Section 85 Rollovers

 In business law, Income Tax

When transferring property that has appreciated in value to a Canadian corporation, you should consider using a section 85 rollover. Under section 85 of the Income Tax Act,[i] you can elect to defer all or part of the capital gains tax that would otherwise arise on the transfer of certain types of property (“eligible property”) to a Canadian corporation. For eligible property, you can elect for income tax purposes a transfer amount which results in no immediate income tax consequences. This means the transfer can take place at the cost of the property, or on a “rollover” basis, without immediately recognizing the accrued gains of the property. Please note once the election has been filed, it cannot be revoked but although it can be amended.

Transferor and Transferee

You can make the section 85 election on a transfer of a property from yourself, a trust, a partnership, or a corporation as the transferor. Except for partnerships, there is no requirement to be a resident in Canada, although a non-resident will be restricted on the kinds of property that can be transferred under the section 85 election. The transfer must be made to a taxable Canadian corporation (the transferee) to ensure that any subsequent dispositions will be taxable in Canada.

Qualified Property

Property that qualifies for the rollover includes, among other things, capital property, resource property, inventory, and eligible capital property.

Form T2057

To make an election under section 85, you must file Form T2057,[ii]  which is both filed with the transferor’s tax return and filed with the transferee corporation’s tax return. On Form T2057, you must specifically describe each property transferred, but you need not list each property or each of the consideration. You must indicate only the total fair market value of all the properties transferred, the lesser of the undepreciated capital cost and the cost of the properties, the fair market value of the consideration received by the transferor, and the agreed (elected) amount for all of the properties.

Consideration Received

For the election to be valid under section 85, the transferee corporation must transfer at least one share (or fraction of a share) of its capital stock to the transferee in exchange for the property transferred to the corporation. The corporation may also give the transferor non-share consideration, which may affect the transferor’s elected amount. Often, the corporation gives the transferor a promissory note for the adjusted cost base of the property and shares of the corporation equal to the difference between the adjusted cost base and the fair market value of the property transferred.

The election allows for a partial or complete rollover, depending on the elected amount chosen. You can report a nominal amount as the agreed amount for the transfer, provided that the amount is within the limitations imposed. If you fail to include in the election form a property transferred into a corporation, CRA will consider the omitted property has been disposed of for fair market value. You may, however, rectify this by filing an additional election for that property after the date the election was otherwise due.


The elected amount becomes the proceeds of disposition for income tax purposes for the property transferred to the corporation. If you elect at your cost of the property, you will have a zero capital gain and zero income inclusion from transferring the property to the corporation at the time of the transfer. The elected amount also becomes the corporation’s cost of the property. The elected amount, net of any other non-share consideration received, becomes the cost of the shares received as consideration for the property.

Note: you should give further consideration to minimizing any land transfer, sales or HST taxes.

When the corporation sells (or is deemed to sell) the property at a later date, the corporation’s adjusted cost base will be equal to the elected amount, since that was part of the rollover election. Thus, the capital gains tax is only deferred by filing the section 85 election. In addition, careful planning is required to avoid double tax – as the corporation incurs a capital gain when it sells the property, and another capital gain will be incurred when you sell (or are deemed to sell) the corporation’s shares.

Partial or No Rollover

Usually, you would prefer to elect at the tax cost of the transferred property, but there are circumstances where this may not be the best approach. You may want to elect an amount greater than your tax cost either if the property qualifies for the capital gains exemption or if the triggered gain could be offset by capital losses (incurred in current year or carryforward from previous years).

Time for Election

You must file the election by the earlier of the transferor’s tax return due date and that of the corporation for the taxation year in which the transfer took place. That said, you can make an election up to three years after the original filing deadline if you are willing to pay a penalty. You can file an election more than three years after the original due date, or amend an election at any time if the circumstances giving rise to the late or amended election are just and equitable at CRA’s discretion.


These notes are for general discussion purposes only and are not to be relied on for legal advice. We expressly disclaim any liability for these notes or to update these notes in the event of a change of the Income Tax Act. We recommend that you speak with your tax accountant before planning any Section 85 rollover.


Thank you to Dickson Lai, CPA, CA, TEP, of Campbell Lawless LLP, for his many contributions to this article.

[i] Income Tax Act R.S.C., 1985, c. 1 (5th Supp.) s 85. 
[ii] Use Form T2058 if you are transferring property from a partnership to a taxable Canadian Corporation.

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