When should I use a Section 85 rollover in Canada?

Use a Section 85 rollover under Income Tax Act s. 85(1) when you are transferring eligible property (real estate, depreciable property, inventory, eligible capital property, most shares) to a taxable Canadian corporation in exchange for shares, and you want to defer any accrued capital gain on that transfer. Common triggers: incorporating a sole proprietorship, moving assets to a Holdco, freezing an estate.

Mechanics. The transferor and transferee jointly elect on Form T2057 to set the transfer price at any elected amount between the property’s ACB/UCC (or cost amount for inventory) and its FMV, subject to the s. 85(1) elected amount rules. The elected amount becomes both the transferor’s proceeds and the transferee’s cost. Consideration must include at least one share of the transferee; boot (non-share consideration like cash or debt) is permitted up to the elected amount.

Example: an Ontario sole-prop plumbing business incorporates. Truck (FMV $50,000, UCC $12,000), tools (FMV $15,000, cost $5,000), and inventory ($8,000 cost, $8,000 FMV) are rolled to NewCo. Transferor elects at UCC/cost for each asset. Consideration: $25,000 promissory note (boot equal to sum of elected amounts) plus one common share. Result: no immediate capital gain to shareholder, corporation takes elected amounts as its cost/UCC basis, promissory note can be drawn tax-free over time.

Wrong elected amount = automatic bump to the correct minimum by CRA. Boot in excess of elected amount = deemed dividend under s. 85(1)(f)(ii) or capital gain under s. 85(2.1). Get the elected amount right.

Note: A s. 85 rollover triggers HST unless a joint s. 167(1) election (Form GST44) is also filed to treat the transfer as a supply of a business without GST/HST. File both elections in the same package.

Source: canada.ca — T2057 Election to transfer property

— Bader A. Chowdry, CPA, CA, LPA — Insight Accounting CPA

Disclaimer: Bader A. Chowdry, CPA, CA, LPA is a Licensed Public Accountant regulated by CPA Ontario. Insight Accounting CPA Professional Corporation is a Chartered Professional Accountant firm. This content is general information only and does not constitute professional advice for your specific facts. Confirm current rules and figures with your own advisor before acting.