How Does a Section 85 Rollover Work in a Corporate Reorganization?
A business-owner overview of Canada's section 85 rollover election, eligible property, agreed amounts, legal consideration, filing deadlines, valuation, and common implementation risks.
Quick answer
What Calgary business owners should know
- Section 85 can permit an eligible taxpayer and taxable Canadian corporation to jointly elect an agreed transfer amount for eligible property.
- The election defers some or all immediate tax only when the legal transfer, consideration, valuation, elected amount, and filing requirements work together.
- The agreed amount must stay within statutory limits and helps determine the transferor's proceeds and the corporation's tax cost.
- Tax and legal advisers should design the steps together before documents are signed or assets move.
What the rollover is designed to do
A section 85 election can be used when eligible property is transferred to a taxable Canadian corporation and the transferor receives at least one share as part of the consideration. Common planning situations include incorporation of an existing business, moving assets within a corporate group, an estate freeze, introducing a holding company, or reorganizing ownership before a transaction.
The rule is a tax-deferral mechanism, not a tax eraser. The elected amount generally becomes the transferor's proceeds and influences the corporation's tax cost. Tax can arise later when shares or transferred property are sold, and other rules can override an intended result.
Coordinate value, consideration, and elected amount
For each asset, identify eligibility, fair market value, tax cost, liabilities assumed, non-share consideration, and the permitted range for the agreed amount. Inventory, depreciable property, capital property, eligible capital history, receivables, real property, and shares can have different consequences. A valuation or supportable valuation method may be necessary.
Legal documents must transfer the actual property and issue the agreed consideration. The accounting entries, corporate resolutions, share attributes, registers, sale agreement, and tax election should tell the same story. A journal entry alone does not complete a legal transfer, and a signed transfer without a correct election can trigger immediate tax.
Practical checklist
- List every asset, liability, tax cost, and fair market value before drafting.
- Model elected amounts and non-share consideration asset by asset.
- Have legal counsel implement the transfer and share terms.
- Prepare and file the joint election by the applicable deadline, then reconcile it to the T2 returns.
Deadlines and common failure points
Form T2057 is a joint election. The normal filing deadline is tied to the earliest date on which either party must file an income-tax return for the year of the transfer. Late elections may be accepted within statutory limits when the required penalty is paid; after the extended period, acceptance is discretionary and conditions apply.
Common risks include ineligible property, missing share consideration, an elected amount outside the permitted range, liabilities or boot that are too high, unsupported value, incomplete legal implementation, a missed deadline, and failure to consider GST/HST, land transfer, payroll, financing, or anti-avoidance rules. Use a written closing checklist with named tax and legal owners for every step.
Official sources
This guide was prepared from the official sources below. Open them to verify the current rule and review exceptions relevant to your situation.
