The strict deadline to file a Form T2057 for a Section 85 rollover is the earliest tax return due date of either the transferor or the transferee corporation. Filing late can trigger a Canada Revenue Agency (CRA) penalty of $100 CAD per month, up to a maximum of $3,600 CAD within the first three years, or an absolute limit of $8,000 CAD if filed even later under subsection 85(7.1).
When a Canadian business owner wants to transfer personally held assets (like real estate, equipment, or shares) into a corporation, doing so at fair market value can trigger a massive capital gains tax bill. To solve this, the Income Tax Act provides a mechanism known as a Section 85 rollover. 💰 This allows you to transfer eligible property to a Canadian corporation on a tax-deferred basis, effectively kicking the tax liability down the road.
Whether you are a real estate investor in Calgary or an expanding tech founder in Toronto, executing a Section 85 rollover is a highly complex corporate manoeuvre. The most critical aspect of this strategy is adhering to the Canada Revenue Agency (CRA) filing deadlines. 📊 Missing the deadline for the joint election form (T2057, or T2058 if transferring from a partnership) can completely invalidate the tax deferral or result in extremely steep late-filing penalties.
Step-by-Step Process in Canada for a Section 85 Rollover
Executing a tax-deferred rollover requires precise coordination between your corporate lawyer and your Chartered Professional Accountant (CPA). Most business owners in this province rely entirely on their professional advisors to handle the heavy lifting. 📋 Here is the standard process for filing a successful T2057 election.
Step 1: Valuing the Transferred Assets
Before any forms are signed, you must determine both the Adjusted Cost Base (ACB) and the current Fair Market Value (FMV) of the property being transferred. If you are rolling over real estate, you generally need a formal appraisal. 🏢 The CRA requires accurate FMV figures to ensure the shares the corporation issues in return are properly valued.
Step 2: Determining the Elected Amount
The “Elected Amount” is the magic number that prevents the immediate tax hit. Your accountant will choose a value between the tax cost (ACB) and the FMV. 📝 By electing the amount equal to the ACB, no capital gain is realized on the transfer. The corporation simply takes over the asset at that original tax cost.
Step 3: Completing Form T2057 or T2058
Both the transferor (the party transferring the asset) and the transferee (the corporation receiving it) must jointly complete the appropriate election form. For individuals, corporations, or trusts, this is CRA Form T2057. If the transferor is a partnership, Form T2058 (Election on Disposition of Property by a Partnership to a Taxable Canadian Corporation) must be used instead. The form details the property, the agreed-upon Elected Amount, and the exact shares or consideration given in return. 📄
Step 4: Identifying the Strict Filing Deadline
The deadline is not a fixed date on the calendar. It is the earliest day on or before which either the transferor or the transferee is required to file their income tax return for the taxation year in which the transfer occurred. If an individual transfers an asset in September, their personal tax return is due April 30 of the following year. If the corporation’s year-end is December 31, its T2 return is due June 30. The election form must be filed by April 30, as it is the earlier date.
Step 5: Submitting to the CRA Tax Centre
The T2057 or T2058 form must be mailed or submitted electronically through the CRA’s “My Business Account” portal. It is filed separately from your actual income tax returns. ⚠ Always retain a confirmation of receipt, as lost forms can lead to severe audit complications down the road.
How Much Does it Cost in Canada?
A Section 85 rollover is one of the most sophisticated tools in Canadian tax planning, and the professional fees reflect that complexity. Furthermore, if you miss the deadline, the CRA levies aggressive financial penalties. 💸 Here is a breakdown of the standard costs in CAD:
- CPA / Accounting Fees: Calculating the elected amounts and preparing the election form (T2057 or T2058) typically costs between $2,000 and $5,000 CAD, depending on the number of assets.
- Corporate Lawyer Fees: A lawyer must draft the share issuance resolutions, promissory notes, and legal transfer agreements. Expect to pay $1,500 to $3,500 CAD for the legal legwork.
- CRA Late Filing Penalty: If you miss the initial deadline, the CRA allows a 3-year grace period to file late. The monthly penalty is the lesser of 0.25% of the deferred capital gain or $100 CAD, up to a maximum of $3,600 CAD for this three-year period. If filed even later under subsection 85(7.1) with Ministerial approval, the absolute maximum penalty caps at $8,000 CAD.
While spending $5,000 CAD on professional fees might seem high, it is a tiny fraction of the cost compared to triggering a $200,000 CAD capital gains tax bill immediately. Proper planning is always cheaper than paying unnecessary taxes. 💰
How Long Does the Process Take?
Planning a Section 85 rollover should never be a last-minute rush. Getting formal appraisals for real estate or business valuations for private shares can take 4 to 8 weeks. ⋱ Once the valuations are complete, drafting the legal agreements and tax forms usually takes another 2 to 4 weeks.
As for the CRA, once the election form is submitted, they do not issue an immediate “approval.” They simply file it away on your account. ⏳ It may take 1 to 2 years before the CRA reviews the transaction during a standard corporate audit to verify that the Fair Market Value and Elected Amounts were reasonable and correct.
T2057 Late-Filing Penalties
| Filing Status | CRA Penalty Formula | Maximum Possible Penalty |
|---|---|---|
| Filed On Time | $0 CAD (No penalty applies). | $0 CAD |
| Up to 3 Years Late | Lesser of: (0.25% of deferred gain x months late) OR ($100 x months late). | $3,600 CAD |
| More than 3 Years Late | Accepted only if approved by the Minister under subsection 85(7.1). | $8,000 CAD (or Total Tax on Capital Gain if denied) |
Frequently Asked Questions (FAQ)
What happens if the CRA disagrees with my valuation?
If the CRA determines that the Fair Market Value you claimed was significantly off, they can reassess the transaction. To protect yourself, lawyers always include a “Price Adjustment Clause” in the legal agreements, which retroactively corrects the share values if the CRA disputes the appraisal.
Do I have to file the T2057 with my annual tax return?
No. Form T2057 (or Form T2058 if the transferor is a partnership) must be filed separately from your annual tax returns. You send it directly to your designated CRA tax centre or submit it via the CRA My Business Account portal.
Can I roll over personal use property like my house?
Generally, you cannot roll over real property that is inventory, and there are complex rules regarding personal use property. It is rarely beneficial to roll over a principal residence due to the Principal Residence Exemption, which is far more tax-efficient.
Does the corporation have to issue shares to me?
Yes. A fundamental requirement of a Section 85 rollover is that the transferor must receive at least one share of the capital stock of the transferee corporation as part of the consideration for the transferred asset.
Can a non-resident of Canada use a Section 85 rollover?
Yes, non-residents of Canada can use a Section 85 rollover, but they face strict limitations on the types of “eligible property” they can transfer. For example, a non-resident cannot transfer Canadian real property unless it is capital property used in a business carried on in Canada. Additionally, if the transferor is a partnership, it can still use the rollover for most assets; however, to roll over capital real property (or an interest/option therein), it must qualify as a Canadian partnership where all partners are Canadian residents.
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