Section 85 Rollover: Avoid 6 Traps That Trigger an Immediate Tax Bill

Last updated: October 16, 2026

A Section 85 rollover lets you transfer property, like your business assets, into a corporation at an agreed amount instead of fair market value, deferring the capital gain or income tax that would otherwise hit immediately. To make it work, you must receive at least one share back and file Form T2057 or T2058 on time. Miss the share requirement, take too much cash or debt as “boot,” or forget an asset on the election, and you can trigger the exact tax bill you were trying to defer.

TL;DR:

• A Section 85 rollover allows transferring assets into a corporation at an elected amount, defering taxes unless boot exceeds this amount or assets are omitted.
• Proper planning requires a clear valuation, carefully drafted share terms, and filing the correct form within strict deadlines to avoid costly mistakes.
• Eligible property includes real estate, goodwill, equipment, and shares, but excludes cash and personal-use assets, requiring asset-by-asset verification.
• The elected amount must stay within the asset’s cost base and fair market value range, with small promissory notes preferred to prevent triggering immediate taxes.
• Common pitfalls include excess boot, missing assets, lack of valuation support, and poor sequencing, which can turn a tax-neutral rollover into a significant tax bill.

Table of Contents

• What is a Section 85 rollover and when should you use it?
• Who qualifies and what property is eligible?
• How does the elected amount actually work?
• What are the T2057 filing deadlines and penalties?
• What traps turn a rollover into a tax bill?
• What do real Section 85 rollovers look like in practice?
• What is the process checklist for a Section 85 rollover?
• Why careful planning matters more than the paperwork
• Get help executing a Section 85 rollover correctly
• Sources
• FAQ

What is a Section 85 rollover and when should you use it?

A Section 85 rollover is a joint election under the Income Tax Act that lets you and your corporation agree on a transfer price, called the elected amount, instead of using fair market value. That agreed number becomes the corporation’s cost for the property and your proceeds of disposition, which is what pushes the tax bill into the future rather than triggering it today. You are not avoiding tax. You are moving the tax liability down the road, usually to whenever you eventually sell the shares or the corporation disposes of the property.

Business owners reach for this election in a handful of recurring situations:

• Incorporating a sole proprietorship or partnership, where the owner wants to move business assets into a corporation without triggering a taxable sale.
• Estate freezes, where a founder locks in the current value of a business on fixed preferred shares and lets future growth accrue to a spouse, children, or a family trust through new common shares.
• Moving passive investments into a holding company, often to help an operating company meet the active business asset test for the Qualified Small Business Corporation (QSBC) exemption.
• Pre-sale reorganizations, where assets get shuffled between entities ahead of a share sale.

Timing matters more than most owners expect. The Canada Revenue Agency expects these transactions to have genuine commercial substance, not just a paper shuffle designed to dodge tax on a transaction that was really something else. Section 85 planning tied to an eventual sale should happen well before that sale is on the table, partly because QSBC holding-period rules and lifetime capital gains exemption timing depend on how long shares have existed in their final form.

Who qualifies and what property is eligible?

The rollover works between a specific set of transferors and one particular kind of transferee. Individuals, corporations, trusts, and partnerships can all be transferors. The corporation on the receiving end has to be a taxable Canadian corporation, meaning it is resident in Canada and subject to Canadian corporate tax, which rules out transfers to foreign entities or tax-exempt bodies.

Eligible property is broad but not unlimited. It generally covers:

• Capital property, including real estate, equipment, and shares of other corporations.
• Eligible capital property and goodwill.
• Inventory used in a business.
• Canadian and foreign resource property in specific circumstances.

Cash does not qualify as eligible property. You cannot elect on straight cash, and certain partnership interests and personal-use property carry their own quirks that make them poor candidates for a rollover. If you are moving a mix of business assets into a newly incorporated company, the practical move is to list every asset that qualifies and confirm each one separately. Owners frequently assume “everything I own in the business” rolls automatically, then discover a piece of equipment or a customer list got left off the election entirely.

How does the elected amount actually work?

The elected amount is the number you and the corporation agree on for tax purposes, and it sits inside a defined range you cannot step outside of. It can never exceed the fair market value of the property. On the low end, it generally cannot fall below the adjusted cost base (ACB) for capital property or the undepreciated capital cost (UCC) for depreciable property. Electing below those floors can create a non-deductible loss or trigger recapture of depreciation you did not intend to realize.

Here is the mechanic that catches the most owners off guard:

1. You must receive at least one share of the corporation as part of the consideration. This is not optional.
2. Any non-share consideration, known as boot, such as cash or a promissory note, gets compared against the elected amount.
3. If the boot exceeds the elected amount, the elected amount is automatically bumped up to equal the boot, which can trigger an immediate taxable gain you never planned for.
4. Practitioners typically structure around this by keeping the promissory note at or below the ACB of the property, then issuing fixed-value preferred shares to cover the remaining fair market value.

A price-adjustment clause in the share terms and the election itself is standard protection. If the CRA later challenges your valuation and adjusts the fair market value, the clause automatically adjusts the number of shares or their redemption value so the elected amount stays inside its legal limits, rather than leaving you with an unintended tax hit years after the fact. Owners with prior share structures should also watch for interaction with section 84.1 and how paid-up capital (PUC) and ACB get affected. Getting this wrong can quietly convert what should be a tax-free share exchange into a deemed dividend.

Pro Tip: Size your promissory note conservatively, well under the ACB rather than right up against it. Valuations get revised, and a note that was fine at ACB on day one can become excess boot after a CRA reassessment bumps the ACB calculation down.

What are the T2057 filing deadlines and penalties?

The election gets filed on Form T2057 for an individual transferor, or Form T2058 when a partnership is transferring the property. Each form requires the elected amount, the fair market value, a description of the consideration received, and signatures from both the transferor and the corporation.

The filing deadline follows an earliest-of rule: you must file by whichever return’s due date comes first, either the transferor’s or the transferee corporation’s. Since corporate fiscal year ends vary, this often means the corporation’s filing deadline, not the individual’s personal tax deadline, ends up driving the timeline.

• Late filing is still possible within three years under subsection 85(7), but it comes with a penalty of the lesser of $100 per month or $8,000.
• Beyond three years, relief depends on ministerial discretion under subsection 85(7.1), which the CRA applies sparingly and only after a “just and equitable” submission.
• Once filed, the election generally cannot be revoked. Amendments are possible only in limited circumstances.

Most rollovers take several months from first conversation to filed election, according to CRA’s own guidance on typical processing. Valuation work and legal drafting of share terms are usually what stretch the timeline, not the paperwork itself.

What traps turn a rollover into a tax bill?

Six mistakes account for nearly every Section 85 rollover that goes sideways, and they show up again and again in practice.

• Excess boot bumping the elected amount. Taking too much cash or debt relative to the elected amount forces an automatic increase that can trigger immediate tax, the single most common mechanical error.
• Missing assets on the election. Leaving equipment, goodwill, or receivables off the T2057 means those items transfer at fair market value by default, with full tax consequences on that piece.
• No price-adjustment clause. Without one, a CRA valuation challenge years later can permanently distort the elected amount instead of self-correcting.
• Section 84.1 and PUC blind spots. Prior corporate reorganizations or related-party sales can trigger a deemed dividend instead of the clean capital treatment you expected.
• Ignoring the QSBC and LCGE timing interaction. Restructuring too close to a planned sale can undercut the holding-period requirements for the lifetime capital gains exemption.
• Weak valuation support. A rough estimate instead of documented support invites a reassessment that changes every number tied to the election.

Pro Tip: Build a one-page drafting checklist before you sign anything: valuation report, board resolution minutes, final share terms, and price-adjustment language. Missing any one of these is what turns a routine rollover into a multi-year CRA correspondence file.

What do real Section 85 rollovers look like in practice?

Numbers make these mechanics concrete. Three scenarios cover most of what business owners actually run into.

1. Incorporating a sole proprietorship. A consultant with equipment and a client list worth $150,000 in fair market value, but an ACB of only $40,000, elects at $40,000. The corporation takes over at that cost base, the consultant receives shares plus a small promissory note capped at $40,000, and no gain is triggered on the transfer itself.
2. An estate freeze. A founder whose company is worth $2 million exchanges common shares for fixed-value preferred shares electing at their $300,000 ACB, locking in that value for tax purposes today. New common shares, worth nominal value at the freeze date, go to a family trust for the founder’s children, so all future growth above $2 million accrues to them instead of the founder’s estate.
3. QSBC purification ahead of a sale. An operating company with $500,000 in surplus investments rolls those passive assets into a new holding company at their ACB, helping the operating company meet the 90% active-business-asset test needed to preserve the lifetime capital gains exemption on a future share sale.

In each case, the elected amount sits at or near ACB, not fair market value, which is precisely what keeps the transaction tax-deferred rather than tax-triggering.

What is the process checklist for a Section 85 rollover?

A rollover runs cleaner when the steps happen in order rather than in parallel under deadline pressure.

• Get a proper valuation of every asset being transferred, not a back-of-envelope estimate.
• Draft share terms and the promissory note with a corporate lawyer, sized to keep boot at or below ACB.
• Confirm every eligible asset is captured on the election, cross-checked against your asset register.
• Prepare and file Form T2057 or T2058 by the earliest applicable due date.
• Keep the valuation report, board minutes, and signed election on file indefinitely, since CRA can audit years later.

Involve a CPA for the tax mechanics and elected-amount calculation, a corporate lawyer for share terms and the price-adjustment clause, and an independent valuator for anything beyond a straightforward asset. For a broader legal perspective on structuring these transactions, the HLP legal blog covers corporate reorganization considerations worth reviewing alongside your own advisors.

Pro Tip: Start the valuation conversation the moment incorporation or a freeze is on the table, not after you have already picked a closing date. Valuators need weeks, not days, to produce something that will hold up under a CRA review.

Why careful planning matters more than the paperwork

Most Section 85 problems I see are not tax law problems. They are sequencing problems. Someone signs a promissory note before confirming the ACB, or a lawyer drafts share terms before the valuation is finished, and by the time everyone compares notes, the boot already exceeds the elected amount. Nobody planned to trigger a tax bill. Nobody caught it until the numbers stopped reconciling.

Get your corporate lawyer and tax advisor talking to each other before year-end, not after the transfer documents are signed. That single habit prevents most of the traps this article covers.

— Wajahat Ajmal (CPA)

Get help executing a Section 85 rollover correctly

Getting the elected amount, boot, and filing deadline right on your own is where most owners either overpay a lawyer for guesswork or miss a T2057 deadline entirely. Some accounting firms offer flat-rate pricing for complex rollovers, providing predictable fees instead of surprise invoices for extra valuation coordination or document drafting.

Our services cover the pieces a rollover actually needs: incorporation assistance to set up the receiving corporation correctly, corporate tax and GST filing to handle the T2057 election and ongoing corporate returns, and virtual CFO support for larger restructurings like estate freezes or QSBC purification that need strategic sequencing rather than a one-off filing. If you are weighing whether to incorporate in the first place, our breakdown of the pros and cons of incorporating is worth reading first.

Check our service packages or reach out through our contact page to get a fixed quote before you sign a single document.

This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.

Sources

• Income Tax Act — section 85
• T2057 — Election on disposition of property by a taxpayer to a taxable Canadian corporation
• Section 85 rollover & business sales in Canada explained

FAQ

What does box code 85 mean on a T4 slip?

Box 85 on a T4 reports employee-paid premiums for a private health services plan and has nothing to do with a Section 85 rollover. The two share only a number, one belongs to payroll reporting, and the other belongs to corporate tax elections under the Income Tax Act.

What is the accounting entry for a Section 85 rollover?

The corporation records the transferred property at the elected amount, not fair market value, which becomes its new cost base or UCC going forward. The transferor removes the asset from their books and records shares received (and any promissory note) as proceeds equal to that same elected amount, keeping the transaction tax-neutral on the books.

What is the difference between a Section 85 and Section 86 rollover?

A Section 85 rollover applies to transferring property, like assets or a business, into a corporation in exchange for shares. Another type of rollover applies specifically to an exchange of existing shares for new shares of the same corporation, such as during a share reorganization, without any new property entering the company.

What is section 85 of the Income Tax Act?

Section 85 is the provision that lets a taxpayer transfer eligible property to a taxable Canadian corporation at an elected amount instead of fair market value, deferring the resulting capital gain or income. It requires the transferor to receive at least one share and file Form T2057 or T2058 by the earliest applicable filing deadline.

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• Lifetime capital gains exemption: 2026 guide for Canadians

This article is intended to inform readers in general terms. It is not intended to provide any tax or business advice. Please consult your T-Ledgers advisor if you have any questions about your unique situation. While we have tried to ensure the accuracy of the information in this article, we accept no liability for errors or omissions.