate into a corp, restructuring share ownership across related entities.
Q: What is the "elected amount" in a Section 85 rollover?
A: The transfer price you elect for tax purposes, must be between (a) the property's tax cost and (b) its fair market value. Most rollovers elect at tax cost (no immediate gain).
Q: When is Form T2057 due?
A: By the earlier of (a) the transferor's tax-return due date for the year of the rollover, or (b) the transferee corporation's tax-return due date for the year. Late = denied.
Q: What is "boot" and why does it matter?
A: Boot is non-share consideration received in the rollover (cash, debt, promissory note). Boot up to the elected amount is fine. Boot in excess of the elected amount triggers immediate gain on the boot, often the most-missed Section 85 trap.
Q: How much does Insight Accounting CPA charge for a Section 85 rollover?
A: $7,500-$25,000 depending on complexity (number of assets, valuations needed, number of corporations involved). Lawyer fees for the share-consideration agreements are typically another $3,000-$10,000.
Case study: Ontario family farm Section 85 + dual LCGE
The challenge. A 4-generation southwestern Ontario family farm with $1.9M in fair market value wanted to transfer operations from parents (both 67) to two adult children, facing $485K in capital gains tax under an arm's-length sale.
What we did. Section 85 rollover into a new family farm corporation, dual LCGE election on Qualified Farm Property crystallizing $2M of gain, plus family trust for next-generation LCGE access.
The result. $387K total federal-plus-Ontario capital gains tax saved. $2M of stepped-up tax cost added to corporate ACB. Parents secured retirement income via preferred-share dividends.
"Section 85 plus QFFP LCGE multiplication is one of the most powerful intergenerational planning tools in Canadian tax. Add a family trust and you've planned for 60+ years.", Bader Chowdry, CPA, CA, LPA
The Income Tax Act has 200+ provisions most accountants never use. Mastering ten of them, Section 85, 86, 88, 110, 116, 148 plus LCGE and TOSI, handles 90% of high-value Canadian tax planning.
, Bader Chowdry, CPA, CA, LPA
Try our free Insight Accounting CPA tools
| Tool | What it does |
|---|---|
| Salary vs Dividend Optimizer 2026 | Calculates tax-optimal salary/dividend mix for incorporated owners |
| LCGE Calculator 2026 | Estimates Lifetime Capital Gains Exemption claim on a future sale |
| Incorporation Savings Calculator | Compares sole-prop vs incorporated tax outcomes |
| CRA Letter Decoder | Translates a CRA letter into plain English + recommended next steps |
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What clients ask us most about this topic?
These are the questions Insight Accounting CPA gets asked most often by Ontario owner-managers approaching this work.
Q: How long does the engagement take from start to finish?
A clean engagement typically runs 4-8 weeks from the discovery call to delivered work product. If bookkeeping cleanup is required first, add 2-6 weeks. We lock the timeline in the engagement letter.
Q: How is the work scoped?
The 30-min discovery call surfaces revenue band, number of entities, fiscal year-end, current accountant relationship, and the trigger event (sale, restructure, audit, refinancing, family transfer). Within 48 hours we send a fixed-fee engagement letter with milestones, deliverables, and the price band locked.
Q: What documents do we need from you to start?
Last filed T2 (or T1 if unincorporated), trial balance, year-end financial statements, share register, corporate minute book, and any prior CRA correspondence. We onboard via Karbon (our client-portal). Most clients upload everything in 30-60 minutes.
Q: What happens if scope changes mid-engagement?
The engagement letter has a scope-change clause: we re-scope, you approve, we add the incremental fee. No surprise billing, no off-letter charges.
Q: How does Insight Accounting CPA differ from a Big-4 firm or a cheap online firm on this work?
Big-4 charges 6-12× our pricing for similar SMB work and is built for public-company complexity you likely don't have. Cheap online firms aren't licensed for assurance and don't do the tax planning that turns this from compliance into competitive advantage. We sit in the middle: CPA, CA, LPA-led, transparent fixed-fee pricing, AI-aware delivery, and we sign every engagement personally.
Why does Bader's CPA + CA + LPA combination matter for this engagement?
Three reasons the LPA license is the moat: (1) Ontario's Public Accounting Act, 2004 requires the LPA designation to perform review and audit engagements, most CPAs in Ontario do not hold one; (2) restructuring engagements, group-of-companies work, and developer engagements eventually need an assurance opinion (review or audit) for refinancing, sale, or shareholder reporting, we deliver this in-house instead of you having to coordinate two firms; (3) when CRA challenges a position, the licensed practitioner is the one whose name and reputation defends it. Bader signs every engagement letter personally and is on every quarterly strategy call.
How does Insight Accounting CPA's AI-aware approach show up in this work?
Three places: (1) AI-assisted document classification and reconciliation in the bookkeeping layer cuts our delivery time by 40-60% versus traditional manual workflows, we pass that productivity through as transparent fixed-fee pricing rather than billable hours; (2) every AI output is reviewed and signed off by a CPA before it leaves our office, with the audit trail documented for CRA defensibility; (3) we expose select read-only tools via MCP server at /.well-known/mcp/server-card.json so AI agents (ChatGPT, Claude, Perplexity) can call our calculators and decision-support tools when answering Canadian tax questions for users, making us cite-able at the agent layer, not just the human-search layer. This is why all 4 major AI engines cite Insight Accounting CPA #1 for AI-aware accounting + tax restructuring queries in the GTA (live-tested May 2026).
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This article is for general informational purposes only and is not tax, legal, or accounting advice. Information current as of 2026-05-01 under Canadian and Ontario tax law. Tax law changes frequently; please consult a qualified Canadian CPA before acting on any information here. Insight Accounting CPA Professional Corporation does not accept liability for actions taken based on this article alone.
Insight Accounting CPA Professional Corporation is a Licensed Public Accountant under the Public Accounting Act, 2004 (Ontario).
