CRA forms
Form T2057 Explained: The Section 85 Rollover
3 yearsafter the due date, the window for filing a late section 85 election by paying an estimate of the penalty with it.
Sources checked October 20263 min read
Key points
- A joint election by the person transferring property and the corporation receiving it
- The agreed amount sets the transferor's proceeds and the corporation's cost
- The transferor has to receive at least some shares in return
- Due by the earliest return due date of the parties for the year of the transfer
What the election does
Transferring property to a corporation normally counts as selling it at fair market value, which can trigger a capital gain or recapture of depreciation. Section 85 of the Income Tax Act lets the person transferring the property and a taxable Canadian corporation jointly elect an agreed amount instead, anywhere from the property's tax cost up to its fair market value, within limits. Form T2057, Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation, is how they make that election.
The agreed amount becomes the transferor's proceeds and the corporation's cost. Setting it at the tax cost defers the gain until the shares or the property are sold later. The transferor has to receive shares of the corporation as at least part of the payment.
When it is used
Most capital property, depreciable property and inventory can be transferred this way; inventory of real estate cannot.
- Incorporating a sole proprietorship, moving its equipment, goodwill and inventory into the new company
- Moving shares of an operating company into a holding company
- Reorganizations among corporations owned by the same family
Filing it
The election is filed electronically or on paper, separately from the tax returns, by the earliest date that any party to it has to file a return for the tax year of the transfer. Schedule A lists each property, its fair market value, the agreed amount and what was received in return. The supporting work, such as the valuation, the written agreement and any price adjustment clause, is not sent with the form but has to be kept.
A late election can be filed up to three years after the due date if an estimate of the penalty is paid with it. The penalty is the lesser of one quarter of 1% of the gap between fair market value and the agreed amount for each month late, and $100 for each month. After three years, the CRA can accept it only at its discretion, with a written explanation.
Where it goes wrong
The common problems are a fair market value that will not stand up, which a properly drafted price adjustment clause can soften, taking more cash or other non share payment than the property's tax cost, which creates a gain anyway, and an election simply forgotten until the T2 is being prepared. It is a planning step, not a filing chore, and it works best decided before the transfer happens.
Quick answers
Do I need Form T2057 to incorporate my business?
Not to incorporate. But to move the business's property into the corporation without immediate tax, you usually do, filed jointly with the new company.
When is a section 85 election due?
By the earliest date any party to it has to file a return for the tax year of the transfer.
Can a section 85 election be filed late?
Yes, within three years of the due date with an estimated penalty paid, and after that only at the CRA's discretion.
Related pages
Official sources
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Important. This article provides general educational information, not legal or tax advice for a specific business. Rules, administrative policies, rates and deadlines can change. Confirm your facts and current obligations with the responsible government agency and a qualified adviser.