Corporate tax planning
Section 85 rollover: moving assets into your corporation without paying tax now
Section 85 lets you move a business, shares or equipment into a corporation and choose the price for tax purposes. Done right, it defers the tax. Done late or carelessly, it triggers it.
Section 85 of the Income Tax Act lets you transfer property to a Canadian corporation in exchange for shares and choose the price for tax purposes. Pick a price equal to what you paid, and no gain is triggered today. The tax is deferred, not forgiven: the corporation inherits your low tax cost, and the gain is taxed later, when the property or the shares are sold.
You and the corporation make that choice jointly by filing form T2057 with the CRA. It is one of the most useful tools an owner-manager has, and one of the easiest to get slightly wrong.
When owner-managers use it
Most of the section 85 elections I prepare fall into five situations.
Incorporating a practice
A consultant, contractor or professional moves equipment, client lists and goodwill into a new corporation without paying tax on the goodwill built up personally. See professional corporation setup.
Adding a holding company
You exchange your operating-company shares for holdco shares so future dividends can move up for creditor protection or investing. See do you actually need a holding company?
An estate freeze
You exchange growth shares for fixed-value preferred shares so future growth goes to your children or a family trust. Inside one corporation this is usually done under section 86; section 85 is used when the freeze runs through a new holding company. See estate and trust tax.
Preparing for a sale
Restructuring so the shares qualify as qualified small business corporation shares, and the lifetime capital gains exemption is available, when a buyer appears.
Moving investments or rental property
Possible, but often a poor fit once land transfer tax and the corporate rate on passive income are counted. More on that below.
What property qualifies
Most business and investment assets can be rolled over, but not all of them. The corporation must be a taxable Canadian corporation, and you must take back at least one share as part of the payment.
| Property | Eligible? | Note |
|---|---|---|
| Shares of another corporation | Yes | The usual holdco and freeze transfer |
| Goodwill and other business intangibles | Yes | The biggest win when incorporating a practice |
| Equipment, vehicles, furniture | Yes | Depreciable property: watch recapture |
| Inventory other than real estate | Yes | |
| Rental or other capital real property held by a Canadian resident | Yes | Land transfer tax still applies |
| Real estate held as inventory (flips, development lots) | No | Excluded by the Act |
| Real property owned by a non-resident | Generally no | Limited exceptions for property used in a Canadian business |
Choosing the elected amount
The elected amount becomes your proceeds of sale and the corporation's cost, so it decides how much tax you pay now. It must sit inside three limits.
The three limits
Ceiling
FMV
No higher than the fair market value of the property you transfer.
Floor one
Boot
No lower than the non-share payment you take back: cash, a promissory note, or debt the corporation assumes.
Floor two
Tax cost
No lower than the lesser of fair market value and tax cost. For depreciable property: the lowest of UCC, original cost and fair market value.
If you take back more boot than the tax cost, the excess is a gain, taxed now. Size the note first, then the election.
Worked example: incorporating a consulting practice
Maria, a sole-proprietor engineer, moves her practice into a new corporation. The values are illustrative.
| Asset | Fair market value | Tax cost | UCC | Elected amount |
|---|---|---|---|---|
| Equipment | $20,000 | $30,000 | $18,000 | $18,000 |
| Goodwill built personally | $400,000 | $0 | $0 | $0 |
| Total | $420,000 | $18,000 |
Maria takes back an $18,000 promissory note plus common shares worth $402,000. Because the note equals the elected amount on the equipment, she reports no gain and no recapture, and she can later withdraw the $18,000 tax-free as the corporation repays the note.
The corporation takes the equipment at a UCC of $18,000 and the goodwill at nil. Maria's shares have a tax cost of nil, so the $402,000 she built stays taxable, just later. If the shares qualify as qualified small business corporation shares when she sells, the lifetime capital gains exemption ($1.25 million, indexed from 2026) may shelter that gain.
The T2057 deadline
Form T2057 is due on the earliest filing due date of the people involved, for the tax year that includes the transfer. Transfer to your corporation in March 2026, and the deadline is whichever comes first: your 2026 personal return (June 15, 2027, if you report business income) or the corporation's return (six months after its year-end).
What happens if it is late
Up to three years late
Accepted, with a penalty of up to $100 for each month late, capped at $8,000.
More than three years late
Only with the CRA's permission, which is not automatic. The same applies to changing an elected amount.
Never filed
The transfer happens at fair market value, and the full gain is taxable now. The election is what creates the deferral; without it, there is none.
Traps that cost money
The election is a two-page form. The expensive mistakes happen around it.
- Too much boot. A note or cash above the tax floor triggers a gain immediately.
- A gift to a family member. If the shares you take back are worth less than what you transferred and a relative benefits, the Act can raise your elected amount. That creates tax with no cash to pay it.
- Getting the value wrong. If the CRA later says the property was worth more, the share terms must adjust. A price adjustment clause in the transfer agreement protects you.
- Paid-up capital. The new shares' paid-up capital is ground down to match the elected amount. Expecting a tax-free return of capital that turns out to be a taxable dividend is a common surprise.
- Section 84.1. Selling shares to a holdco you control and taking back a large note or high paid-up capital can be reclassified as a deemed dividend.
- Real estate. Section 85 defers income tax, not Ontario land transfer tax. Moving a $1 million Toronto rental into a corporation can cost more than $30,000 in provincial and municipal land transfer tax, and HST may apply on commercial property.
- Spouses and children as shareholders. The corporate attribution rules can impute income back to you. Plan the share structure before the transfer, not after.
- Missing paperwork. The CRA expects a signed transfer agreement, resolutions and a valuation that supports the numbers. The T2057 alone is not enough.
Common questions
Is a section 85 rollover tax-free?
No, it is tax-deferred. The gain you do not report now stays in the shares and the corporation's assets, and it is taxed when they are sold.
Do I need a valuation?
For goodwill or private-company shares, yes, or at least a well-documented estimate. The elected amount and the share terms rely on fair market value, and a price adjustment clause only protects you if the original value was a good-faith estimate.
Can I roll my house into my corporation?
Technically, but it rarely makes sense. You give up the principal residence exemption, pay land transfer tax and face shareholder-benefit rules for living in a corporate-owned home.
What if I miss the T2057 deadline?
You can still file for up to three years, with a penalty of up to $100 a month, capped at $8,000. After three years you need the CRA's permission.
Can section 85 be used with an existing corporation?
Yes. It is commonly used to add a holding company or move shares between related corporations, with extra care around section 84.1.
Planning a transfer?
A section 85 rollover is worth doing once, properly. I prepare the transfer terms, the elected amounts and the T2057 together, so the numbers agree and the deadline is met.
General information, current as at November 2026. It is not advice on your situation, and reading it does not create a professional relationship. Rates and thresholds change, and the right answer depends on facts specific to you.