The decision rule in one paragraph
Price the gain first, then pick the route. A transfer to your own corporation is a disposition either way; the only question is whether the tax on the accrued gain is paid now or later. If paying it now is cheap, because the gain is small, because capital losses can absorb it, or because an exemption shelters it, a straight sale at fair market value is often the better deal: you skip the election, take back a note for the full price, and hand the corporation a full-value cost base. If paying it now is expensive, the rollover defers the bill and keeps the cash working in the business. Almost every file we run lands on one of those two answers within the first meeting, and the rest of the work is making sure the chosen route does not trip one of the traps below.
One framing correction before the detail. Owners often assume the sale route means real money changes hands and the rollover means paper only. In truth both are usually paper on day one; the difference is what the paper is worth to you tax-free. A sale leaves you holding a note for the full price. A rollover caps your note at the tax cost of the property and pays the rest in shares. That gap, note versus shares, matters as much as the tax bill itself.
What actually happens in each route
A fair-market-value sale is the simpler machine. You sell the asset to the corporation at its appraised value, report the result this year, and take back whatever consideration you like, usually a promissory note for the whole price, since no share needs to be issued and no election needs to be filed. On capital property, half the gain is taxable to you. On depreciable property, the part of the price above the undepreciated capital cost comes back first as recapture, which is fully taxable income, with capital gain treatment only above original cost. The corporation, for its part, owns the asset at a cost equal to what it paid, which means more depreciation to claim and a smaller gain when it eventually sells.
The section 85 rollover replaces the sale price with an elected amount that you and the corporation choose within statutory limits, normally your tax cost, so no gain arises today. In exchange the rules impose structure: you must receive at least one share, non-share consideration is capped by the elected amount, a joint T2057 election has to be filed by a deadline set by the earlier of your two filing dates, and the paid-up capital of the shares you take back is ground down so the deferred value cannot be pulled out as tax-free capital later. The full machinery lives in our guide to section 85 rollovers for business owners; here it is side by side with the sale:
| Dimension | Sale at fair market value | Section 85 rollover at cost |
|---|---|---|
| Tax this year | Gain and any recapture taxed now | None, if the election is done correctly |
| Consideration you take back | Anything, commonly a note for the full price | At least one share; notes and assumed debt capped at tax cost |
| Cost base inside the corporation | Full price paid, subject to a trim on depreciable property | Your old tax cost carries over; the gain waits inside |
| Paperwork | Purchase agreement and valuation; no tax election | All of that plus the joint T2057 by its deadline |
| Tax-free extraction later | Note repayments, up to the full price | Note repayments only up to tax cost; PUC on the shares is ground down |
| Where it usually wins | Small, sheltered or deliberately crystallized gains | Large unsheltered gains, cash-poor transfers, freezes and restructures |
Read the middle rows twice, because they carry the trade. The sale buys you a big note and a big cost base at the price of tax today. The rollover buys you deferral at the price of structure, a smaller note, and a gain that still has to be dealt with someday, inside the corporation, on your shares, or both.
What a full-value sale buys you
The sale route earns its tax bill three ways. First, the note: a promissory note for the entire fair market value can be repaid to you over the following years with no further tax, because repaying debt is not income. For an owner who wants a steady, tax-free draw from the corporation, a full-value note is the single most valuable piece of paper this transaction can produce, and only the sale route produces it at full size.
Second, the cost base. The corporation acquires the asset at what it paid, so future depreciation is claimed on the higher figure and the gain on an eventual resale is measured from it. One honest caveat belongs here: on depreciable property bought from a non-arm's-length seller, a special rule trims the buyer's cost for depreciation purposes, so the corporation does not get to depreciate the untaxed half of your gain. The step-up is real but partial, and we model it rather than assume it.
Third, simplicity and certainty. No election, no deadline, no elected-amount schedule, no ground-down paid-up capital to explain to the next accountant. When the gain is genuinely small, the entire section 85 apparatus can cost more in fees and future complexity than the tax it defers. Part of giving honest advice is saying so.
The sale is also how gains get crystallized on purpose. If today's gain can be absorbed by capital losses you are already carrying, taxed at rates you expect to look good in hindsight, or realized while an exemption is available, then triggering it now converts a contingent future liability into a settled, known number, and everything after that point grows on a fresh cost base.
What the rollover protects, and the dial in between
The rollover protects cash and timing, and those are worth more than they sound. Tax deferred is paid later with dollars that stayed invested in the meantime, and paid in a year you planned rather than the year a restructure happened to occur. For a transfer with a large accrued gain and no cash proceeds, the sale route can create a five- or six-figure liability with nothing liquid to pay it; the rollover makes the same restructure possible without writing that cheque. This is why freezes, holdco insertions and most reorganizations run through section 85 rather than through sales.
And the choice is genuinely a dial, not a switch. The elected amount can be set anywhere from tax cost up to fair market value, so a hybrid is routine: elect above cost by exactly the amount of gain you want to trigger, no more. Owners use the dial to soak up expiring or idle capital losses, to crystallize the lifetime capital gains exemption on qualifying small business shares, currently up to 1.25 million dollars per person, or simply to use up a low-income year. The elected amount is the instrument; the sale-versus-rollover question is really about where to set it, and whether the structure of a full sale, note for everything, no election, serves you better than the structure of an election.
What the rollover cannot protect is the exit. After a rollover at cost, the old gain lives on in two places, in the corporation on the asset and in your hands on low-cost shares, and unwinding that without double tax takes planning of its own. A sale at value largely avoids that duplication because the gain was taxed once, at the start. If your endgame is a sale of the company within a few years, that difference belongs in the analysis on day one.
The traps on each road
Each route has traps the other does not, and two of them surprise owners constantly. On the sale side, the first trap is pricing. Sell to your own corporation below fair market value and the rules deem you to have received full value anyway, while the corporation keeps only the low price it actually paid as its cost: the adjustment is one-sided, and the same value gets taxed twice. Sell above fair market value and the corporation's cost is pushed down to true value while you are taxed on the inflated price. A defensible valuation is not optional on the sale route; it is the whole foundation.
The second sale-side trap is losses. Selling a loss asset to your own corporation to bank the loss does not work: because you and the corporation are affiliated, stop-loss rules deny the loss on the transfer, and depending on the property the denied amount is either added to the corporation's cost base or suspended until the asset leaves the group. The third is subtler: tax can come due before cash does. A reserve can spread a gain only where the price is genuinely not payable until later years, and a demand note from your own company does not qualify, so the tax bill arrives in year one even if the note is repaid over ten.
One trap sits on both roads when the asset is shares of your operating company rather than equipment or real estate. Selling opco shares to your own holdco for a note, at full value, and claiming the exemption on the gain is precisely the pattern section 84.1 exists to shut down: the note can be recharacterized as a taxable dividend, which is worse than the capital gain you were planning around. Share transfers to a corporation you do not deal with at arm's length need their own analysis on either route, and the rollover side has its own list, boot limits, the PUC grind and the filing deadline among them. Not every transfer even needs the election; when a section 85 election is required sorts that threshold question first.
What changes the answer, and how we run the comparison
Six facts decide which route, or which point on the dial, fits your transfer:
- The size of the accrued gain, asset by asset. Small gains lean toward a sale; large ones lean toward deferral.
- What shelter exists today: capital losses carried forward, exemption room on qualifying shares, or a low-income year that makes crystallizing cheap.
- The property type. Depreciable assets bring recapture, which is fully taxable, and a trimmed step-up; that combination often flips the math against the sale.
- How much tax-free extraction you want. If a large note repaid over years is the goal, the sale route sizes the note at full value and the rollover caps it at cost.
- What the corporation does next. An asset it will sell or depreciate soon rewards a high cost base; an asset it will hold forever makes the step-up worth less.
- Whether the asset is shares of a related company, which brings section 84.1 into play on either route and usually reshapes the whole plan.
We price both routes, and usually a hybrid, on one schedule before anything is signed: tax now, note size, cost base, paid-up capital and the exit, side by side. That comparison is a fixed, defined-scope exercise under our Strategic Projects model, with a written fee agreed after a free 15-minute discovery call, and it is the standard first step we take as a corporate reorganization and tax planning CPA serving Ontario owner-managers. If the numbers say sell, we will say sell; the election is a tool, not a default.
