S.85 rollover — transferring business assets to a corporation tax-free
Transfer of property to corporation by shareholders
Section 85 allows individuals and corporations to transfer eligible property to a corporation in exchange for shares at an elected amount rather than fair market value, deferring capital gains tax on the transfer.
Plain-language explanation
Section 85 is the cornerstone of Canadian corporate tax planning. It allows a business owner to "roll over" assets (or an entire business) into a corporation at any elected amount between the ACB and FMV — triggering some, all, or none of the accrued gain.
Why use s.85? When you incorporate a business or restructure a corporation, you are technically transferring property from one person to another. Without s.85, this would trigger capital gains at FMV. S.85 defers those gains.
The election: You and the corporation jointly file Form T2057 to elect an amount for the transfer. The elected amount: - Must be between ACB (or UCC for depreciable property) and FMV - Is the proceeds to the transferor and the cost to the corporation - Can trigger some gains if desired (e.g., to use the LCGE or a capital loss carryforward)
What consideration is received: To qualify, you must receive shares of the corporation as at least part of the consideration. You can also receive "boot" (cash or debt), but the boot cannot exceed the elected amount.
Common uses: - Incorporating a sole proprietorship - Claiming the LCGE by triggering gains up to the exemption limit - Estate freezes (freezing the value of a business for estate purposes using a s.86 reorganization)
Example
Asha has a sole proprietorship with assets (ACB $50,000, FMV $600,000). She incorporates and transfers assets to the new corp under s.85. She elects an amount of $50,000 (ACB) — no capital gain triggered. The corporation acquires the assets at $50,000 for CCA/CG purposes. She receives shares equal to the elected amount.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Section 85 election rules clarified to require that at least one class of shares be received as consideration. All-cash or all-debt rollover without share consideration does not qualify. Boot rules were also refined to prevent taxpayers from extracting post-rollover gains through excess boot arrangements.
Before
Some transactions were structured to avoid share consideration requirement
After
At least one share must be received; boot cannot exceed elected amount; strict technical requirements confirmed
Common questions
When would I use a s.85 rollover? +
When incorporating a business, reorganizing a corporation, or crystallizing gains to use the LCGE. Without s.85, any transfer of business property to a corporation triggers deemed proceeds at FMV — potentially a large capital gain.
What is "boot" in a s.85 rollover? +
Boot is non-share consideration you receive from the corporation in addition to shares — typically cash or a promissory note. Boot cannot exceed the elected amount. It is used to extract some value immediately without triggering additional tax (e.g., recovering your original investment).
What is Form T2057? +
The joint election form filed by both you and the corporation to put the s.85 rollover in place. Both parties must file it with CRA by the due date for the tax return in the year of the transfer. Late elections are accepted with a penalty.
Key terms
CPA recommendation
S.85 rollovers require careful planning and joint filing. A CPA who specializes in corporate reorganizations should handle the technical election.
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 85. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.