Section 85 rollovers: moving assets into your corporation without triggering tax
When you transfer property you own — a sole proprietorship, equipment, goodwill, shares — into a corporation, the tax rules treat it as a sale at fair market value. Section 85 of the Income Tax Act lets you elect out of that result and defer the tax, if the election is filed correctly and on time on form T2057. Done casually, incorporating an existing business can create a tax bill for the privilege of restructuring.
Just looking for the form? Form T2057 on canada.ca →
The short version
What a section 85 election actually does.
- Without it: transferring property to your corporation is a sale at fair market value — gains are taxed now, with no cash received to pay the bill
- With it: you and the corporation jointly elect a transfer price (the “elected amount”), usually your cost — deferring the gain until the corporation sells
- The paperwork is form T2057, filed by the earliest tax-filing deadline of anyone involved
- You must take back at least one share of the corporation as part of the payment
The rollover does not erase tax — it moves it into the future. The gain is preserved inside the corporation and taxed when the property is eventually sold.
When you need a section 85 rollover
The common situations, in roughly the order we see them:
- Incorporating an existing business. A sole proprietor or partnership moving equipment, inventory, customer lists and goodwill into a new corporation. This is the classic case — and goodwill with little or no cost base is where the surprise tax usually hides.
- Setting up a holding company. Moving shares of your operating company into a holdco. Transferring shares you already own into a new corporation is a disposition unless the election is made — covered in more detail on our holding company page.
- Reorganising before a sale or investment — getting assets into the right entities while deferring rather than triggering gains.
- Estate and succession planning — often alongside a section 86 share exchange in an estate freeze.
A section 85 rollover example
A sole proprietor has run a contracting business for ten years and is incorporating. The business assets:
| Asset | Cost / UCC | Fair market value | Accrued gain |
|---|---|---|---|
| Equipment | $40,000 | $70,000 | $30,000 |
| Goodwill (customer base, name) | $0 | $100,000 | $100,000 |
Without an election: incorporation is treated as a sale at fair market value. Roughly $130,000 of gains and recapture land on the owner’s personal return in one year — with no cash received, because the “buyer” is their own company.
With a T2057 election: owner and corporation jointly elect transfer prices at cost — $40,000 for the equipment, a nominal amount for the goodwill. No gain is triggered. The corporation inherits those low cost bases, so the deferred gain is taxed when the corporation eventually sells. The owner takes back shares, preserving the value in a form that can later use the lifetime capital gains exemption if the company qualifies.
Form T2057: how the election is actually filed
The election is made jointly on form T2057 (or T2058 where a partnership is transferring). Both the person transferring and the corporation sign. It is filed separately — not simply attached to a return — and it lists each property, its cost, its fair market value, the elected amount, and the consideration taken back.
The deadline people miss
T2057 is due by the earliest tax-filing deadline of anyone involved in the election. If your corporation’s T2 is due before your personal T1, the corporation’s date governs. Waiting until your own return is due is the most common way this goes wrong.
Filed late
A late election can still be accepted for up to three years with a penalty — broadly $100 per month late, to a maximum of $8,000 — and beyond that only at CRA’s discretion. Expensive, but usually far cheaper than the tax on an unelected transfer, which is why a missed deadline is worth fixing rather than abandoning.
What has to be true for the election to work
- The corporation is a taxable Canadian corporation
- The property is eligible property — most business assets qualify; cash and certain real property held as inventory do not
- You receive at least one share of the corporation as part of the consideration
- The elected amounts sit within the boundaries for each asset
Section 85 is not the only rollover
Two neighbours worth knowing about, because the right tool depends on what is being reorganised:
- Section 86 — exchanging shares of a corporation for new shares of the same corporation, the mechanism at the centre of most estate freezes. No T2057 is required for a straightforward s.86 exchange.
- Section 51 — converting securities (such as convertible shares or debt) into shares of the same corporation.
Reorganisations often combine these — a freeze may use section 86 for the founder’s shares and section 85 to move assets. Which sections apply, in which order, is planning work rather than form-filling.
Get the election right the first time
Greg has prepared corporate year-ends and reorganisations in the Fraser Valley since 2002 and prepares every file himself at our Langley tax practice. For a section 85 transfer that means valuing what is moving, setting the elected amounts within the boundaries, structuring the share consideration, and filing the T2057 on time. A 15-minute call is usually enough to say whether your transfer needs an election and what it involves. The fee is agreed in writing before any work starts.
Related reading: What is a holding company? · Incorporating in BC · Salary vs dividends