Transferring appreciated assets into a corporation is one of the most powerful tax-planning moves available to Canadian business owners — but done carelessly, it triggers an immediate capital gains hit that can cost tens of thousands of dollars. The section 85 rollover, found in the Income Tax Act (ITA), is the provision that lets you make that transfer on a tax-deferred basis, so the gain stays locked inside the corporate structure until you actually realize it. Used correctly, it is the cornerstone of incorporation planning, corporate reorganizations, and estate freezes.
A section 85 rollover is a joint election made under subsection 85(1) of the ITA that allows an individual, partnership, or corporation to transfer eligible property to a taxable Canadian corporation and receive shares (and possibly other consideration) in return, all without recognizing the accrued gain at the time of transfer. Instead of triggering capital gains at fair market value (FMV), you and the corporation agree on an elected amount — a value below FMV — that substitutes for both the transferor's proceeds of disposition and the corporation's cost of the property.
The result is elegant: the tax on the unrealized gain is deferred, not eliminated. The corporation picks up the property at the elected amount as its cost base, meaning the embedded gain lives on inside the corporation and will eventually surface when the corporation disposes of the asset. You have effectively moved the tax liability into the future and into a different legal entity — often one that can shelter income and plan distributions more efficiently.
The most common trigger is incorporation. A sole proprietor who has run a business for years often holds appreciated assets — customer lists, equipment, real estate, or goodwill — that have grown substantially in value. If they simply transfer those assets to a new corporation at FMV, the difference between the FMV and the adjusted cost base (ACB) is a taxable capital gain in the year of transfer. On a business with $500,000 of embedded goodwill, the tax bill alone could exceed $120,000 at 2025 Canadian rates for an individual in a high income-tax bracket.
A section 85 rollover eliminates that immediate hit. The assets move into the corporation at their ACB, no gain is recognized today, and the owner receives shares in the corporation rather than cash. For someone transitioning from sole proprietorship to corporation, this is almost always the right structure.
Beyond incorporation, the rollover is used in corporate reorganizations — moving assets between related corporations, splitting businesses, or restructuring ownership — and most importantly, in estate freezes, which we will address below.
Not everything qualifies. The ITA specifies eligible property as follows:
The following are not eligible and cannot be rolled over under section 85:
If you are unsure which of your assets qualifies, a review with an accounting firm familiar with corporate reorganizations — such as Swift Accounting in Calgary — can prevent costly misclassification before you file.
The elected amount is the agreed-upon transfer price, and it must fall within a specific range:
In most cases, the goal is to elect at the lowest possible amount — typically the ACB or cost amount of the property — to defer the maximum gain. For a piece of equipment with an ACB of $80,000 and an FMV of $200,000, electing at $80,000 means no gain is recognized today. The corporation's cost of that equipment is $80,000, and when it eventually sells, the full gain will be taxed at that point.
If the cost amount of property has been reduced below zero (for example, through CCA recapture dynamics or debt assumptions), the minimum elected amount rules become more complex and must be calculated carefully.
Boot refers to any non-share consideration the transferor receives from the corporation — cash, promissory notes, assumed liabilities, or any debt the corporation takes on as part of the deal. Boot is perfectly legal and often used to allow the transferor to pull some cash out of the corporation tax-free immediately. But it creates a constraint that trips up many improperly structured rollovers.
The rule is simple but unforgiving: the elected amount cannot be less than the boot received. If you receive $50,000 in cash or notes from the corporation, the elected amount must be at least $50,000.
The danger emerges when the boot exceeds the ACB of the property being transferred. In that scenario, the excess is treated as a capital gain triggered at the time of transfer — the very outcome you were trying to avoid. For example, if a property has an ACB of $30,000 and you receive boot of $50,000, you have a $20,000 capital gain recognized immediately.
The safe practice is to keep boot at or below the property's ACB. If you need liquidity from the rollover, size the promissory note or cash consideration carefully, and ensure it does not push the elected amount above the ACB unless you are intentionally triggering a partial gain for planning purposes (for instance, to use up a capital loss carryforward).
The corporation must issue shares as consideration in a section 85 rollover — this is a mandatory requirement. Shares are the primary consideration, and boot (if any) is secondary. The ACB of the new shares received by the transferor equals the elected amount minus the boot received. Using the earlier example: if the elected amount is $80,000 and boot is $20,000, the ACB of the shares issued is $60,000. This means the deferred gain has been rolled into the shares — it will eventually surface when those shares are sold.
The election is made on CRA Form T2057 (or T2058 for partnerships). Both the transferor and the corporation must sign and file the form jointly. The deadline is the earlier of the two parties' filing due dates for the taxation year in which the transfer occurred.
For most individuals, that means the form is due by April 30 of the following year (or June 15 if self-employed, but the tax balance is still due April 30). For the corporation, the deadline is six months after its fiscal year-end.
Late elections are permitted under the ITA but attract a penalty of $100 per month (to a maximum of $8,000) plus interest, and CRA must accept the late filing. It is always preferable to file on time. A late or missing T2057 invalidates the rollover, meaning the transfer is deemed to have occurred at FMV and the full gain becomes taxable immediately.
One of the most sophisticated applications of the section 85 rollover is the estate freeze — a strategy used by business owners who want to cap their own tax exposure on death while allowing the next generation to benefit from future growth.
The structure works as follows: the owner transfers the business assets (or shares of an operating company) to a holding corporation using a section 85 rollover. In exchange, the owner receives fixed-value preferred shares with a redemption value equal to the elected amount — locking in or "freezing" the current value of their estate for tax purposes. The children or family trust then subscribes for new common shares at a nominal cost. All future growth in the business accrues to the common shares, which are held by the next generation.
When the owner dies, the deemed disposition is on the preferred shares at their fixed value, not on an asset that has grown to five times its original worth. The tax on death is knowable and manageable. This structure, combined with proper use of the lifetime capital gains exemption (LCGE), which in 2025 stands at $1,250,000 for qualified small business corporation shares, is one of the most effective wealth-transfer tools in Canadian tax planning.
Swift Accounting Calgary works with business owners at various stages of this planning — whether you are incorporating for the first time, restructuring an existing group, or beginning succession discussions with family members.
A section 85 rollover involves interlocking rules around elected amounts, boot, share consideration, and CRA filing deadlines. A single misstep — boot that exceeds ACB, an improperly valued asset, or a missed T2057 — can undo the entire deferral and produce a tax bill larger than if no rollover had been attempted. Before transferring any property to your corporation, have the structure reviewed and the numbers verified by a professional.
Contact Swift Accounting today to discuss your incorporation, reorganization, or estate freeze. Our team will help you structure the rollover correctly, file Form T2057 on time, and ensure your assets move into the corporation in a way that actually achieves the tax deferral you are planning for.
No. Cash is not eligible property under section 85. You cannot roll cash into a corporation tax-free using this provision. Cash transferred to a corporation is typically treated as a shareholder loan or a capital contribution — neither of which creates a tax problem, but neither of which requires a section 85 election. The rollover is specifically designed for property that has an accrued gain, such as capital property, goodwill, or business inventory.
CRA allows late elections under subsection 85(7), but you must apply and CRA must accept the filing. The penalty is $100 per month from the original due date, capped at $8,000, plus arrears interest on any tax that would have been owing. More critically, if CRA does not accept the late election, the transfer is deemed to have occurred at FMV and the full accrued gain becomes taxable in the year of transfer. Filing on time is not optional — it is essential.
No — it defers capital gains tax, not eliminates it. The gain remains embedded in the corporation's cost base of the transferred asset and in the ACB of the shares you received. When the corporation sells the asset, it will recognize the gain at that time. When you sell or are deemed to dispose of your shares (including on death), the gain in the shares will be recognized. The strategic value is in timing and structure: gains can be realized over time, potentially at lower rates, sheltered by the lifetime capital gains exemption, or offset by losses.
Section 85 applies when you are transferring property to a corporation in exchange for shares and possibly boot — the classic incorporation or asset-transfer scenario. Section 86 applies when an existing shareholder exchanges their current shares for a new class of shares in the same corporation, typically as part of a share reorganization or estate freeze at the share level rather than the asset level. Both provisions can be used in a freeze, but they address different transfer scenarios. Many complex reorganizations use both provisions in combination, which is another reason professional advice is critical before proceeding.
Our Calgary team handles personal tax, corporate returns, GST/HST, payroll, and bookkeeping.
Book a Consultation