Generally, a Section 85 Rollover in Canada allows you to transfer personal assets, like real estate or intellectual property, into your corporation without paying immediate capital gains tax. By receiving corporate shares instead of cash, you legally defer the tax bill. Most business owners choose to hire a specialized accountant and corporate lawyer to file the required paperwork with the Canada Revenue Agency (CRA).
As your business grows, you might realize that owning highly valuable assets in your personal name is legally risky and financially inefficient. Whether you developed expensive software in Toronto, Ontario, or own a commercial workshop in Calgary, Alberta, moving these items into your company usually triggers a massive tax bill. 😮 This is exactly where a Section 85 Rollover Canada becomes an incredibly powerful financial tool, allowing local entrepreneurs to protect their assets without draining their bank accounts.
Normally, if you simply give a building or a patent to your business, the Canada Revenue Agency (CRA) treats the transaction as if you sold it to a stranger at its current highest price. This “fake sale” forces you to pay heavy capital gains tax, even though you did not actually receive a single dollar of cash from the company. 💸 Generally, utilizing Section 85 of the Income Tax Act allows you to hit the pause button on those taxes, legally transferring the property completely tax-free in exchange for issuing new shares in your own company.
Step-by-Step Process for a Section 85 Rollover in Canada
Because federal tax laws apply universally, the steps for this complex corporate rollover are the exact same whether you operate your business in Halifax, Nova Scotia, or Vancouver, British Columbia. It is important to remember that this is an advanced accounting procedure, not a simple form you can just fill out on a Sunday afternoon. 📂 Here is the general path most financial professionals follow to ensure your personal assets are safely protected without triggering CRA penalties as of March 2026.
Step 1: Identifying Eligible Property
The very first step is ensuring the item you want to transfer actually qualifies under Canadian tax law. You cannot use this protective rule for absolutely everything; for example, transferring your personal family home or a private vehicle usually does not qualify. 🏠 Generally, eligible property includes active business inventory, commercial real estate, farming land, and critical intellectual property like patents, trademarks, or custom software code.
Step 2: Determining Fair Market Value (FMV) and Adjusted Cost Base (ACB)
Before moving any asset into the corporation, you must figure out exactly what it is worth today and what you originally paid for it. Your original purchase price is called the Adjusted Cost Base (ACB), and the price it could logically sell for today is the Fair Market Value (FMV). 📈 Most applicants choose to hire an independent appraiser for large assets like buildings, because if the CRA disagrees with your estimated value later, you could face severe personal tax penalties.
Step 3: Transferring the Asset for Corporate Shares
To successfully defer your capital gains taxes, your corporation cannot just write you a giant cheque for the asset. Instead, the company must legally issue you new corporate shares that are equal in value to the property you are giving up. 💳 You are allowed to take a small amount of cash or have the company assume your existing mortgage (often called “boot”), but this non-share payment absolutely cannot exceed the original ACB of the property, otherwise, you will immediately trigger the exact taxes you are trying to avoid.
Step 4: Filing Form T2057 with the CRA
The final and most critical step is officially declaring the transaction to the federal government. You and your corporation must jointly sign and submit a highly specific tax document called Form T2057 (Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation). 📝 This form clearly states the “elected amount,” which officially locks in your tax deferral and keeps the CRA fully informed of your legal corporate reorganization.
| Transfer Method | Immediate Capital Gains Tax | What You Receive from the Company |
|---|---|---|
| Regular Sale to Corporation | Very High (Treated as sold at current Fair Market Value). | Usually Cash or a Promissory Note. |
| Section 85 Rollover | Zero (Taxes are fully and legally deferred). | Corporate Shares (Plus strictly limited cash/debt). |
How Much Does it Cost?
A Section 85 rollover is a highly complex legal and accounting maneuver, meaning it requires a significant upfront financial investment to execute correctly. However, paying these professional fees is almost always much cheaper than paying a massive, unexpected tax bill to the government. 💸 Here are the typical expenses you can expect to pay when reorganizing your Canadian business structure:
- $2,500 to $6,000+: The average accounting fees for a Certified Professional Accountant (CPA) to carefully calculate your ACB, FMV, and correctly prepare the complex T2057 election form.
- $1,500 to $4,000+: The typical legal fees for a corporate lawyer to officially draft the asset transfer agreements, update the minute book, and legally issue the new corporate shares to you.
- $500 to $3,000+: The estimated cost of hiring a professional appraiser to determine the precise, unarguable Fair Market Value of commercial real estate or specialized intellectual property.
- Late Penalties: If you miss the strict CRA filing deadline for the election form, you can be heavily charged a penalty of $100 per month, up to a maximum limit of $8,000.
How Long Does the Process Take?
Because this corporate process involves professional business valuations, careful legal drafting, and strict government filing deadlines, it is absolutely not a quick fix. You must plan several months ahead if you want the tax deferral to properly apply to your current financial year. 🕕 Here are the realistic timelines associated with completing a Section 85 rollover safely:
- 2 to 4 Weeks: The initial time usually required for an independent appraiser to inspect and officially value your commercial real estate or intellectual property.
- 3 to 6 Weeks: The average time for your corporate lawyer and accountant to collaborate, draft the share transfer documents, and accurately prepare the tax election without rushing.
- CRA Deadline: The final T2057 form must be filed on or before the earliest due date of the tax return for either you (the individual taxpayer) or your corporation for the exact tax year the transfer occurred.
Frequently Asked Questions (FAQ)
Does a Section 85 Rollover mean I never have to pay tax?
No. A Section 85 rollover only defers the tax; it does not eliminate it forever. You are essentially passing your original low purchase price onto your newly issued corporate shares. When you eventually sell those corporate shares in the future, or if the corporation sells the specific asset to a third party later, the capital gains tax will finally become due.
What happens if I make a mistake on the Fair Market Value?
If the CRA audits your business and decides your estimated Fair Market Value was incorrectly low or high, it can trigger massive, unexpected tax penalties. To prevent this disaster, corporate lawyers and accountants generally include a special “Price Adjustment Clause” in the legal contract. This helpful clause legally allows the final share price to be corrected retroactively without penalty if the government successfully challenges your initial valuation.
Can I use this tax rollover to transfer my personal house?
Generally, no. A Section 85 rollover is specifically designed for business and investment assets. Furthermore, your primary family home is usually already protected from capital gains tax by Canada’s Principal Residence Exemption. Moving a personal home into a corporation is usually a terrible financial idea that strips away your natural, built-in tax advantages.
What exactly is “boot” in a rollover transaction?
“Boot” is simply a professional accounting term for the non-share items you receive from the corporation in exchange for giving them your asset. This usually means receiving direct cash, or having the corporation take over your existing bank mortgage on a building. To keep the transfer completely tax-free, the total value of this “boot” cannot be higher than your original purchase price (Adjusted Cost Base) of the asset.
Can I transfer my assets to a corporation owned by someone else?
Generally, the receiving company must be defined as a “taxable Canadian corporation.” While you do not have to be the sole, 100% owner of the company, you absolutely must receive actual shares in that specific corporation as part of the legal payment. Most entrepreneurs use this rule to safely move assets into a holding company they already control, or when formally merging their business with new partners.
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