What section 85 actually defers on a rental property
Moving a rental into your corporation is a sale for tax purposes, and section 85 is the election that stops that sale from being taxed now. Without it, the transfer is treated as a disposition at fair market value even though no money changed hands: tax on the accrued capital gain, plus recapture of the capital cost allowance you have claimed against the building over the years. With the election, you and the corporation jointly choose the transfer value for tax, and choosing your existing tax cost pushes both amounts forward until the corporation eventually sells. The corporation inherits your cost, so the gain is deferred, not erased.
The machinery is specific and unforgiving on timing. The transferee must be a taxable Canadian corporation, you must take back at least one share of it as part of your payment, and the chosen value goes on Form T2057, a joint election due by the earliest date either you or the corporation has to file a return for the year of the transfer. A late election is accepted for up to three years, but a penalty rides along and grows the longer it waits. We cover the general machinery in what a section 85 rollover is; this page is about what changes when the asset is a rental property, because more changes than most owners expect.
Tax cost, for this purpose, is not what you paid for the property. The land's cost is its adjusted cost base, the original allocation plus whatever you have capitalized since. The building's number is its undepreciated capital cost: original cost plus additions, minus every dollar of CCA you have claimed. Owners are routinely surprised by how low that second figure has drifted after years of depreciation, and since the deferral room is measured against these balances, pulling the actual figures from your past returns is step one, not a detail for later.
One eligibility point removes some readers immediately. The election works for a rental you hold as a capital investment, but real estate held for resale is inventory, and real property inventory is specifically excluded from section 85. If you buy, renovate and sell, no election form makes the rollover available for those properties. A property that was once your principal residence can still be transferred, but its exemption history has to be settled before the corporation takes title, because a corporation can never claim that exemption for the years that follow.
One property, three elections: the land, the building and what is inside
For tax purposes your rental is not one asset, and that is where the real work sits. The land, the building and any depreciable contents are separate properties, each with its own elected amount inside its own limits. The land is non-depreciable capital property, so the lowest workable election is broadly its cost. The building is depreciable property, so its floor is built around its undepreciated capital cost, the balance left after every year of CCA you have claimed. Elect at that balance and the recapture stays deferred; elect above it and you pull recapture into your own income in the year of the transfer.
| Component | Lowest amount you can usually elect | What a wrong number triggers |
|---|---|---|
| Land | Broadly its adjusted cost base, its cost for tax | Capital gain taxed this year |
| Building | Broadly its undepreciated capital cost after past CCA | Recapture taxed as regular income, plus gain above original cost |
| Appliances and equipment | Their remaining undepreciated cost in their CCA classes | Recapture on the difference |
| Any component carrying assumed debt above these floors | The assumed debt itself becomes the minimum | Gain forced out regardless of what the form says |
The split of total value between land and building has to be defensible, because it drives both floors and the corporation's future CCA base. The allocation from your original purchase, adjusted for additions since, is the starting point; for a property that has appreciated substantially, an appraisal that separates land and building value earns its fee. CRA reviews section 85 values with the benefit of hindsight, so a price adjustment clause in the transfer agreement is standard protection for the day a number turns out to be off.
Recapture deserves particular respect on a long-held rental. It is not a capital gain: it is fully taxable income, and on a building depreciated for fifteen or twenty years it can be the bigger of the two numbers at stake. This is precisely the tax the election exists to hold back, which is why the building's elected amount is normally set at its undepreciated cost to the dollar, not rounded for convenience.
The mortgage sets a floor you cannot elect under
Debt the corporation assumes counts as payment to you, and the rules will not let you elect below the payment you take. If the mortgage the corporation takes over exceeds the property's tax cost, the elected amount is forced up to the debt, and the difference lands in your return as gain in the year of transfer no matter how the paperwork reads. The standard trap is a property bought long ago, depreciated year after year, then refinanced as values climbed: the loan balance now sits far above the old tax cost, and a straight rollover cannot fully defer the gain.
There are ways through, and they are planning decisions rather than form-filling. Sometimes part of the debt stays personal and is serviced by rent the corporation flows out to you. Sometimes the borrowing is restructured before the transfer so the assumed portion fits under the floor. Sometimes the honest answer is to accept a measured gain this year because it is small, or covered by losses you already carry. The same payment rules govern any note the corporation issues you, which we walk through separately in how a promissory note works in a section 85 rollover.
The lender holds a quiet veto over all of it. Transferring title without consent typically breaches the mortgage terms, and consent usually means the corporation is underwritten fresh, with your personal guarantee attached and possibly today's rate replacing the one you locked in. Insurance, the property tax account and every tenant lease need re-papering to the new owner at the same time. None of this is fatal; all of it belongs in the plan before the deed moves, not in the cleanup after.
Whatever the route, settle the lender sequence before anything is signed: consent requested, the corporation's covenants and your guarantee confirmed in writing, the rate and term carried over or renegotiated with open eyes, and only then the transfer documents dated. A rollover closed ahead of consent leaves you in breach of the mortgage while holding a tax election you cannot easily unwind. The order of operations is cheap insurance.
The bills the election never touches: land transfer tax and HST
Section 85 defers income tax and nothing else, so two other taxes need their own answers before you commit. Ontario land transfer tax applies when the property is conveyed to the corporation, calculated on the value of the consideration, which includes the mortgage the corporation assumes and the value of the shares it issues. There is no general exemption for moving a property into a corporation you own, so the tax is a real cash cost of the transfer, payable now against a deferral whose benefit arrives later. For a Toronto property, the municipal land transfer tax applies on top of the provincial amount, and the combined bill is often the single largest cost of the whole transaction.
HST turns on what kind of rental it is. The sale of a used residential rental is generally exempt, so a house, condo or small residential plex usually transfers without HST at all. Commercial and mixed-use property is generally taxable, but where the corporation is GST/HST-registered before closing, it normally self-assesses the tax through its own return instead of paying cash. That makes the registration date part of the closing sequence rather than an admin item; handled in the wrong order, a paper entry becomes a cheque.
The remaining closing costs are smaller but real: an appraisal to support the values, legal fees for the conveyance and the corporate documents, title work, and the accounting on the election itself. Land transfer tax is payable on registration, so the cash has to be ready at closing, not at tax time. Weigh the whole pile against the value of deferring a gain you might not have triggered for another decade anyway; on a modest gain, the costs can eat the benefit.
Source: Ontario — Land Transfer Tax.
A deferred gain is not a reason on its own
Even a flawless rollover moves your rent into a corporation that pays tax on it at close to the top personal rate. Rental income earned without a substantial staff is investment income inside a corporation, not active business income, so the small business rate never applies to it. Part of the corporate tax is refundable when the corporation pays you taxable dividends, so over the full cycle the system roughly evens out, but nobody should incorporate a rental expecting a rate win. And if you also own an operating company, the rent can make things worse: passive income across an associated group grinds down the small business deduction once it passes the annual threshold.
The reasons that do justify the transfer are structural. A corporation separates the property from your personal creditor exposure, gives it a container that can outlive you, and converts a land title into shares that can be frozen, distributed among family or reorganized in ways a deed never can. As a corporate reorganization and tax planning CPA in Ontario, we see the rollover earn its costs most often as step one of an estate or group plan, and least often as a standalone move by a landlord chasing a lower rate on rent. Where the property should sit within your wider structure is its own decision, part of the corporate restructuring conversation rather than the election itself.
Count the ongoing costs honestly before you decide. The corporation files its own return every year, its books must be kept properly, and rent or loans between your entities need written agreements behind them. Losses trapped in a corporation cannot flow back to your personal return, so a property expected to run negative for several years may be worth more to you held personally. The transfer is a one-way door in practice: getting a property back out of a corporation later is its own taxable event.
Be clear, too, about what happens when the corporation eventually sells. The deferred gain and recapture surface inside the corporation and are taxed there, with half of any capital gain credited to the capital dividend account for tax-free distribution and part of the corporate tax refunded as dividends flow out to you. Deferral moved the bill and changed who pays it; it did not shrink it. The transfer earns its keep through structure, creditor separation and timing, not through arithmetic magic.
What changes the answer
Six facts decide whether your transfer defers tax in practice and whether it is worth making at all:
- The mortgage against the tax cost: assumed debt above cost forces gain out of even a perfect election.
- How much CCA you have claimed: past depreciation sets both the recapture at stake and the building's election floor.
- Capital investment or flip: property held for resale is inventory and cannot use section 85 at all.
- The land transfer tax bill: payable now on close to full value, with Toronto property taxed twice over.
- Residential or commercial: which sets the HST answer and the registration sequence before closing.
- What the corporation is for: creditor separation and estate structure justify the costs; a rate saving on rent does not exist.
We run these transfers as defined-scope Strategic Projects: the worth-it analysis first, then valuation support, elected amounts, the T2057, the land transfer tax filing and lender coordination handled as one file with your lawyer. If the numbers say keep the property personal, we say so before the legal fees start, and it begins with a free 15-minute discovery call. Whether your situation needs the election at all is a separate question, answered in when a section 85 election is required.
