Transferring personal business assets or a sole proprietorship to a corporation usually triggers a massive capital gains tax. A Section 85 rollover allows business owners in Ontario to defer this tax by exchanging assets for corporate shares, which is vital for long-term estate planning.
When you spend decades building a successful sole proprietorship or accumulating valuable real estate in Ontario, planning for the future becomes critical. Whether your business operates in downtown Toronto, a busy plaza in Mississauga, or a farm near London, simply transferring these assets to the next generation can trigger a devastating tax bill. 💸 Under the rules of the Canada Revenue Agency (CRA), giving away or moving assets into a corporation is treated as if you sold them at their Fair Market Value, forcing you to pay immediate capital gains tax.
This is where a Section 85 rollover under the federal Income Tax Act becomes a powerful tool for your Ontario estate plan. It allows you to legally “roll over” your highly appreciated personal assets into an Ontario or federal corporation on a tax-deferred basis. 📝 By receiving corporate shares instead of cash, you postpone the tax liability, protect the wealth you have built, and make it much easier to freeze your estate’s value or pass shares to your heirs. Generally, successfully executing this strategy requires meticulous coordination between your accountant and a local law firm.
Step-by-Step Process for a Section 85 Rollover in Ontario
Executing a tax-deferred rollover is highly technical and requires strict adherence to corporate and tax laws in Canada. While the principles apply universally across the province, the exact documents must be drafted perfectly. 📋
Step 1: Determine the Fair Market Value (FMV) of Assets
Before any transfer can happen, you must know exactly what your assets are worth today. You will usually need to hire a professional valuator to assess your sole proprietorship’s goodwill, equipment, or real estate. 💰 The CRA heavily scrutinizes these valuations; if you guess the value and are wrong, you could face severe tax penalties and double taxation.
Step 2: Incorporate an Ontario or Federal Company
If you do not already have a corporation, your lawyer will need to create one for you. You can choose to register provincially in Ontario or federally, but the corporation must be considered a taxable Canadian corporation. 💼 Your legal counsel will ensure the articles of incorporation are structured with the specific classes of shares needed for the rollover (usually preferred shares that carry a fixed value equal to the assets).
Step 3: Draft the Asset Transfer Agreement
Next, your law firm will draft a legally binding purchase and sale agreement between you (the individual) and the corporation. This contract clearly outlines which assets are being moved and strictly states that the transfer is taking place under Section 85(1) of the Income Tax Act. 🤖 It will also feature a “price adjustment clause,” which protects you just in case the CRA disagrees with the initial valuation down the road.
Step 4: Issue Shares and “Boot”
In exchange for giving your assets to the company, the company must pay you back. However, to avoid tax, you cannot take full payment in cash. You must take back corporate shares. 💱 You can receive a small amount of non-share consideration (known as “boot”), such as a promissory note or assumption of debt, but it cannot exceed the original cost base of your transferred assets.
Step 5: File Form T2057 with the CRA
The final and most crucial step is officially electing to defer the tax. You and the corporation must jointly sign and file CRA Form T2057 (Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation). 📩 This form must be filed on or before the earliest tax filing deadline for either the individual or the corporation. Missing this deadline can ruin the entire tax-deferral strategy.
How Much Does it Cost in Ontario?
Setting up a Section 85 rollover is an investment in protecting your family’s wealth from unnecessary taxation. You will need professional assistance from both a law firm and an accounting firm. 💲
| Service Required | Estimated Cost (CAD) |
|---|---|
| Business Valuation | $2,000 to $5,000+ (Depends on complexity) |
| Incorporation & Legal Drafting | $1,500 to $3,500 |
| Accountant Fees (T2057 Election) | $1,000 to $3,000 |
| CRA Filing Fee | $0 (But high penalties if late) |
How Long Does the Process Take?
A corporate rollover is not something that can be rushed at the last minute. 🕙
- Valuation Phase: Hiring an expert and getting a formal valuation report typically takes 3 to 6 weeks.
- Legal Setup and Drafting: Incorporating and drafting the complex transfer agreements generally takes 2 to 4 weeks.
- CRA Filing: The T2057 election must be submitted by the tax deadline, but the CRA may take several months to officially process the forms on their end.
Frequently Asked Questions (FAQ)
Can I do a Section 85 rollover by myself without a lawyer?
It is highly discouraged. The tax rules governing Section 85 are incredibly complex. A single mistake in calculating your adjusted cost base, issuing the wrong class of shares, or missing the price adjustment clause can trigger thousands of dollars in immediate capital gains taxes.
What happens to the corporate shares when I die?
When an Ontario resident passes away, there is a deemed disposition of all their assets, including their corporate shares. However, because you rolled your assets into a corporation, you can now use strategies like an estate freeze or secondary Wills to minimize probate fees (Estate Administration Tax) and pass the shares efficiently to your children.
Does a rollover avoid the Ontario Estate Administration Tax (Probate)?
By itself, no. However, holding your business assets inside a private Ontario corporation allows you to draft a Secondary Will (Corporate Will) specifically for those shares. In Ontario, shares of a privately held corporation can typically be passed through a Secondary Will without needing to go through the probate process, legally bypassing the 1.5% probate tax.
What is the penalty for filing Form T2057 late?
The CRA imposes a penalty for late-filed Section 85 elections. The penalty is generally calculated as 1/4 of 1% of the deferred tax amount for each month it is late, up to a maximum penalty of $8,000 CAD. It is crucial to meet your tax deadlines.
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