Yes, and the assumption itself is treated as payment to you
The company can take over the debt because section 85 puts no restriction on who services a mortgage; the restriction is on how the assumption is counted. When your corporation assumes a liability attached to property you transfer, you have been relieved of an obligation, and the Income Tax Act treats that relief exactly as if the corporation had handed you cash for the same amount. Assumed debt is non-share consideration, the same category as a cheque or a promissory note, and the trade calls it boot.
This is true whether or not anyone writes it down. The purchase agreement might describe the transfer as being made for shares alone, but if the corporation starts making the mortgage payments, or the lender novates the loan into the corporate name, the assumption happened in substance and the tax rules count it. Boot that nobody planned for is still boot, and it is one of the most common ways a transfer that everyone believed was tax-free produces a reassessment.
Why does the label matter so much? Because section 85 puts one hard limit on non-share consideration: the elected amount, the value you and the corporation jointly pick as your proceeds, can never be less than the fair market value of the boot you receive. Take back boot up to the tax cost of the property and you can still elect at cost, so no gain arises. Take back boot above that cost and the elected amount is dragged up with it, dollar for dollar, and the excess lands on your return as income in the year of the transfer.
There is a second, quieter cost. Boot room, the gap between tax cost and zero, is a limited budget, and every dollar of assumed debt spends it. Many owners want to take back a promissory note on a rollover, because the corporation can repay a note over the following years with no tax at all. An assumed mortgage fills that same room first. If the mortgage equals the tax cost of the property, there is no room left for a note, and the rest of your consideration must be shares. If you are new to the framework, the primer on what a section 85 rollover is covers the moving parts in one page; this page stays on the debt question.
The floor rule: where assumed debt starts forcing a gain
The safe zone is simple to state: total boot, assumed debt plus any cash or notes, must not exceed the tax cost of the property being transferred. For land, investments or shares, tax cost means the adjusted cost base, the ACB. For a building, equipment or goodwill, it means the undepreciated capital cost, the UCC, which is cost minus the depreciation already claimed. Stay at or below that number and the election can sit at cost, the deferral holds, and the debt simply changes who writes the mortgage cheque each month.
Cross the line and the arithmetic is mechanical. Suppose a property is worth 900,000 dollars, its ACB is 400,000, and it carries a 550,000 mortgage the corporation assumes. The boot is 550,000, so the elected amount cannot be set below 550,000, and the transfer produces a 150,000 gain even though you received no cash at all. The gain is real, the tax on it is due for that year, and the money to pay it has to come from somewhere else, because the equity is now sitting inside the corporation.
Three positions cover almost every file we see, and each has a standard response:
| Where the assumed debt sits | Income tax result | What we usually do |
|---|---|---|
| Debt at or below the tax cost (ACB or UCC) | Full deferral is available; the debt uses up boot room that could have gone to a promissory note | Decide deliberately how to split the remaining boot room between debt and a note before the lawyer drafts anything |
| Debt above tax cost but below fair market value | The elected amount is forced up to the debt; the excess over cost is taxed in the year of transfer | Model the gain first, then either accept and shelter it, restructure the debt, or rethink the transfer |
| Debt at or near fair market value | Most or all of the accrued gain is triggered; the rollover defers little or nothing | Usually pause; a transfer this leveraged rarely makes sense as a rollover and sometimes should not happen at all |
Note what the table does not say: it never says the transfer is prohibited. Section 85 does not stop you from moving heavily mortgaged property; it just stops pretending the debt relief was not payment. Whether the resulting tax bill is acceptable is a planning question, not a legal one.
The refinanced-property problem, and the four ways out
Debt exceeds tax cost most often because the property was refinanced along the way, not because it was bought with too much leverage. An owner buys a building, it appreciates, the bank happily lends against the new value, and the cash goes into another project or into the house. Years later the mortgage reflects what the property is worth today while the ACB still reflects what it cost, and the gap between them is exactly the gain a rollover will trigger. Depreciable property makes it worse, because every year of capital cost allowance claimed pushes the UCC lower and widens the gap further.
When the numbers come back ugly, four responses are on the table:
- Pay the debt down before the transfer. If cash or other borrowing can bring the mortgage to or below tax cost before closing, the problem disappears. Sequence matters: the balance on the day of the transfer is the number that counts.
- Have the corporation assume only part of the debt. You can remain personally liable for the balance and keep servicing it from your own resources. This works mechanically, but be careful how the corporation funds you afterward: if it simply pays you amounts to cover the retained debt, those payments are taxable to you, and the plan has only moved the problem.
- Spread the debt across other transferred property. If the same transaction moves assets with high tax cost and little debt, the liability can be allocated against them instead. The next section covers how that works.
- Accept the gain and plan it. Sometimes triggering a measured gain is the cheapest answer, especially where capital losses are available to absorb it or the gain is modest. A deliberate gain with a plan beats an accidental one discovered at filing.
What almost never works is ignoring the mortgage and hoping the election papers over it. The CRA sees the assumed debt on the transfer documents, on the land registry, and on the T2057 itself, and the elected amount is adjusted automatically when it sits below the legal floor. This is a design problem, and it has to be solved before the agreements are signed.
Several assets, one loan: how debt gets allocated on the election
When one transfer moves several properties, the debt does not have to follow the asset it is registered against; it has to be allocated reasonably across the properties on the election. A section 85 transfer of a whole business is really a bundle of property-by-property elections: each asset gets its own elected amount, and the total consideration, shares and boot alike, is divided among them. That division is where a skilled preparer earns the fee.
The useful move is to allocate debt toward property with high tax cost and away from property with almost none. Goodwill in an owner-built business often has a tax cost near zero, so even a small slice of debt allocated to it forces a gain. Recently purchased equipment or land bought near today's value can absorb debt harmlessly. Aim the boot where the cost is, and a transaction that looked offside in aggregate can be fully deferred property by property.
Two guardrails keep the allocation honest. First, each property's boot cannot exceed its own elected amount; the limits apply line by line, not to the bundle as a whole, so you cannot cure an over-leveraged asset by pointing at the pile. Second, the allocation must be defensible and consistent: the number on the election, the purchase agreement, and the corporate resolutions should all tell the same story, because in a review the CRA reads all three. This is also where the paperwork earns its keep; whether your transfer needs the election at all, and what the form must contain, is covered in when a section 85 election is required.
The lender, HST and land transfer tax get a vote too
The income tax election binds the CRA, not the bank, so the mortgage itself has to move under the loan documents. Most commercial mortgages carry a due-on-sale or consent clause: transfer the property without the lender agreeing and the loan can be called. In practice the lender consents, papers an assumption, and almost always keeps your personal guarantee, so your covenant does not disappear just because the corporation is now the borrower. Build the consent into the closing timeline, because it is often the slowest item on the list.
Ontario land transfer tax is the second surprise. The tax is calculated on the value of the consideration for a conveyance, and consideration includes debt assumed. A transfer that is fully deferred for income tax can still produce a land transfer tax bill measured by the mortgage the corporation takes over plus everything else it gives you. Narrow relief exists for certain transfers between closely related corporations, but it is conditional, requires its own filings, and cannot be assumed; it needs its own analysis before closing, not after.
HST is the third. A section 85 election does nothing for HST, and a transfer of commercial real property or business assets between entities is a supply. Depending on the facts, relief may come from the joint election available when substantially all the assets of a business transfer as a going concern, or from the self-assessment rules that let a registrant purchaser account for the tax without cash changing hands. Each route has its own conditions and its own form, and the wrong assumption here creates a cash cost no income tax election can fix.
What changes the answer, and how we set these up
Five facts decide how the debt side of a rollover should be built:
- The debt against the tax cost. Everything starts with whether the mortgage sits below ACB or UCC, between cost and value, or near value.
- Why the debt is that size. Original purchase financing usually sits below cost; refinancing to pull equity usually sits above it, and that history tells us the problem early.
- What else is transferring. Other high-cost assets in the same transaction create allocation room a single-property transfer does not have.
- How much boot room you want for a note. If tax-free repayments over the next few years matter to you, the mortgage and the note are competing for the same budget.
- The property type and the lender. Real property brings land transfer tax and HST into the plan, and the lender's consent and your guarantee shape the closing timeline.
We run these as defined-scope work under Strategic Projects: confirm the tax cost and the debt balances, model the boot before anything is signed, set the allocation schedule, coordinate the lawyer and the lender, and file the election on time. It is the kind of file a corporate reorganization and tax planning CPA in Ontario should be able to walk you through in one meeting, with the gain, if there is one, on the table before you commit. The full mechanics of elected amounts, share consideration and the T2057 sit in our longer guide, section 85 rollovers explained for business owners, and the structural side of moving assets between companies belongs to our reorganization work. A free 15-minute discovery call is enough to tell you whether your mortgage fits inside the deferral or needs one of the fixes above.
