First, how bad is it? A quick triage
The severity of a missed Section 85 deadline depends on exactly one thing: how much time has passed since the election was actually due. Everything else, including the penalty and the paperwork, follows from that date. Here is the whole landscape at a glance.
| Where you are | What the CRA does | What it costs |
|---|---|---|
| Filed on time | Processes the T2057 as filed | Nothing beyond the professional work |
| Late, within 3 years of the deadline | Must accept the election once the penalty is paid | A monthly penalty, capped at $8,000 |
| More than 3 years late, or amending an election | May accept it, at its discretion, where just and equitable | The penalty, plus a submission that has to earn the discretion |
| Never filed, and no longer fixable | Treats the transfer as a sale at fair market value | Tax on the full accrued gain, sometimes with double-tax exposure |
Most owners who search this question are in the second row, and the second row is a solved problem: file the form, pay the penalty, keep the deferral. The work is in doing it precisely, because a late election gets read more carefully than an on-time one.
Two things lateness does not do. It does not unwind the transfer: the property moved when the documents said it moved, and the corporation owns it either way. And it does not, by itself, invite reassessment of everything else: a late T2057 with clean numbers is a penalty problem, not an audit problem. What turns it into the second thing is filing numbers that cannot be supported, which is why the fix gets assembled with the same care as an on-time election.
Triage starts with the deadline itself. The T2057 was due on the earliest date that any party to the election had to file a tax return for the year of the transfer. That word earliest is why this deadline gets missed so often. If you transferred property personally to your corporation, the relevant dates are your personal filing deadline and the corporation's T2 deadline, six months after its year-end, and whichever lands first governs. A corporation with a year-end shortly after the transfer can pull the deadline to a date months before anyone was thinking about tax filings. Two corporations with different year-ends create the same trap in both directions. So before anything else, we establish the true deadline, because occasionally the election believed to be late is not late at all, and just as often it is later than the client thought.
The three-year window: late filing as of right, at a price
Within three years of the deadline, the CRA has no discretion to refuse: a late Section 85 election is accepted once it is filed with an estimate of the penalty. The penalty accrues for each month or part-month of lateness. It is calculated as the lesser of a quarter of one percent of the deferred amount, meaning the excess of the property's fair market value over the elected amount, for each month late, and $100 per month, and it tops out at $8,000. Two practical consequences follow. First, small deferrals generate small penalties, so a modest rollover filed a few months late often costs less than the anxiety suggests. Second, the meter runs monthly, which means the worst thing you can do right now is wait. Filing this month is cheaper than filing next month, every time.
The two branches of that formula matter in opposite directions. On a small deferral, the quarter-percent branch governs and the penalty is genuinely minor. On a large deferral, the $100-per-month branch takes over quickly and the $8,000 ceiling does the rest, which means even a seven-figure deferred gain filed years late cannot generate a late-filing penalty beyond $8,000. What the ceiling does not cap is everything downstream of never filing, so the penalty is best read as the price of keeping the deferral, and it is almost always a price worth paying promptly.
The filing itself is the complete package, not a bare form: the T2057 with every schedule of transferred property, signatures from both the transferor and the corporation, the penalty estimate, and a payment or instruction covering it. If the transfer involved a partnership, the form is the T2058 and every partner's authorization enters the picture, which takes longer to assemble than owners expect. The package goes in with a covering letter that states the true deadline, the months late and the penalty computation, so the file explains itself instead of inviting questions.
Beyond three years: earning the CRA's discretion
After three years, or where an already-filed election needs amending, acceptance is no longer automatic: the CRA may accept the election only where, in its opinion, doing so is just and equitable. That standard is real, not a rubber stamp, and submissions succeed on evidence. The strongest cases show that a rollover was genuinely intended at the time of the transfer and that the lateness came from circumstances like reliance on an advisor who failed to file, error despite reasonable care, or events outside anyone's control. What sinks a request is the appearance of hindsight, meaning a taxpayer who saw how the year turned out and now wants retroactive tax treatment that was never actually agreed.
This is where your transaction documents stop being formalities and start being evidence. A transfer agreement that recites the parties' intention to elect under section 85, directors' resolutions authorizing consideration shares, a lawyer's reporting letter describing the rollover, accounting entries recording the property at its elected amount: each of these shows the intention existed before the deadline passed. We build discretionary submissions around exactly this record, and where the record is thin, we say so and price the risk honestly. A request like this is a professional submission, not a form: it cites the provision, walks the chronology, encloses the evidence and computes the penalty as if the election were accepted, because the easier a file is to say yes to, the more often yes is the answer.
The elected amount still has to hold up
A late election is judged on the same substance as a timely one, so the numbers need the same support they always did. The elected amount must sit inside the permitted band: no less than the non-share consideration taken back, no more than fair market value, with tax cost as the usual target. That means the late filing package needs the adjusted cost base support, the valuation evidence and the liability schedule that should have been assembled the first time; our checklist of what a rollover file needs applies in full. Lateness also does not suspend the other mechanics of section 85, so consideration shares must genuinely have been issued and the paid-up capital adjustments still apply. If the original transaction was documented as a simple sale with no share consideration at all, the problem is bigger than a late form, and the honest advice may be that no valid election is available; when a Section 85 election is required, and possible, is its own question.
What happens if it never gets fixed
Without a valid election, the transfer is taxed as a disposition at fair market value on the day it happened. The accrued gain on the property becomes taxable to the transferor for that year, with interest running from that year's balance-due date, and for depreciable property the recapture arrives as ordinary income on top. Worse, the corporation now holds the property at a stepped-up cost while you may have paid tax without receiving cash to pay it with, and if the consideration was mispriced, shareholder benefit rules can add a second layer of tax. That combination, tax on paper gains plus possible double tax, is why we treat an unfixed missing election as urgent even when the three-year window makes the fix routine. Interest also compounds daily on balances that old, so the cost of ignoring an unfixable file grows faster than the cost of confronting it.
What changes the answer, and what we do first
Five facts determine how your situation resolves:
- The true deadline, set by the earliest filing date of any party to the election.
- How many months have run since, because the penalty accrues monthly and the three-year cliff is absolute.
- The size of the deferred gain, which drives the penalty within its caps and the stakes if the fix fails.
- What the transaction documents say, since they are the evidence of intention for any discretionary request.
- Whether share consideration was actually issued, without which there may be nothing to elect on.
Our first week on a file like this looks the same every time: confirm the real deadline, assemble the documents, test that the elected amounts still hold, compute the penalty, and file. As a corporate reorganization and tax planning CPA firm in Ontario, we handle the submission and any CRA correspondence that follows through CRA Audit & Dispute Support, and if the underlying reorganization was never properly papered, our Corporate Restructuring work rebuilds it properly. The broader context on how these elections fit into a reorganization is in Section 85 rollovers, explained for business owners. A free 15-minute discovery call is enough for us to tell you which row of the table you are in.
