Can a section 85 rollover be used if the buyer is a partnership or foreign company?

A section 85 rollover defers tax when a seller exchanges property for shares, and the buyer’s legal form decides whether it is available. What a section 85 rollover is is covered elsewhere. This page asks about two buyers it does not fit, a partnership and a foreign company, and what a seller should expect instead.

Why a foreign company does not qualify

Subsection 85(1) applies where a taxpayer disposes of eligible property to a taxable Canadian corporation for consideration that includes shares of that corporation, and the two jointly elect. The CRA’s form T2057 carries the same description. The Act defines a Canadian corporation as one resident in Canada and incorporated here or resident here throughout a stated earlier period, so a company resident outside Canada does not qualify as a transferee, whatever the form of the deal.

Why a partnership is handled differently

Section 85 speaks only of corporations. Subsection 97(2) is the partnership counterpart, and it reads section 85 with partnership words substituted. It applies only if the partnership is a Canadian partnership, meaning every member is resident in Canada, the transferor is a member, the property is of a listed type and all the other members join the election. An outside buyer paying cash is not in that situation.

What a seller faces instead

Without a rollover, a sale is generally a disposition on which the seller works out any gain or loss in the ordinary way. The CRA notes that selling assets can bring recapture or a terminal loss of capital cost allowance, and that gains on qualified small business corporation shares may support a capital gains deduction. A non-Canadian buyer also faces the separate notification or review regime of the Investment Canada Act when it acquires control of a Canadian business.