Understanding Section 85 Rollovers

The Key to Moving Assets Without Moving Your Tax Bill

By Delzad Kutky

What are Section 85 Rollovers?

Section 85 of Canada’s Income Tax Act allows certain taxpayers to transfer eligible property to a taxable Canadian corporation on a tax-deferred basis. In short, an eligible individual, corporation, or trust can convey assets to a Canadian corporation without immediately triggering the capital gains or income tax consequences that would usually occur upon a disposition of property.

This type of transfer is often called a “Section 85 Rollover” and is frequently seen in corporate structuring, reorganizations, and estate planning matters. For example, an entrepreneur might decide to transfer her sole proprietorship business into a newly incorporated company, or an investor may want to transfer appreciated assets like real estate or shares in another business to a corporation to take advantage of lower corporate tax rates.

Canada’s Income Tax Act has a similar provision for transferring property to Canadian partnerships under Section 97(2). Many of the mechanics of the tax deferral are similar for transfers to partnerships, but this article focuses only on Section 85 Rollovers to corporations, which have their own set of rules.

How a Section 85 Rollover Works

Usually when a transferor disposes of property to a transferee for a greater cost than what the transferor originally paid, the transferor will be responsible for paying income tax on the difference between the new sale price and the original purchase price. The original purchase price for the transferor is often called the “Adjusted Cost Base” (ACB) or “tax cost”.

Section 85 allows the transferor and the corporation to agree on an “elected amount” for the transfer. The elected amount is considered the transferor’s proceeds of sale and the transferee’s ACB. There are prescribed limits to what the elected amount can be, but the most common scenario is for the elected amount to be the transferor’s ACB or tax cost, which would result in a tax-free transfer of property for the transferor. In some cases, the elected amount is greater than the transferor’s ACB but less than the fair market value of the property, which means the transferor would pay income tax on the difference between the elected amount and their ACB.

What a Section 85 Rollover Could Look Like

Consider a scenario where an entrepreneur runs their small business as a sole proprietor in York Region and they’re ready to incorporate in 2026 to take advantage of preferred tax rates. The fair market value of the property being transferred into the new corporation is $500,000, but the entrepreneur acquired the property for only $100,000. We also know that in 2036 the entrepreneur will want to sell their business entirely and it will be worth $1,000,000 at that time.

Without a Section 85 Rollover, when the entrepreneur transfers the property to their corporation, they will realize a $400,000.00 gain that will be taxed at their personal income tax rate. In 2036, the corporation will sell its property for $1,000,000 and its taxable gain will be $500,000 (which is the sale price of $1,000,000 minus the corporation’s ACB of $500,000 from when it acquired the property from the entrepreneur).

With a Section 85 Rollover, the entrepreneur and corporation can have the elected amount of the transfer be $100,000. In the eyes of the CRA, the entrepreneur hasn’t received any gain on the transfer of the property, and the entrepreneur isn’t on the hook for any tax. In 2036, the corporation will sell its property for $1,000,000 and its taxable gain will be $900,000 (which is the sale price of $1,000,000 minus the corporation’s ACB which was elected to be $100,000), which could be eligible for taxation at significantly lower corporate tax rates. In this situation, the entrepreneur deferred paying income tax on the transfer of property by ten years, and they may be able to take advantage of tax planning strategies available to Canadian corporations that could allow them to ultimately pay less of their hard-earned money to the CRA in the long run.

How to Carry out a Section 85 Rollover

Section 85 Rollovers are extremely technical, require elections to be filed with the CRA, and must be documented meticulously to ensure the transaction is smooth and you don’t get any unexpected tax bills. Furthermore, Section 85 Rollovers are only available for transfers of eligible property. A discussion with your accountant and a corporate lawyer is needed to properly carry out a Section 85 Rollover.

The skilled corporate lawyers at SorbaraLAW are ready to guide you through the process of tax-deferred transactions and work with your accountant to prepare the necessary documents to paper the transaction properly.