A Section 85 rollover in Canada generally takes 2 to 6 months to complete properly. This timeline includes working with accountants to determine the fair market value of your assets, having a lawyer draft the necessary corporate resolutions, and filing the mandatory T2057 form with the Canada Revenue Agency (CRA).
As a sole proprietor or partnership grows in Canada, transferring the business assets into a new corporation is a natural next step. 💼 However, if you simply “sell” your highly valued equipment, real estate, or intellectual property to your new company, the Canada Revenue Agency (CRA) will trigger a massive capital gains tax bill. To avoid this, Canadian tax law offers a brilliant solution known as a Section 85 rollover.
Under Section 85 of the Income Tax Act, you can transfer your personal or business assets into a Canadian corporation on a tax-deferred basis. In exchange for the assets, the corporation issues you shares. While the concept sounds simple, the actual execution is highly complex. Whether your business is in Vancouver, Calgary, or Toronto, failing to meet the strict legal and accounting requirements can invalidate the rollover, leaving you with an unexpected and devastating tax reassessment.
Step-by-Step Process for a Section 85 Rollover in Canada
Executing a Section 85 rollover is not a do-it-yourself project. 📈 It requires a coordinated effort between a tax accountant and a corporate lawyer to ensure every document is perfectly aligned.
Step 1: Consult a Tax Professional and Corporate Lawyer
Your first step is to sit down with a tax accountant and a lawyer to map out the strategy. They will determine if a Section 85 rollover is actually beneficial for your specific situation. The lawyer will need to incorporate your new company (if you have not already) and ensure its share structure is designed to properly receive the rollover assets.
Step 2: Determine the Fair Market Value (FMV) of the Assets
This is often the longest part of the process. 💰 You cannot simply guess what your business is worth. Your accountant or an independent valuator must calculate the exact Fair Market Value (FMV) and the Adjusted Cost Base (ACB) of everything you are transferring, from physical machinery to intangible goodwill. The CRA routinely audits these valuations, so they must be highly accurate.
Step 3: Draft the Asset Purchase Agreement
Once the numbers are finalized, your corporate lawyer will draft a comprehensive Asset Purchase Agreement. This legal contract details exactly which assets are being transferred from you personally to the corporation. It will also specify the exact number and class of shares the corporation will issue to you as payment.
Step 4: Prepare Corporate Resolutions and Issue Shares
The corporation must formally agree to accept the assets. 📄 Your lawyer will draft directors’ resolutions and shareholders’ resolutions approving the transaction. They will then update the corporate minute book, issue the physical or digital share certificates to you, and record the transaction in the corporate ledgers.
Step 5: File the T2057 Form with the CRA
The final and most critical step is filing the joint election form (T2057) with the CRA. This form officially notifies the government that you are electing to use the Section 85 rollover rules. It must be signed by both the transferor (you) and the transferee (your corporation) and filed on time to avoid severe late penalties.
How Much Does it Cost in Canada?
A Section 85 rollover involves high-level accounting and legal expertise. Here are the estimated professional fees in Canadian dollars (CAD):
| Service / Professional | Estimated Cost (CAD) | Details |
|---|---|---|
| Corporate Lawyer Retainer | $2,500 – $5,000+ | Legal fees to draft the purchase agreements, resolutions, and update the minute book. |
| Accounting / Valuation Fees | $3,000 – $10,000+ | Depends on how difficult it is to value your business goodwill and physical assets. |
| Incorporation Fees | $1,200 – $2,000 | If you need to set up a new provincial or federal corporation to receive the assets. |
| CRA Late Filing Penalty | Up to $8,000 | If you file the T2057 late, the CRA charges a penalty based on the time delayed. |
How Long Does the Process Take?
From the initial consultation to the final filing, a standard Section 85 rollover usually takes 2 to 6 months. 🕐 The biggest delay is typically waiting for the accountants to finish the formal valuation of your business assets. The legal drafting takes about 2 to 3 weeks once the numbers are ready. Crucially, the T2057 form must be filed with the CRA on or before the earliest tax filing deadline for either the person transferring the assets or the corporation receiving them.
Frequently Asked Questions (FAQ)
What happens if I forget to file the T2057 form?
If you fail to file the T2057 form on time, the CRA will assume you sold the assets at their Fair Market Value and tax you on the capital gains. You can file late, but the CRA applies harsh penalties of up to $8,000 CAD.
Can I roll over real estate into a corporation?
Yes, real estate can be transferred using Section 85 to defer capital gains. However, this federal tax rule does not exempt you from paying provincial Land Transfer Tax, which can be a massive extra cost in provinces like Ontario or British Columbia.
Can I roll over assets to my spouse’s corporation?
Section 85 requires the transferor to take back shares in the corporation receiving the assets. If you transfer assets to a company solely owned by your spouse, you will still need to receive shares, which introduces complex income-splitting rules.
Does a rollover trigger GST/HST?
Usually, no. If you are rolling over substantially all of the assets of a business to a corporation to carry on that same business, you can file a separate joint election (Form GST44) with the CRA to have the transfer exempt from GST/HST.
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