Yes for income tax: how the section 85 rollover works
Section 85 of the Income Tax Act lets you transfer a rental property to a taxable Canadian corporation at an elected value as low as your existing tax cost, so the accrued capital gain and the CCA recapture stay deferred instead of being triggered by the change of ownership. Without the election, moving a property to your own corporation is a disposition at fair market value, exactly as if you had sold it to a stranger, with tax due on the gain and on any capital cost allowance being recaptured. The election is what turns a taxable sale into a deferral.
The mechanics have firm requirements. You and the corporation file a joint election on Form T2057, you must take back at least one share of the corporation as part of the payment, and you choose an elected amount that sits within limits: broadly, no lower than any non-share payment you receive, and no higher than fair market value, with a special floor for depreciable property built around its undepreciated capital cost. Choosing the elected amount is the actual planning; the form is just where the choice is recorded.
The deadline is unforgiving in a specific way: the T2057 is due by the earliest date either you or the corporation must file an income tax return for the year of the transfer. Late-filed elections are accepted for up to three years, but a penalty rides along, and it grows with time. The transfer agreement, the share terms and the election should be papered together as one transaction, which is exactly the kind of defined-scope work we run under Strategic Projects.
What the rollover does not defer
The election stops the income tax bill; it does not touch Ontario land transfer tax, and it does not always solve HST. Land transfer tax applies when the property is conveyed to the corporation, calculated on the value of the consideration, which includes any mortgage the corporation assumes and the value of the shares it issues. In practice that means tax at close to fair market value, and there is no general exemption for transferring a property to a corporation you own; the narrow deferral that exists applies to transfers between affiliated corporations, not from an individual. For property in Toronto, the municipal land transfer tax applies on top of the provincial one, roughly doubling the bill.
HST depends on what the property is. The sale of a used residential rental property is generally exempt, so a house, condo or residential plex usually moves without HST. Commercial and mixed-use property is generally taxable, but where the purchasing corporation is GST/HST-registered it normally self-assesses the tax on its own return rather than paying it in cash, which makes registration timing part of the plan rather than an afterthought. Getting this sequencing wrong is one of the few ways to turn a paper issue into a real cheque.
| Item | What happens on the transfer |
|---|---|
| Accrued capital gain | Deferred by the section 85 election at your chosen amount |
| CCA recapture | Deferred if the elected amount is set at the undepreciated capital cost |
| Ontario land transfer tax | Payable now on the value of consideration, including assumed debt; Toronto adds its municipal tax |
| HST | Used residential rentals generally exempt; commercial property taxable but usually self-assessed by a registered corporation |
| Legal, appraisal and lender costs | Payable now; the rollover needs a supportable fair market value and papered consents |
| Tax rate on future rents | Not a deferral question at all: corporate investment rates apply from the transfer onward |
Source: Ontario — Land Transfer Tax.
The mortgage decides more than the election does
If the mortgage is bigger than the property's tax cost, a straight rollover cannot fully defer the gain, because debt the corporation assumes counts as non-share payment to you, and the elected amount cannot be set below it. A property bought years ago, depreciated, and then refinanced as values rose is the classic trap: the loan balance now exceeds the old cost, and the excess forces a gain into your hands in the year of transfer no matter what the form says. Sometimes the fix is partial, sometimes it is restructuring the debt first, and sometimes the honest advice is not to transfer.
The lender is the other half of the mortgage problem. Moving title to a corporation without consent typically breaches the mortgage terms, and consent usually means the corporation is underwritten fresh, often with your personal guarantee, sometimes at today's rates instead of the ones you locked in. Insurance, property tax accounts and leases all need the same re-papering. We cover the full set of traps, including the boot problem in detail, in the tax risks of transferring mortgaged property to a corporation; if your property carries significant debt, read that page before deciding anything.
Deferral is not the same as a good idea
Even a flawless rollover moves your rent into a corporation that pays tax at roughly the top personal rate on it, because rental income earned with a small staff is investment income, not active business income. A corporation whose main business is earning rent is generally a specified investment business unless it employs more than five full-time people, so the small business deduction is off the table. Part of the corporate tax is refundable when the corporation pays you taxable dividends, so the system roughly evens out over time, but there is no headline rate win for most landlords, and there is a permanent new layer of accounting and filing cost.
What the corporation genuinely buys is different: separation of the property from personal creditor exposure, a container that can outlive you, and shares that can be reorganized in ways a land title cannot. This is where the transfer usually makes sense, and it is estate-driven rather than rate-driven. As a business estate planning CPA in Ontario, we most often see the rollover used as step one of a plan: property goes in tax-deferred, then the shares are frozen so future growth accrues to the next generation while you keep control, something the raw deed could never do.
Two personal-tax facts belong in the decision. A property that was ever your principal residence needs its exemption history handled before any transfer, because the corporation can never claim it going forward. And losses trapped in a corporation cannot flow back to your personal return, so a property expected to run negative for years may be worth more to you personally than incorporated. Both cut against transferring in specific situations, and both are cheap to check in advance.
Where the property lands in a multi-entity structure
If you already run companies, the rental usually belongs beside your operating business, not inside it, and the rollover can deliver it there directly. Transferring into the operating company parks a passive asset in the entity most exposed to lawsuits, leases and bank covenants, which is backwards. A separate realty corporation, or a holding company above the group, keeps the property insulated while still letting the family of companies work as one unit. Ownership structure is a bigger question than this page, and we treat it fully in accounting and tax planning for real estate investment companies.
Once the property sits inside a group, the intercompany plumbing has to be real. Rent charged between your companies needs a written lease at defensible rates; money lent from one entity to fund another needs a documented loan; and management fees need agreements and invoices behind them. Undocumented intercompany transactions are the first thing both CRA and future lenders pull on, and they unravel structures that were sound on paper.
Plan the group's cash as one system from the start. Mortgages sitting in the realty company get serviced by rents that may arrive in another entity, dividends can only move cash along the ownership chain, and a consolidated cash flow view is what tells you whether the whole arrangement actually clears its obligations each month. A structure that looks elegant on the org chart but starves the company holding the debt is a failure, and it is a preventable one.
What changes the answer
Six facts decide whether this transfer is tax-deferred in practice and whether it is worth doing at all:
- The mortgage against the tax cost: debt above your cost forces gain out of even a perfect election.
- The land transfer tax bill: calculated on consideration near fair market value, doubled for Toronto property, and payable in cash now.
- The size of the accrued gain and past CCA: the bigger the deferral, the more the election carries, and the more a supportable valuation matters.
- Residential or commercial: which sets the HST treatment and the registration sequencing.
- Why you want a corporation: creditor separation and estate planning justify the costs; chasing a lower tax rate on rent does not.
- What the property will do next: expected losses, an eventual sale, or a principal-residence history each shift the math.
We run these transfers end to end as Strategic Projects: the decision analysis first, then the valuation support, elected amounts, T2057, land transfer tax filing and the intercompany paper, coordinated with your lawyer and lender. If the numbers say do not transfer, we tell you that at the analysis stage, before the legal fees start. It begins with a free 15-minute discovery call and a written scope; our real estate investor tax planning work shows how the structure runs after the dust settles.
