Can a section 85 rollover defer tax on an asset sale?

Section 85 is a rollover into a corporation, not a general way to postpone tax on an asset sale. Whether it helps depends on who the buyer is and what you take back. A cash sale to an arm’s-length buyer sits outside it.

What section 85 requires

Subsection 85(1) applies when a taxpayer disposes of eligible property to a taxable Canadian corporation for consideration that includes shares of that corporation, and the two jointly elect in the prescribed form (CRA form T2057). Eligible property includes capital property (with limits for real property owned by a non-resident) and inventory other than real property. Without shares in the price the conditions are not met, so a straightforward cash purchase of your assets cannot be rolled over.

When the price includes the buyer’s shares

If the buyer is a taxable Canadian corporation and part of the price is its shares, you and the buyer can elect an amount within the limits the Act sets, and the shares you receive carry the gain you did not realize. Cash or other non-share consideration worth more than the elected amount raises the elected amount to match, so that part is taxed now. Depreciable property has its own limit in paragraph 85(1)(e), and the CRA notes that selling assets can produce recapture or a terminal loss of capital cost allowance.

Spreading tax on a price paid over time

If you sell capital property and receive part of the price after the year of sale, the CRA says you may be able to claim a capital gains reserve and report part of the gain as the price is received. It says that, generally, the maximum period for most reserves is four years, so the gain is included over five, with longer periods in some family transfers. You generally cannot claim a reserve if, at the end of the year or at any time in the following year, you were not resident in Canada or were exempt from tax, or if you sold to a corporation you control in any way.

A rollover as a step before the sale

A rollover can also come before the sale. If assets are first moved into a corporation, that corporation becomes the seller and is taxed on the result, which raises the second layer of tax in double taxation when a corporation sells assets. See also what a section 85 rollover is.