Summary
A Section 85 rollover lets you move assets or shares into a Canadian corporation and defer the tax on accrued gains, in exchange for at least one share and a joint T2057 election. You need it when the property has grown in value or carries recapture: incorporating a profitable sole proprietorship with goodwill, moving shares to a holding company, an estate freeze or a pre-sale reorganization. You often don't need it when assets are worth about what they cost. This guide explains the rules, costs, deadlines, Ontario land transfer tax and HST issues, and the CRA business number (BN) steps for the corporation, with a calculator.
"Do a Section 85 rollover" is advice many Ontario business owners hear the moment they mention incorporating, creating a holding company or planning a sale. It's one of the most useful tools in Canadian tax, but it isn't always necessary, and it isn't free. Done unnecessarily, it adds legal and accounting fees for no benefit. Done carelessly, it can create the very tax it was meant to avoid.
The rollover exists for one reason: transferring property to a corporation is normally treated as a sale at fair market value. If the property has grown in value, that "sale" can trigger capital gains or recapture of depreciation, even though no cash changed hands. Section 85 lets the owner and the corporation jointly elect a lower transfer amount, deferring the tax until the shares or assets are later sold.
This guide explains, in plain language, when Ontario owners genuinely need a rollover, when they can skip it, and what to watch for. It's general information, so always work with a qualified tax advisor on the specifics. Our fractional CFO services help owners plan reorganizations and coordinate with their tax and legal advisors.
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1. What a Section 85 Rollover Is
- Who: an individual, trust or corporation (the transferor) and a taxable Canadian corporation (the transferee).
- What: eligible property, generally including capital property such as shares, goodwill and equipment, and most inventory. Real property held as inventory is generally not eligible.
- How: the transferor receives at least one share, and can also take back non-share consideration ("boot"), such as a promissory note.
- The election: both parties file Form T2057, choosing an "elected amount" within limits set by the Income Tax Act.
- The result: the elected amount becomes the transferor's proceeds and the corporation's cost, so the gain is deferred, not eliminated.
2. When You Actually Need It, and When You Don't
| Situation | Usually need Section 85? | Why |
|---|---|---|
| Incorporating a profitable sole proprietorship with goodwill | Yes | Goodwill has value but no tax cost; a direct transfer triggers a gain |
| Equipment worth more than its UCC | Often | Transfer at fair value triggers recapture |
| Moving appreciated shares of an operating company to a holding company | Yes | Defers the gain; watch Section 84.1 and 55(2) |
| Estate freeze | Often (or Section 86) | Locks in current value for the owner; future growth to new shareholders |
| Pre-sale reorganization | Often | Positions shares for the capital gains exemption or a holdco structure |
| New business with no significant assets | No | No accrued gain to defer |
| Assets worth about what they cost (cash, new equipment) | No | A sale at fair value creates little or no tax |
| Real estate you hold personally | Think twice | Land transfer tax and other costs may outweigh the benefit |
Five questions to decide
- Is the property worth more than its tax cost or UCC? If not, you likely don't need a rollover.
- How large is the tax you'd defer? Compare it with the professional fees.
- Is real estate involved? Land transfer tax may change the answer.
- Are you moving shares to a related corporation? Anti-avoidance rules need careful planning.
- What's the longer-term plan? Sale, succession or growth, as set out in your 12-month operating roadmap, should drive the structure.
3. How the Elected Amount Works
The elected amount must fall within a range. In simplified terms:
| Limit | Rule (simplified) |
|---|---|
| Ceiling | Cannot exceed the property's fair market value (FMV) |
| Floor 1 | Cannot be less than the FMV of the boot (non-share consideration) received |
| Floor 2 | Generally cannot be less than the lesser of FMV and the property's tax cost (ACB, or for depreciable property the lesser of UCC and capital cost) |
| Effect | Gain recognized now = elected amount − tax cost; deferred gain = FMV − elected amount |
4. Worked Example: Incorporating a Mississauga Sole Proprietorship
An illustrative Mississauga marketing consultant incorporates a successful sole proprietorship. The business has goodwill valued at $250,000 (tax cost $0) and equipment worth $40,000 (UCC $25,000, original cost $60,000).
| Asset | FMV | Tax cost | Without election (taxable now) | With election at tax cost |
|---|---|---|---|---|
| Goodwill | $250,000 | $0 | $125,000 taxable (½ of $250,000 gain) | $0 now |
| Equipment | $40,000 | $25,000 UCC | $15,000 recapture | $0 now |
| Total | $290,000 | $25,000 | $140,000 added to income | $0 added to income |
Immediate personal tax on the transfer
Illustrative, using a 45% combined marginal rate on $140,000 of added income
The consultant could also take back a $25,000 promissory note (equal to the equipment's tax cost) without triggering tax, and receive shares for the rest. With roughly $63,000 of tax deferred, a rollover is clearly worth its cost here. If the business had no goodwill and only a laptop, it wouldn't be.
5. Interactive Rollover and Late-Filing Calculator
Enter one property's figures to see the allowed elected range, the tax impact of your chosen amount and the penalty if the election is filed late. Simplified; confirm with your tax advisor.
6. Ontario Costs and Common Traps
| Issue | What it means |
|---|---|
| Ontario land transfer tax | Section 85 defers income tax only; transferring real estate to a corporation generally triggers land transfer tax, plus Toronto's municipal tax for Toronto property |
| HST | Transferring business assets may attract HST; a joint election may be available when substantially all business assets move to a registrant |
| Section 84.1 | Taking boot when selling shares to a related corporation can turn the excess into a deemed dividend |
| Section 55(2) | Intercorporate dividends can be recharacterized as capital gains in some reorganizations |
| Benefit rule | If FMV exceeds the total consideration and the excess benefits a related person, it can be taxed; use a price adjustment clause |
| Corporate attribution | Freezes that benefit a spouse or minors can attract attribution rules |
| Alternative minimum tax | Claiming the capital gains exemption on a crystallization can trigger AMT |
- Valuation: the rollover depends on a supportable fair market value, especially for goodwill and private shares.
- Professional fees: legal and accounting work for a straightforward incorporation rollover often costs a few thousand dollars, and more for holdco structures or freezes. Compare them with the tax deferred.
- Lenders and franchisors: moving a business into a corporation can require lender and franchisor consent; see our guide to a business plan for a franchise acquisition loan.
7. Step-by-Step Process, BN Registration and Deadlines
| Step | What happens | Who |
|---|---|---|
| 1. Plan | Confirm the rollover is needed, choose the structure and elected amounts | Tax advisor, CFO |
| 2. Incorporate | Incorporate the transferee (often through the Ontario Business Registry) with suitable share classes | Lawyer |
| 3. Register the BN | Confirm the corporation's CRA business number and add GST/HST and payroll accounts as needed | Accountant |
| 4. Value and document | FMV support, transfer agreement, price adjustment clause, share issuance | Valuator, lawyer |
| 5. File T2057 | Joint election by the earliest return due date of the parties | Accountant |
| 6. Update the books | Record assets at elected amounts, track tax cost and boot | Bookkeeper |
- BN registration first: the transferee corporation needs a CRA business number before filings. Ontario corporations generally receive a BN at incorporation through the Ontario Business Registry; add GST/HST (RT) and payroll (RP) accounts through the CRA's Business Registration Online service.
- Match the details: use the corporation's exact legal name and business number on the T2057, the transfer agreement and bank and lender records.
- Deadline: the T2057 is generally due by the earliest income tax return due date of the transferor and the corporation for the year of transfer. Late elections are generally accepted within three years with a penalty, which the CRA describes as the lower of $8,000 or $100 for each complete month late.
- Books from day one: our bookkeeping services set up the new corporation's records, including the tax cost of transferred assets. Our financial modeling services model the cash and tax effect of alternative structures, and our business plan services help newly incorporated businesses approach lenders.
Multi-entity businesses such as dealer groups use rollovers regularly when adding holding companies or rooftops; see why auto dealerships in Toronto need a dedicated fractional CFO. Owners incorporating to expand into new markets should also review how to do a Canadian market analysis.
8. Frequently Asked Questions
What is a Section 85 rollover?
A Section 85 rollover is a joint election under the Income Tax Act that lets a taxpayer transfer eligible property, such as business assets or shares, to a taxable Canadian corporation and defer some or all of the tax on accrued gains. The transferor must receive at least one share of the corporation, and the parties elect a transfer amount within limits set by the Act, using Form T2057.
Do I need a Section 85 rollover to incorporate my business?
Only if the assets you are moving into the corporation have accrued gains or recapture, such as valuable goodwill, appreciated property or equipment worth more than its undepreciated capital cost. If your assets are worth about what they cost, or you are starting a new business with no significant assets, you can usually transfer or sell them to the corporation without a rollover.
When is the T2057 election due?
Form T2057 is generally due by the earliest of the income tax return filing due dates of the transferor and the corporation for the tax year in which the transfer happened. Late elections can generally be filed within three years of that date with a penalty, and later only in limited circumstances at the CRA's discretion.
What is the penalty for filing a Section 85 election late?
The CRA describes the penalty for accepting a late election as the lower of $8,000 or $100 for each complete month from the original due date. For transfers with small deferred gains, the formula in the Act can produce a lower amount. Filing on time avoids the penalty entirely.
Does Ontario land transfer tax apply to a Section 85 rollover?
A Section 85 election defers income tax only. Transferring real estate to a corporation in Ontario generally still triggers Ontario land transfer tax, plus Toronto's municipal land transfer tax for Toronto properties, unless a specific exemption applies. This cost often makes it better to leave real estate outside the corporation.
Summary
A Section 85 rollover is worth it when you're moving property with real accrued gains or recapture into a corporation: goodwill on incorporation, appreciated shares into a holdco, an estate freeze or a pre-sale reorganization. It's usually unnecessary when assets are worth about what they cost. Weigh the tax deferred against fees, land transfer tax and HST, plan around Section 84.1 and related rules, complete BN registration for the corporation, and file the T2057 on time under the correct CRA business number.
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Sources: CRA, penalty for accepting a late, amended or revoked election; Insights CPA, T2057 filing deadline; Wolters Kluwer, Section 85 rollovers: basic rules. Examples and the calculator are simplified and illustrative.