Section 85 Rollover

Transferring property to a corporation is a disposition for income tax purposes. Without an election, an owner who moves equipment, goodwill or shares into a company is treated as selling them at fair market value and pays tax on any accrued gain, even though only shares changed hands.

Subsection 85(1) of the Income Tax Act changes that result. The transferor and the corporation agree on an amount, called the elected or agreed amount, and that figure becomes both the transferor's proceeds of disposition and the corporation's cost of the property. Elect at the property's tax cost and no gain arises today. The deferral is not forgiveness: the shares received take a correspondingly low tax cost, so the gain is taxed when those shares are sold, redeemed or deemed disposed of.

Four conditions must be met:

• The transferee is a taxable Canadian corporation. A corporation incorporated and resident in Canada that is not tax-exempt qualifies; a US corporation does not.
• The property is eligible property. This covers most capital property (shares, goodwill, equipment, and real property held as capital property by a Canadian resident), inventory other than real property, and Canadian and foreign resource property. Real estate held as inventory, such as a builder's lots, is excluded.
• The consideration includes shares. At least one share of the transferee must be issued to the transferor. The rest can be cash, a note or assumed debt.
• Both parties jointly elect. The election is made on Form T2057. A partnership transferring property uses subsection 85(2) and Form T2058.

The Act sets a ceiling and two floors. Within them, the parties can choose any figure, and they usually choose the one that produces the tax result they want.

Electing at tax cost gives a full deferral. Electing higher is sometimes deliberate: an owner of qualified small business corporation shares may elect an amount that triggers a gain sheltered by the lifetime capital gains exemption, stepping up the tax cost of the new shares. That is called crystallization.

Everything turns on fair market value. If the shares received are worth less than the property transferred and the shortfall benefits a related person, such as a child who holds common shares, paragraph 85(1)(e.2) adds the benefit to the transferor's proceeds and creates immediate tax. Rollover agreements therefore rely on a supportable valuation and include a price adjustment clause.

Boot is any non-share consideration: cash, a promissory note, or the corporation assuming the transferor's debt. Boot up to the property's tax cost can usually be taken without immediate tax, which is how owners recover their original investment when they incorporate.

Boot above the tax cost forces the elected amount up to at least the boot, and the excess is taxed. For example, equipment that is the only property in its capital cost allowance class, with a cost of $75,000, undepreciated capital cost of $40,000 and a fair market value of $60,000, can be rolled in for a $40,000 note plus shares with no tax. Take a $50,000 note instead and the elected amount must be at least $50,000, producing $10,000 of recaptured depreciation.

Two further rules catch owners off guard. Subsection 85(2.1) limits the paid-up capital of the new shares to, broadly, the elected amount less the boot, so they cannot later return more capital tax-free than the tax cost rolled in. And where an individual transfers shares to a corporation they do not deal with at arm's length, section 84.1 can turn boot above the greater of the shares' paid-up capital and adjusted cost base into a deemed dividend. That rule is explained under intergenerational business transfers.

The parties file Form T2057, listing each property, its fair market value, the elected amount and the consideration received. Under subsection 85(6), it is due by the earliest filing-due date of any party for the taxation year that includes the transfer. For an individual, that is April 30 of the following year, or June 15 if the individual carried on business; for a corporation, six months after its year-end. The CRA accepts T2057 on paper or electronically through its online accounts and certified software.

A late election is accepted for up to three years after the deadline if the estimated penalty is paid with it. The penalty is the lesser of 1/4 of 1% of the amount by which the property's fair market value exceeds the elected amount for each month late, and $100 per month, to a maximum of $8,000. After three years, or to amend an election, the CRA must agree that accepting it would be just and equitable.

The election is a federal income tax election only. It does not by itself exempt the transfer from HST, which may call for a section 167 election, or from Ontario land transfer tax on real property.

• Incorporating a sole proprietorship. A sole proprietor moving an established business into a new corporation usually rolls equipment, inventory and goodwill across under section 85. Whether to incorporate at all is covered in our guide on when to incorporate your business, and Lamba Law's free incorporation calculator estimates the tax difference.
• Adding a holding company. An owner transfers operating company shares to a new holding company for holdco shares, so future dividends and sale proceeds can be held corporately. Boot on this kind of transfer is where section 84.1 bites.
• Estate freezes. An owner exchanges common shares for fixed-value preferred shares so future growth passes to the next generation. See estate freeze.
• Rollover equity on a sale. When a buyer pays part of the price in its own shares, the seller can defer tax on that part with a section 85 election, provided the buyer is a taxable Canadian corporation. The cash portion is boot and is taxed. In an arm's-length share-for-share exchange where the seller receives only shares, section 85.1 can defer the gain automatically without an election. The share purchase agreement should oblige the buyer to sign and file the T2057.

Nadia Haddad has run a web development business in Mississauga as a sole proprietor since 2019. In September 2026 she incorporates Haddad Digital Inc. to limit her liability and keep profits in the company at corporate rates. Her accountant values the business at $282,000: computer equipment with an undepreciated capital cost of $18,000 and a fair market value of $22,000, and self-generated goodwill worth $260,000 with no tax cost.

A transfer without an election would trigger about $4,000 of recaptured depreciation on the equipment and a $260,000 capital gain on the goodwill in 2026, half of that gain taxable. Instead, she transfers the assets to the corporation for an $18,000 promissory note and 100 preferred shares worth $264,000, redeemable at that amount and subject to a price adjustment clause. The parties elect $18,000 for the equipment and a nominal amount for the goodwill.

No gain arises in 2026. The corporation takes over the equipment with undepreciated capital cost of $18,000, and the note can be repaid to Nadia without further tax. Her preferred shares carry a nominal tax cost, so the deferred $264,000 is taxed only when she sells or redeems them, or on her death. Because she carried on business in 2026, her filing-due date is June 15, 2027; the corporation chose a December 31 year-end, so its own due date is June 30, 2027. The T2057 is therefore due by June 15, 2027. Her lawyer also prepares the bill of sale, assigns her client contracts to the corporation, and flags a section 167 election for HST.