Section 85 Rollover — Section 85 Rollover
Last updated April 24, 2026 · By Evermore Private Wealth · Tax Strategy
Section 85 Rollover — Section 85 Rollover. A Section 85 rollover is a Canadian tax provision that allows an individual or corporation to transfer eligible property to a Canadian corporation in exchange for shares — at an elected value rather than fair market value — deferring the capital gains tax that would otherwise be triggered on the transfer. It is one of the most flexible tools in the Canadian tax planner's toolkit and underpins virtually every estate freeze, business incorporation, and corporate reorganization in the country.
Source: Canada Income Tax Act
Source: CRA forms catalogue
Source: ITA s. 85
How Section 85 works
Without Section 85, transferring an appreciated asset to your own corporation would trigger a deemed disposition at fair market value — and immediate capital gains tax on the embedded gain. Section 85 lets the transferor and transferee jointly elect a transfer value anywhere between the property's tax cost and its fair market value, deferring the gain. The shares received in exchange take on a new adjusted cost base equal to the elected amount, preserving the unrealized gain inside the share itself.
The election must be filed on Form T2057 by the earlier of the parties' tax filing deadlines for the year of transfer. Late filing is possible (under s. 85(7)) but the CRA can deny it for unreasonable delay.
Common uses of Section 85
Three classic scenarios: (1) Incorporation — a sole proprietor rolls business assets into a new corporation without triggering tax on goodwill and inventory; (2) Estate freeze — exchanging appreciated common shares for fixed-value preferreds in a Section 86 reorganization combined with Section 85 elections on related transfers; (3) Corporate reorganization — moving assets between related corporations (Holdco, Opco, sister companies) at elected values to align ownership for sale, succession, or creditor-proofing.
What this means for HNW Canadian families
Section 85 is the silent workhorse of high-end Canadian tax planning — almost every meaningful succession, estate freeze, or corporate restructuring touches it. The single most expensive Section 85 mistake we see is amateur execution: missing the T2057 deadline, electing the wrong amount (creating a benefit assessment under s. 15), or failing to coordinate the boot (non-share consideration) with the elected amount. Most failed CRA reassessments in this area come from DIY incorporations or low-cost lawyer engagements that didn't model the full tax impact. The cost of doing it right (typically $5k–$25k of tax + legal fees) is a fraction of the cost of doing it wrong.
Worked example — Rolling a sole proprietorship into a corporation
A Burlington consultant has built a sole-proprietorship practice with $300k of internally-generated goodwill. Without Section 85, incorporating means an immediate capital gain on the $300k transfer to the new corporation — recognized in the year of incorporation and taxed at the consultant's personal marginal rate. With a Section 85 rollover, the consultant can elect a transfer price equal to the (zero) tax cost of the goodwill, exchanging it for shares of the new corporation that carry the embedded $300k gain. Tax is deferred until those shares are eventually sold or redeemed — potentially decades later, and potentially at the LCGE-eligible reduced rate if the company qualifies as a Qualified Small Business Corporation at the time of sale.
Common Questions
What is a Section 85 rollover?
A Section 85 rollover is a tax election under section 85(1) of the Canadian Income Tax Act that allows an individual or corporation to transfer property to a Canadian corporation at an elected value — typically the property's tax cost — rather than at fair market value, deferring the capital gain that would otherwise be triggered.
When do you need to file the T2057?
The Section 85 election (Form T2057) must be filed by the earlier of the transferor's and transferee's tax-filing deadlines for the year of the transfer. Late filing is possible under s. 85(7) for up to three years past the deadline, but requires payment of a penalty and is at the CRA's discretion.
What property qualifies for a Section 85 rollover?
Most capital property qualifies, including shares of another corporation, real estate (other than inventory), eligible capital property such as goodwill, and inventory of a business. Cash and prepaid expenses generally do not qualify. The transferee must be a 'taxable Canadian corporation.'
Is a Section 85 rollover tax-free?
No — it is tax-<em>deferred</em>, not tax-free. The unrealized gain on the property transferred is preserved in the cost base of the shares received. When those shares are later sold or redeemed, the deferred gain is recognized at that time, at then-current tax rates and inclusion percentages.
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