How Do I Move Shares or Assets Into Another Corporation Without a Tax Bill Right Now?

What a section 85 rollover actually does

A section 85 rollover swaps an immediate taxable sale for a deferral: you transfer property to a corporation at an agreed tax value, usually your cost, so the built-in gain moves into the corporation instead of onto this year's return. Without it, the default rule is harsh. A transfer to a corporation you control is a disposition at fair market value whether or not any cash changes hands, so handing appreciated shares, equipment or goodwill to your own company triggers tax exactly as if you had sold to a stranger.

Section 85 overrides that default when you and the corporation jointly elect. You pick an elected amount within limits the Act sets, and that one number does three jobs: it becomes your proceeds of disposition, the corporation's cost of the property, and the starting point for the cost of the shares you take back. Elect at your tax cost and no gain arises today. Nothing is forgiven; the gain is parked, and it resurfaces when the corporation sells the property or when you sell or redeem your shares.

Owners reach for the rollover in a handful of recurring situations:

• Incorporating an existing business. A sole proprietorship's equipment, goodwill and customer relationships roll into a new corporation without triggering tax on the value the business has already built. It is a standard step in an incorporation done properly.
• Putting a holding company over an operating company. Your opco shares roll up to a new holdco so future surplus can move behind a creditor barrier.
• Splitting one corporation into cleaner pieces, such as moving a building or an investment portfolio out of the company that faces customers, suppliers and lawsuits every day.
• Estate freezes and family restructures, where today's value has to be fixed before future growth is passed to the next generation.
• Cleaning up before a sale, so the shares being sold can meet the tests for the lifetime capital gains exemption.

Two trade-offs deserve plain words up front. First, deferred is not gone: when the corporation eventually sells the property, the gain is taxed inside the corporation, and gains on passive assets held in a company are taxed at roughly half their amount at a combined rate near the top personal bracket until dividends move the money out. Second, after a rollover the same economic gain often exists in two places, inside the corporation on the property and in your hands on the shares, and only deliberate planning keeps that from becoming double tax on the final exit. Neither point is a reason to avoid section 85; both are reasons to design the share terms and the exit at the same time as the transfer.

What the deferral buys is timing, and timing is worth real money. Tax postponed is paid later, often years later, with dollars that stayed invested in the business in the meantime, and paid in a year whose circumstances you planned for rather than the year a restructure happened to force. The point of section 85 is not escaping tax; it is refusing to pay it earlier than the law requires.

If you want the short version before the machinery, start with what a section 85 rollover is. The rest of this page covers what the one-page version leaves out: what qualifies, how the elected amount really works, what you can take back, and where the traps sit.

What you can transfer, and the limits on the elected amount

Most property a business owner wants to move qualifies: shares of a private company, marketable securities, land held as capital property, buildings, equipment, vehicles, goodwill and other intangibles, and inventory other than real estate inventory. The Act calls this eligible property. The transferee must be a taxable Canadian corporation; the transferor can be an individual, a trust, another corporation or a partnership.

A few things sit outside the rollover or are handled differently:

• Cash carries no accrued gain, so it needs no election; it simply moves.
• Accounts receivable are usually transferred under a separate election, section 22, which preserves the ability to deduct bad debts inside the corporation.
• Real estate held for resale, a builder's or flipper's inventory, cannot roll under section 85 at all.
• Prepaids and contracts need case-by-case review; some carry no gain, and some are better assigned outside the election entirely.

Two acronyms carry the rest of this page, so here they are in plain words. ACB, the adjusted cost base, is what you paid for property, adjusted for events since you bought it. UCC, the undepreciated capital cost, is the cost of your depreciable assets minus the capital cost allowance already claimed against them. Every limit below is measured against one of these numbers or against fair market value.

The elected amount is not a free choice. It cannot exceed the property's fair market value, it cannot be less than the fair market value of any non-share consideration you take back, and each category of property has its own floor. The floors exist so you cannot manufacture artificial losses or sidestep recapture on assets you have already depreciated.

Electing at the floor gives full deferral, but the dial turns the other way too. Owners sometimes elect above cost on purpose: to crystallize a gain that the lifetime capital gains exemption, currently up to $1.25 million on qualifying small business shares, will absorb, or to soak up capital losses that would otherwise sit unused. A rollover is not always about paying zero this year; it is about choosing when the gain lands and at what rate.

Each property also gets its own elected amount, which is why the transfer of a whole business is really a schedule of mini-transfers: land at one number, equipment at another, goodwill at a third. Nothing requires you to roll every asset, either. Mixed transactions, some property rolled, some sold outright, some deliberately kept in personal hands, are routine when the numbers point that way.

What you take back: at least one share, then the rest is design

The only hard requirement is that you receive at least one share of the transferee corporation as part of your payment. Everything else you take back, cash, a promissory note, or debt the corporation assumes, is non-share consideration, known as boot, and boot is where rollovers are won and lost. The elected amount can never sit below the value of the boot, so boot up to your tax cost is safe, and boot beyond it triggers gain dollar for dollar.

Used well, boot is one of the quiet advantages of section 85. Take back a promissory note equal to the tax cost of what you transferred, and the corporation can repay that note to you over the following years with no tax at all, because repayment of a debt is not income. For an owner moving assets worth far more than they cost, that note is often the only tax-free money the transaction will ever produce, so its size deserves as much attention as the election itself.

Debt counts as boot even when no note is written. If the corporation assumes the mortgage on a building you transfer, that assumption is consideration paid to you. A building carrying a large mortgage and a small tax cost is the classic trap: the assumed debt exceeds the floor, drags the elected amount up with it, and produces a taxable gain in the middle of what everyone believed was a tax-free transfer. That has to be caught in design, not discovered at filing.

The shares themselves are usually fixed-value preferred shares with a redemption value equal to the property's fair market value minus the boot. Two attributes on those shares decide what you can do later:

• ACB of the shares: roughly the elected amount minus the boot. Sell the shares one day and this is the cost you measure the gain against.
• PUC, or paid-up capital: the amount the corporation can hand back to you as a tax-free return of capital. On a rollover the Act grinds PUC down to about the elected amount minus the boot, no matter what the shares are worth on paper.

The PUC grind surprises people every time. You cannot take a note for your full tax cost and also keep high paid-up capital; the Act makes you choose one exit route for the tax-paid value, not two. And because every limit hangs on fair market value, well-drafted rollovers include a price adjustment clause, which lets the share redemption value shift if the CRA later proves the valuation wrong, instead of the difference becoming a taxable benefit.

Keep the three share numbers straight, because they do different jobs. Redemption value is what the shares are worth against the corporation, ACB is what a future sale is measured against, and PUC is what can come back out as tax-free capital. On a plain rollover at cost with no boot, redemption value is high while ACB and PUC are both low, which is exactly why the eventual exit needs planning of its own.

In practice we size the consideration in a fixed order: decide how much tax-free capital you may want out over the next few years, set the note there, never above tax cost unless a gain is intended, let any assumed debt fill part of that room, and put the balance in shares. The order matters because every dollar of boot spends the same limited room.

The traps that turn a deferral into a tax bill

Four traps cause most section 85 damage, and all four are avoidable with sequencing and honest numbers. None of them are exotic. They show up in ordinary owner-managed transactions, and especially in the most popular one, moving operating-company shares under a new holding company.

Section 84.1 is the big one. When an individual transfers shares of one corporation to another corporation they do not deal with at arm's length, the Act tests how much boot and paid-up capital comes out the other side. Take back a note supported by value that was never taxed in your hands, value sheltered by the lifetime capital gains exemption or built since incorporation for nominal cost, and section 84.1 converts the excess into a taxable dividend, with no capital gain treatment at all. This is precisely the fact pattern of a holdco insertion, which is why we treat moving opco shares into a holding company as its own exercise with its own rules.

Benefits to related shareholders are the second. Elect low while family members already hold shares of the transferee, and value quietly shifts from you to them. Where the CRA sees a benefit conferred on a related person, it can push the elected amount up and tax the difference, and a price adjustment clause only protects transactions that made a genuine attempt at fair market value in the first place.

Valuation is the third. Every limit in section 85 is measured against fair market value, and the hardest number in any owner-managed business is goodwill, the value above the identifiable assets. A defensible valuation documented at the time of the transfer is cheap insurance compared with re-fighting the numbers during a CRA review years later, after memories and markets have moved.

The taxes outside the Income Tax Act are the fourth. A section 85 election does nothing for HST or for Ontario land transfer tax. An asset transfer between entities can attract HST unless relief applies, including the joint election available when substantially all the assets of a business are sold as a going concern, and a transfer of real property can trigger land transfer tax even between companies the same family owns. Each of these needs its own analysis and, in some cases, its own election filed on its own deadline.

There is also a housekeeping trap with no section number. The rollover happens on paper, and then the books never change: the corporation records the property at one value for tax and another for accounting, the promissory note is never documented, the share register is never updated, and five years later nobody can prove what happened. A rollover is only as strong as the paper trail behind it, including the entries your bookkeeper posts the month after closing.

The T2057 election: the deadline, the contents and late filings

The election is filed on form T2057, signed by both you and the corporation, and it is due on the earliest date either party has to file an income tax return for the year of the transfer. That wording trips people constantly. If the corporation's return comes due before your personal return, the corporate deadline governs, and a transfer made late in a corporate year can leave a surprisingly short window. When a partnership is the transferor, the form is T2058 and every partner signs.

The form itself is a description of the deal: each property transferred, its fair market value, its tax cost, the elected amount, and the full consideration received, shares and boot both. Sloppy T2057s, round-number valuations, missing consideration, elected amounts sitting below a floor, are what turn routine reorganizations into CRA correspondence.

The filing mechanics are unglamorous, and they bite. The form is filed with the CRA on its own rather than inside anyone's return, one form covers one transferor and one corporation, and multiple transferors on the same transaction each sign and file their own. Keep the valuation working papers with your copy, because questions, when they come, tend to come years later.

Missing the deadline is not fatal, but it has a price. The CRA accepts an election filed up to three years late as of right, with a penalty that accrues for every month of lateness. Beyond three years, or to amend an election already filed, you need the CRA to agree that accepting it is just and equitable, which is discretionary and never guaranteed. Build the filing into the transaction calendar rather than treating it as year-end paperwork.

One more sequencing point: the legal transfer and the tax election are separate events. The lawyer papers the purchase agreement, the share issuance, the note and the corporate resolutions; the election reports the tax treatment of what that paper did. If the paper and the T2057 tell different stories, the CRA believes whichever version hurts more, so the elected-amount schedule should exist before the agreements are signed, not after.

Not every transfer needs the election, and filing one where it adds nothing is its own kind of clutter. Whether your transaction actually requires it is covered in when a section 85 election is required.

Source: CRA — Form T2057, Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation.

What changes the answer, and how a rollover actually runs

Six facts decide whether section 85 is the right tool and how the transaction should be built:

• The gap between fair market value and tax cost for each property. No accrued gain, no need for an election at all.
• How much value you want out in cash or notes, now or over the coming years, because boot room is capped at tax cost.
• Whether you are moving assets or shares. They behave differently, and shares moving to a non-arm's-length corporation bring section 84.1 into play.
• The debt sitting on the property, since assumed liabilities are boot whether or not anyone calls them that.
• Who else holds or will hold shares of the transferee, which raises the benefit rules and, for family members, the tax-on-split-income regime.
• The filing calendar: the year-ends of both parties set the T2057 deadline, and any HST or land transfer tax filings run on their own clocks.

Sometimes the answer is a different section entirely. Share exchanges inside the same corporation can often run under section 86 or section 51 with no election form at all, which is common in estate freezes, and occasionally the right answer is to do nothing, because the misfit is cosmetic and the accrued gains are small. The point of the analysis is to pick the cheapest tool that reaches the goal, not to file the most impressive form.

Run properly, a section 85 rollover is a defined-scope project with a beginning and an end. Ours all follow the same arc: confirm what the transfer is meant to achieve, value the property, design the consideration and elected amounts on a schedule everyone can read, coordinate the corporate lawyer's paperwork so it matches, file the T2057 on time, and hand the bookkeeper entries that reflect the plan. That is the shape of our Strategic Projects engagement: a written scope and fee, agreed after a free 15-minute discovery call, before any work starts.

If you are comparing firms, the useful test is specific. A section 85 rollover CPA in Ontario should be able to show you the elected-amount schedule before anything is signed, explain in plain words where your boot room ends, flag section 84.1 without being asked, and tell you exactly which parts belong to the lawyer. That conversation costs nothing, and it usually settles whether the rollover is worth doing at all.