Tax Restructuring Ontario 2026 — Section 85, 86, and 88 Combinations Explained

Reviewed by Bader A. Chowdry, CPA, CA, LPA on June 30, 2026

Why do Ontario owner-managers need all three sections — not just one?

Most guides cover section 85, 86, and 88 in isolation. But real mid-market restructurings in Ontario almost always involve at least two of these provisions in sequence, and getting the order wrong can cost the LCGE, create an inadvertent income inclusion, or trigger the bump anti-avoidance rules. If you are a GTA business owner planning a holdco insertion, an estate freeze, or a post-acquisition consolidation, understanding how ITA s.85(1), s.86(1), and s.88(1) interact in sequence — not just individually — is the planning skill that separates a clean restructuring from a CRA audit trigger.

What is the most common multi-step combination Ontario owner-managers use in 2026?

The holdco insertion is the most frequently executed combination in the GTA mid-market. The owner first uses s.85(1) to roll their operating company (Opco) shares into a newly incorporated holding company (Holdco) at an elected amount — either at ACB (deferring all gain) or at FMV (crystallizing the $1,275,000 LCGE before growth compounds further). Holdco issues preferred shares plus common shares back to the owner. Holdco now owns 100% of Opco. From there, Holdco receives tax-free intercorporate dividends from Opco under ITA s.112, shields assets from Opco creditors, and provides the platform for an estate freeze one to three years later using s.86(1). The T2057 election form must be filed with the income tax return for the year of transfer — typically one of the first items to slip past busy owner-managers.

How does the section 85 and section 86 combination work for an estate freeze?

The sequence that maximizes the LCGE before freezing future growth is s.85 first, then s.86 — never the reverse. In step one, the owner uses ITA s.85(1) to transfer Opco shares (or assets) to Holdco at an elected amount equal to FMV. If FMV equals the $1,275,000 LCGE threshold (2026 indexed amount), the entire gain is sheltered and the exemption is crystallized. In step two, the owner uses ITA s.86(1) to exchange ALL remaining Holdco common shares for fixed-value freeze preferred shares. New common shares are issued to a family trust for the benefit of the next generation — capturing all future growth outside the owner’s estate. If the steps are reversed — freeze first via s.86, then try to crystallize via s.85 — the crystallization is unavailable because s.86 already disposed of the shares at ACB, not FMV. The order matters enormously.

When does section 88 and the bump rule fit into an Ontario corporate restructuring?

The s.88(1)(d) bump rule typically appears after an acquisition, not at the start. When Parent acquires 90% or more of Subsidiary shares, Parent can later wind Subsidiary up into itself under ITA s.88(1). On the wind-up, Parent receives Subsidiary’s assets at their tax cost (ACB and UCC). But the bump designation under s.88(1)(d) allows Parent to step up the ACB of certain non-depreciable capital property — such as land, shares of another corporation, or eligible intangibles — to the FMV those assets had at the time Parent originally acquired control of Subsidiary. For an acquisition completed at, say, $4 million total (including $1.5 million allocable to a commercial property with a $200K ACB), the bump steps the property ACB up to $1.5 million, eliminating a future $1.3 million capital gain if the property is later sold. The prohibited-person rule disallows the bump if a person who previously held the property acquires it again as part of the same series of transactions — the CRA watches for bump-and-flip structures closely.

What elections and forms does a multi-section restructuring require in 2026?

Each section has distinct filing obligations. For s.85(1): Form T2057 (transferor is an individual) or T2058 (transferor is a corporation) must be jointly signed by both the transferor and the corporation and filed with the income tax return for the taxation year in which the transfer occurs. Late-filed elections carry penalties: $100 per month (maximum $8,000) under ITA s.85(8). For s.86(1): No CRA election form is required, but the corporation must update its articles under the Business Corporations Act (Ontario) to create the new share class, and the board must pass resolutions authorizing the exchange. For s.88(1): The wind-up itself must be conducted under provincial or federal corporate law; the bump designation is made by attaching a Schedule (often Schedule 10 of the T2) to the Parent’s return for the wind-up year. Failure to file the bump designation forfeits it — there is no late-filed amendment route. (See Income Tax Act, RSC 1985, c 1 (5th Supp) at CanLII.)

What is the risk if your section 85 elected amount is wrong?

If the elected amount is below the minimum allowable under ITA s.85(1)(b) and (c) — for example, below the lesser of ACB and FMV for capital property — the CRA deems the elected amount to be the minimum, potentially accelerating a gain the taxpayer intended to defer. If the elected amount exceeds FMV, the CRA deems it to equal FMV. Over-electing also creates a corresponding deemed acquisition cost at the excessive amount in the corporation, potentially creating a windfall ACB that CRA can challenge. The sweet spot is electing at the exact adjusted cost base for full deferral, or at exactly the LCGE threshold for full crystallization.

Can you combine a section 85 rollover with an amalgamation under section 87?

Yes, and this is common in multi-company group cleanups. ITA s.87 allows two or more predecessor CCPCs to amalgamate into a new corporation on a tax-deferred basis — the new corporation inherits tax attributes (loss pools, CDA, GRIP) of the predecessors. A typical sequence: use s.85(1) to reorganize ownership into a clean Holdco/Opco structure, then use s.87 to amalgamate redundant operating entities, then use s.88(1) to wind up any remaining shell subsidiaries (see CRA Income Tax Folio S4-F7-C1) and trigger the bump on held properties. Insight Accounting CPA maps the full sequence before any step is executed — sequence errors are permanent tax events with no rewind button.

This article is an estimate only and is not legal or accounting advice. Tax restructuring transactions under ITA sections 85, 86, and 88 involve complex legal and tax considerations that depend on the specific facts of each situation. Consult a qualified tax advisor before executing any restructuring transaction. Insight Accounting CPA Professional Corporation is licensed under Ontario’s Public Accounting Act, 2004.