When is a Section 85 rollover more useful than a Section 51 exchange?

Use Section 85 when you are transferring assets (real property, inventory, depreciable capital, most eligible property) to a corporation, or exchanging shares while receiving any non-share consideration (boot). Use Section 51 only for the narrow case of a convertible-debt-to-share exchange, or a share-for-share exchange within the same corporation where no boot is received.

Section 85 covers a much wider transaction scope: it is the workhorse rollover for incorporations, Holdco freezes, asset transfers to a corporation, and Section 85 hybrid sales. It requires a T2057 election and permits any elected amount between cost amount and FMV.

Section 51 (convertible property) is automatic: no election needed. It kicks in when convertible debt or convertible preferred shares are converted into other shares of the same issuer. Elected amount is fixed – the taxpayer’s cost of the new shares equals the cost of the converted property. No boot permitted; if boot is received, s. 51 fails and s. 85(1) is required if a rollover is desired.

Example: an angel investor holds convertible debt of a startup. On Series A conversion the debt converts into preferred shares. Section 51 automatically applies – the ACB of the preferred shares equals the ACB of the debt, no immediate gain. If instead the investor exchanges the debt for shares plus cash, s. 51 fails; a s. 85 rollover would be needed to defer any accrued gain on the shares portion, and the cash boot is taxable to the extent of accrued gain.

Section 86 sits in the same family – internal reorg of capital, no election, no boot.

Note: The three rollovers overlap for the specific fact pattern of an internal share-for-share exchange with no boot. In that case s. 51, s. 85, or s. 86 can each apply; the elected amount and PUC/ACB consequences differ. Choose deliberately.

Source: canada.ca — Rollovers and other transfers

— 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.