How is the agreed amount set in a section 85 rollover?

Under s. 85(1)(a) of the Income Tax Act, the amount the taxpayer and the corporation agree on in their joint election is deemed to be the taxpayer’s proceeds of disposition and the corporation’s cost of the property. The CRA publishes the election as form T2057. The parties name a figure for each property, but the section does not let them name just any figure. Several paragraphs replace it, “irrespective of the amount actually so agreed on”, when it falls outside the limits.

The ceiling: fair market value

If the agreed amount is greater than the fair market value of the property at the time of the disposition, s. 85(1)(c) deems it to equal that fair market value. Choosing a higher number does not create a higher cost for the corporation. That is why the value placed on the property matters even in a rollover. If you are unsure how the value was reached, ask your accountant what support exists for it.

The floors

Section 85(1)(b) deals with an agreed amount that is less than the fair market value of the consideration received other than shares of the corporation, such as cash or a note. The paragraph is subject to s. 85(1)(c), and if the agreed amount is less than that value, it deems the amount to equal the fair market value of that other consideration. Two further floors depend on the type of property, and s. 85(1)(e.3) says how they combine with s. 85(1)(b):

• Inventory and capital property other than depreciable property of a prescribed class (s. 85(1)(c.1), which lists a few other property types too): if the agreed amount is less than the lesser of the property’s fair market value and its cost amount, it is deemed to equal that lesser amount. Section 85(1)(c.2) sets a different rule, notwithstanding s. 85(1)(c.1), for inventory of a farming business whose income is computed by the cash method.
• Depreciable property of a prescribed class (s. 85(1)(e)): if the amount would be less than the least of three amounts, one of which is the undepreciated capital cost of the class and another the fair market value, it is deemed to equal that least amount.

What to ask before the election is filed

Ask who is choosing the figure for each asset, and how the limits above were checked against it. Section 85 has further rules, such as s. 85(1)(e.2) on benefits to a related person, so ask whether any apply. If the value could later be questioned, ask whether the agreement should address that; the CRA’s price adjustment clause folio describes how such clauses work. For the basics of the election, see what a section 85 rollover is.