Completing a Section 85 tax-deferred rollover in Ontario generally takes 2 to 4 months. To avoid severe Canada Revenue Agency (CRA) late penalties of up to $8,000 CAD, the joint election form (T2057) must be filed on or before the earliest tax filing deadline of either the transferor or the receiving corporation.
When an Ontario entrepreneur decides to transition their successful sole proprietorship into a corporation, or when an individual wishes to transfer valuable real estate or intellectual property into their holding company, they face a massive tax hurdle. Under standard rules, transferring an asset to a corporation is treated as selling it at Fair Market Value (FMV), triggering immediate and often crippling capital gains taxes.
Fortunately, the Income Tax Act provides a powerful tool: the Section 85 Rollover. 📈 This mechanism allows business owners in Toronto, Ottawa, and across Ontario to transfer eligible property into a Canadian corporation on a tax-deferred basis. By exchanging the assets for corporate shares, you defer the tax liability until you eventually sell the shares. However, this is a highly complex procedure requiring seamless coordination between your corporate lawyer and your Chartered Professional Accountant (CPA).
Step-by-Step Process for a Section 85 Rollover in Ontario
Executing a Section 85 rollover is not a DIY project. A single mistake in the valuation or the legal drafting can void the tax deferral, resulting in massive CRA audits and penalties.
Step 1: Professional Valuation of Assets
Before any transfer occurs, your CPA or an independent valuator must determine the precise Fair Market Value of the assets being transferred. Whether it is heavy machinery in Hamilton, commercial real estate, or client goodwill, the CRA demands accurate valuations. If you arbitrarily guess the value, the CRA may reassess the transfer and penalize you.
Step 2: Incorporating the Ontario Company
If the receiving corporation does not already exist, your business lawyer must incorporate it. Crucially, the Articles of Incorporation must be specifically tailored to include the exact classes of shares required for the rollover (usually special voting or non-voting preferred shares with specific redemption values that match the transferred assets).
Step 3: Drafting the Asset Transfer Agreement
Your law firm will draft a comprehensive Asset Purchase Agreement. This legal document details exactly which assets are moving into the corporation and outlines the “consideration” (the exact number and type of shares, plus any assumed debt) the corporation will give you in return. It will also include a critical “price adjustment clause” to protect you if the CRA disputes the initial valuation.
Step 4: Issuing Shares and Updating the Minute Book
Once the agreement is signed, the corporate lawyer will formally issue the preferred shares to you from the corporation. They will draft the corporate resolutions, issue the share certificates, and update the corporate minute book to legally record the transaction under the Ontario Business Corporations Act.
Step 5: Filing Form T2057 with the CRA
The final and most time-sensitive step is filing the joint election form (T2057) with the CRA. Your CPA will typically prepare this form, declaring the “elected amount” for the transfer. Both you (the transferor) and a director of the corporation (often also you) must sign and submit this form before the strict statutory deadline.
How Much Does it Cost in Ontario?
A Section 85 rollover requires specialized tax and legal expertise. While it requires an upfront investment, it often saves tens or hundreds of thousands of dollars in capital gains tax.
- CPA / Tax Advisor Fees: Preparing the valuations, determining the elected amounts, and filing the T2057 usually costs between $3,000 and $6,000 CAD.
- Corporate Lawyer Fees: Drafting the asset transfer agreement, structuring the specialized share classes, and completing the corporate resolutions generally ranges from $2,500 to $5,000 CAD.
- CRA Late Penalties: If you miss the filing deadline, the CRA charges a penalty of 1/4 of 1% of the deferred tax per month, up to a maximum of $8,000 CAD.
How Long Does the Process Take?
Because multiple professionals must coordinate their efforts, you should not leave a rollover to the last minute. 🕘 Here is the general timeline:
| Phase of Rollover | Estimated Timeline |
|---|---|
| Asset Valuation by CPA | 2 to 4 weeks |
| Legal Drafting & Share Issuance | 2 to 3 weeks |
| Filing the T2057 Election Form | Must be filed by the earliest tax return deadline of either party. |
Frequently Asked Questions (FAQ)
What happens if I miss the T2057 CRA deadline?
The CRA allows late filings up to three years after the original deadline, but you will be subject to heavy late filing penalties. If you attempt to file after the three-year grace period, the CRA may deny the rollover entirely, triggering full capital gains taxes.
Can I transfer cash using a Section 85 rollover?
No. Cash does not trigger a capital gain and cannot be rolled over. Section 85 is strictly for eligible property like real estate, equipment, inventory, and intangible assets like business goodwill.
Do I really need a lawyer if I have a good accountant?
Yes. While your CPA calculates the tax figures, only a corporate lawyer can legally draft the Asset Purchase Agreement, amend the Articles of Incorporation, and legally issue the required shares. Without proper legal documentation, the CRA can invalidate the entire rollover.
What is a price adjustment clause?
If the CRA audits your rollover and determines your valuation was too low, they can assess harsh penalties. A price adjustment clause is a legal safety net drafted by your lawyer that automatically adjusts the value of the shares issued to match the CRA’s new valuation, helping prevent negative tax consequences.
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