A Section 85 rollover is a tax deferral mechanism in the Canada Income Tax Act that allows you to complete a transfer of assets to a Canadian corporation without triggering immediate tax liabilities.
Instead of being taxed right away, the transferor and transferee agree on an elected value, then file the election using Canada Revenue Agency (CRA) Form T2057. This lets you postpone the gain until the corporation eventually disposes of the property.
All of this is because as a sole proprietor transitioning to a corp - you likely want to get all the benefits of having equipment inside your business (as it can help reduce your tax burden) but not have to pay a boatload in capital gains tax when you transfer the assets.
Below is the deeper context required for a research driven article.
Section 85 exists to help self-employed business owners, including sole proprietors, move assets into a corporation without being penalized by an immediate taxable gain.
Without this, the transfer of property such as equipment, goodwill (i.e. A business worth $100,000 is bought for $150,000 because of its reputation and loyal customers; the extra $50,000 is the goodwill)l, or shares into your own corporation would be treated as a sale at fair market value, which would create capital gains you may not have cash available to pay.
Section 85 only applies to eligible property as defined in the Income Tax Act. This is where mistakes are common.
Some examples of eligible property under Section 85 include:
Not everything can be rolled over. These exclusions matter:
If your situation is unclear or your assets do not clearly fall into one of these categories, check out the Canada Revenue Agency (CRA) website for more information on other categories.
A Section 85 rollover creates a three value structure:
Electing an amount close to the ACB provides maximum tax deferral. Electing an amount closer to FMV results in more gain recognized now.
In exchange for the property, the corporation issues shares to the transferor, typically common shares or preferred shares. This ensures the transfer is not treated as a taxable disposition.
Here are typical scenarios in Canada:
Move business assets from a sole proprietor into a Canadian corporation with no immediate tax hit.
Shift assets for growth, liability protection, or better tax planning.
Transfer assets to a family corporation to lock in current value.
Restructure ownership so new shareholders purchase common shares at FMV.
Move assets between related companies for operational or tax reasons.
To satisfy the Canada Income Tax Act, you must follow these conditions:
Non compliance can result in denied elections and immediate taxation.
Frequent problem areas include:
If the elected value is outside the ACB to FMV range, the election becomes invalid.
The CRA may apply penalties because the form requires exact details about the transfer of property, elected values, and share consideration.
If the transferor receives cash or non share consideration, the tax deferral is reduced or removed.
The corporation inherits the elected value as its tax cost. This affects future tax liabilities, capital gains, and depreciation claims.
Understanding these differences is essential for research purposes and corporate structuring.
A proper rollover in Canada usually includes:
This documentation is expected by Revenue Canada if questions arise.
Avoid or reconsider a Section 85 rollover when:
For many small incorporations, the deferred tax is simply too small to justify that cost. A common example is transferring a personal vehicle into a new corporation.
Suppose you own a vehicle that you could sell today for $18,000. You originally paid $12,000 for it.
That means there is a $6,000 increase in value.
If you do nothing special and just deal with the tax normally, the tax you would personally owe on that $6,000 increase is usually less than $1,000.
To avoid paying that tax now, you could do a rollover, however, that process often costs way more than $1,000 in professional fees.
So in this situation, the rollover usually isn’t worth it.
If the tax savings do not clearly exceed these costs, the rollover is usually not worth doing.
A Section 85 rollover allows the tax deferred transfer of assets from an individual or corporation to a Canadian corporation by choosing an elected value that postpones tax. It is widely used by self-employed business owners, sole proprietors, and growing corporations to minimize immediate tax liabilities, reorganize ownership, and meet long term planning objectives.
Thinking about moving from a sole prop to a corp? Need a second opinion on whether a rollover even makes sense? Book a free consultation and let’s talk about it.