What is a section 85 rollover?

Section 85 of the Income Tax Act is one of the most-used provisions in Canadian corporate tax planning. It exists because moving property into a corporation would otherwise be a disposition at fair market value, triggering tax on a transaction where no cash has changed hands. The rollover lets the transfer happen on a deferred basis where the conditions are met.

What the election actually does

The transferor and the corporation jointly elect an amount that is treated as the transferor’s proceeds of disposition and the corporation’s cost of the property. Choosing an amount equal to the property’s existing tax cost generally defers the whole accrued gain. Choosing a higher amount realizes part of the gain deliberately, which is sometimes what you want — for example, to use up a loss or to crystallize the lifetime capital gains exemption. The elected amount is bounded: broadly, it cannot be below the tax cost of the property or above its fair market value, with specific rules for different property types.

The core conditions

• The transferee must be a taxable Canadian corporation.
• The consideration must include at least one share of the corporation; non-share consideration such as cash or a note is permitted but limited.
• Non-share consideration taken above the elected amount generally triggers an immediate gain, which is a common and avoidable error.
• The property must be eligible property; inventory that is real property and certain other items are excluded.
• The election is filed on the prescribed form by a deadline tied to the parties’ filing dates, and late filing generally requires a penalty payment.

Where it shows up before a business sale

Section 85 is the workhorse behind much pre-sale restructuring. It is used to move redundant assets out of an operating company into a holding company as part of purification. It is used in estate freezes, exchanging growth shares for fixed-value preferred shares so future growth accrues to the next generation. It is used to incorporate a sole proprietorship or partnership, and to crystallize the exemption at a chosen point in time. Each of these has its own conditions on top of section 85 itself.

Why this is not a self-serve provision

The rollover interacts with attribution rules, corporate law requirements for the share terms, price adjustment clauses, and general anti-avoidance provisions. Errors in the elected amount, in the share attributes, or in the filing can convert a planned deferral into an immediate tax bill, sometimes discovered years later. This is legal and accounting work, done together, with the paperwork completed properly at the time.