Under the Income Tax Act (Canada), a Section 85 rollover allows you to transfer personal assets into a corporation on a tax-deferred basis. In an Ontario divorce, this corporate tax planning directly impacts your Net Family Property (NFP) calculation, but your ex-spouse generally cannot reverse a historical freeze without proving fraud.
Navigating a separation when you or your spouse owns a business can feel overwhelming. When a business owner in Toronto or Ottawa engages in corporate tax planning, they often use a Section 85 rollover. This strategy allows them to transfer personal assets, like real estate or an existing sole proprietorship, into a corporation without triggering immediate capital gains tax. While this is an excellent tool for wealth management, it creates layers of complexity when calculating equalization during a divorce.
Generally, family law in Ontario requires spouses to share the financial growth that occurred during the marriage. 📈 If a Section 85 rollover or an estate freeze was executed years before the separation, the value of those corporate shares must be accurately assessed on the Valuation Date (often called the V-Date). Whether you live in Mississauga, London, or anywhere else in Ontario, understanding how these historical tax decisions impact your current financial reality is critical for a fair settlement.
How a Section 85 Rollover Impacts Equalization in Ontario
In Ontario, the equalization process compares the net worth of both spouses at the date of marriage and the date of separation. When a Section 85 rollover is involved, the personal assets are now locked inside a corporation, usually in exchange for preferred shares or a promissory note. This means the court and your family lawyer must look at the corporate structure to determine your true net worth.
Step 1: Valuing the Preferred Shares and Promissory Notes
When you transfer assets into a corporation under Section 85, you typically receive preferred shares fixed at the fair market value of the assets at the time of the transfer. 💰 For equalization purposes, a Chartered Business Valuator (CBV) will assess these fixed-value shares. Because their value does not generally grow over time, the owner’s net worth tied to these specific shares remains relatively stable, which can protect pre-marriage wealth if the rollover occurred before the wedding.
Step 2: Assessing the Growth of Common Shares
After a freeze and rollover, new common shares are usually issued to the business owner, their spouse, or a family trust. These common shares capture all the future growth of the company. If these shares grew in value during the marriage, that growth is subject to division under Ontario’s Family Law Act. A common dispute in Toronto family courts revolves around accurately valuing this subsequent growth.
Step 3: Challenging an Old Estate Freeze
Sometimes, an ex-spouse may feel that a historical Section 85 rollover was done specifically to hide assets or minimize equalization. 🔍 Generally, the Superior Court of Justice will respect valid corporate tax planning that was executed for legitimate business reasons. It is very difficult to reverse or challenge a legally binding Section 85 rollover unless there is clear evidence of fraud or a deliberate attempt to defeat a spouse’s claim under family law.
How Much Does the Valuation Process Cost in Ontario?
Determining the value of a corporation with a complex tax structure is not something you can do on your own. You will generally need to hire specialized professionals to ensure the Net Family Property is calculated correctly.
- Chartered Business Valuator (CBV): Typically costs between $5,000 CAD and $15,000 CAD, depending on the complexity of the corporate structure and the historical tax rollovers.
- Corporate Tax Lawyer Consultation: Hourly rates in Ontario usually range from $350 to $800 CAD.
- Court Filing Fees: If you must apply to the Superior Court of Justice, the basic Application fee is $214 CAD (or $224 CAD if the application includes a divorce claim), and placing the action on the list for hearing is an additional $445 CAD.
How Long Does the Process Take?
Resolving a high-net-worth divorce involving corporate assets requires patience. ⏳ In most cases across Ontario, a standard business valuation takes between 2 to 4 months to complete, provided both parties are fully transparent with their financial disclosure. If a spouse refuses to provide the necessary corporate tax returns, ledgers, or historical Section 85 election forms (like the CRA T2057 form), the process can drag on for 1 to 3 years through the court system.
| Asset Type | Impact on Equalization in Ontario | Growth Potential |
|---|---|---|
| Fixed Preferred Shares | Value is locked at the time of the Section 85 rollover. Often used as a date-of-marriage deduction. | Zero growth. Value remains static. |
| Common Shares | Value fluctuates. Any increase during the marriage is shared with the ex-spouse. | High growth. Captures all future business success. |
| Promissory Notes | Treated as a straightforward debt owed by the corporation to the individual. | Usually includes a predetermined interest rate. |
Frequently Asked Questions (FAQ)
Can my ex-spouse take half of my corporation?
In Ontario, an ex-spouse does not automatically get half of your shares. Instead, the value of the shares’ growth during the marriage is calculated into your Net Family Property, and you may owe an equalization payment in cash.
What happens if the CRA audits the Section 85 rollover during our divorce?
If the Canada Revenue Agency (CRA) determines the rollover was invalid, it could trigger massive retroactive capital gains taxes. This notional tax liability would significantly decrease the value of the corporation for equalization purposes.
Do we have to use the same business valuator?
Most separating couples in Ontario opt for a joint retainer, meaning they hire one neutral Chartered Business Valuator to save costs. However, if there is high conflict, each spouse can hire their own expert.
Does a Section 85 rollover affect spousal support?
The rollover itself is an asset transfer, not income. However, the income generated by the corporation after the rollover is considered when calculating spousal support under the Spousal Support Advisory Guidelines (SSAG).
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