Section 85 rollovers: moving assets into a corporation

Most transfers of property are treated for tax purposes as if they happened at fair market value, even between people who are closely connected. That is a problem when an owner wants to move an appreciated asset — a building, goodwill, equipment, or an entire unincorporated business — into a corporation. Without relief, the transfer would trigger tax on a gain that produced no cash. Section 85 of the Income Tax Act is the relief.

What a section 85 rollover actually does

Section 85 lets a taxpayer and a taxable Canadian corporation jointly elect to treat a transfer of eligible property as happening at an agreed amount rather than at fair market value. Because both sides sign the same election, the corporation's cost of the property and the transferor's proceeds are the same number. The accrued gain does not disappear — it is deferred, sitting in the shares the transferor receives and in the corporation's lower cost base for the asset.

The CRA form used for the election under subsection 85(1) is Form T2057, Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation.

Not everything qualifies

The rules define what counts as eligible property. Most capital property and most business inventory qualify; some property does not, and real property held as inventory is a notable exclusion. Cash generally does not need a rollover at all, since it has no accrued gain. Before any election is drafted, each asset has to be sorted into the right bucket — a single ineligible asset in a bulk transfer can produce an unexpected tax bill.

The elected amount is the whole exercise

The agreed transfer price is not a free choice. It sits between a statutory floor and a statutory ceiling: broadly, it cannot fall below the tax cost of the property (with adjustments that vary by property type) and it cannot exceed fair market value. Within that range, the number is chosen deliberately. Electing at tax cost defers the entire gain. Electing higher deliberately realises part of the gain — sometimes useful, for example when an owner wants to use up available losses or make room for the lifetime capital gains exemption on a future sale.

Shares, “boot” and what comes back

The consideration the corporation gives back must include shares of the corporation — that share component is what makes the election available in the first place. The corporation can also give back non-share consideration: cash, a promissory note, or the assumption of debt. Tax people call that “boot.”

Boot is useful because it can be drawn down later without a dividend. But it is capped in practice: if the non-share consideration exceeds the elected amount, the excess generally produces an immediate income inclusion, which defeats the purpose of the rollover. Getting the boot right is one of the most common places these transactions are corrected after the fact.

Where owners typically see one

• Incorporating an existing business. A sole proprietor with real accrued value — goodwill, equipment, a client list — usually cannot simply start a corporation and carry on. See our comparison of incorporating versus staying a sole proprietor.
• Inserting a holding company. Shares of an operating company can be rolled into a new holding company without triggering tax on the accrued share value.
• Estate planning. A rollover is often one step inside a larger reorganisation such as an estate freeze.
• Pre-sale reorganisations. Moving non-business assets out of an operating company before a share sale so the shares can qualify for the exemption.

Filing, timing and the things that go wrong

The election has a filing deadline tied to the tax returns of the parties to the transaction, and a late election is only available in limited circumstances and carries a penalty. Alongside the election itself, the corporate-law steps have to be done properly: share subscriptions, directors' resolutions, and a price-adjustment clause in the transfer agreement so the numbers can be corrected if the CRA disagrees on value. GST/HST and provincial property transfer taxes follow their own rules and do not automatically ride along with the income tax rollover.

The failures we see are rarely about the concept. They are about execution: an elected amount outside the permitted range, boot that exceeds it, a missing share, an unsupported valuation, or a transaction papered months after it supposedly happened.

The bottom line

A section 85 rollover is a genuinely useful tool, and it is also one of the more technical elections in Canadian tax. There is no version of this that is safe to attempt from a template. If a transfer into a corporation is on the table, work through it with a CPA and a corporate lawyer on your specific facts before anything is signed — that is the same conversation we have with owners as part of business advisory work, and it belongs before the transaction, not after.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and it does not create a client relationship. Tax rules change and your situation is unique — please speak with a CPA before acting on anything here.