Section 86 Estate Freeze and Section 85 Rollover: How to Minimize Your Tax Obligations
Paying taxes later and paying less of them is always beneficial. Fortunately, the Income Tax Act (Canada) provides several tax planning tools that allow business owners to defer taxes and manage future tax exposure effectively. Two of the most powerful strategies are the Section 85 Rollover and the Section 86 Estate Freeze.
Both mechanisms allow individuals to freeze assets at their current value, defer capital gains tax, and strategically plan for business succession and intergenerational wealth transfer.
This article explains how each tool works, its benefits, and when it should be used as part of a comprehensive tax and estate planning strategy.
What Is a Section 85 Rollover?
A Section 85 Rollover is a tax-deferred transfer that allows an individual to transfer property to a Canadian corporation without triggering immediate tax consequences.
This tool is most commonly used when a sole proprietor incorporates a business or transfers personally owned assets into a corporation.
Normally, transferring assets to a corporation would trigger a taxable disposition because a corporation is a separate legal entity. Section 85 of the Income Tax Act neutralizes this result by allowing the transfer to occur at cost or fair market value, thereby deferring capital gains tax until a later disposition.
The transfer is commonly referred to as a “rollover” because accrued gains are not immediately realized.
How Does a Section 85 Rollover Work?
To complete a Section 85 rollover, the transferor and the corporation must file a joint election using CRA Form T2057.
The election allows for:
- A complete rollover, with no immediate gain recognized; or
- A partial rollover, where a portion of the gain is recognized immediately, depending on the elected amount
To qualify:
- The transferor must receive at least one share of the corporation as consideration
- Non-share consideration (commonly referred to as “boot”) may also be received, though it can affect the elected amount and trigger tax consequences
What Assets Can Be Transferred Under Section 85?
Section 85(1) applies to several categories of property, including:
Capital Property
Capital property includes assets that increase in value over time, such as real estate or equipment.
Example:
Jane purchased land in 2005 for $100,000. It is now worth $1,000,000. By using a Section 85 rollover, she can transfer the land to a corporation at its original cost, deferring tax on the $900,000 gain.
Eligible Capital Property
This includes intangible assets such as:
- Goodwill
- Intellectual property
- Customer lists
- Trademarks
Inventory
Inventory that has increased in value from its original purchase price may also be transferred under Section 85.
When Must the Section 85 Election Be Filed?
The election must be filed no later than the earlier of the following:
- The transferor’s tax return due date; or
- The corporation’s tax return due date
Late filing is permitted within three years, subject to penalties. After three years, the Canada Revenue Agency (CRA) may allow late filing if it considers it just and equitable, though penalties will still apply.
What Is a Section 86 Estate Freeze?
A Section 86 Estate Freeze is a corporate reorganization that allows a shareholder to freeze the current value of their shares so that any future growth accrues to the next generation.
This strategy is commonly used in succession planning for family-owned businesses.
Under Section 86 of the Income Tax Act, the shareholder exchanges common shares for fixed-value preferred shares. New common shares are then issued, typically to children or a family trust, representing all future growth of the corporation.
How a Section 86 Estate Freeze Works
- The shareholder surrenders common shares
- The corporation issues preferred shares with a fixed redemption value
- The next generation subscribes for new common shares
- Future growth accrues to the new common shareholders
As a result, the original shareholder’s tax exposure is crystallized and capped.
Benefits of a Section 86 Estate Freeze
The primary benefits include the following:
- Deferral of capital gains tax
- Shifting future tax liability to the next generation
- Predictable estate tax planning
- Preservation of family-owned businesses
Without an estate freeze, a shareholder faces a deemed disposition of shares upon death, often resulting in significant capital gains tax. If the estate lacks liquidity, the family may be forced to sell the business to pay the tax liability.
An estate freeze allows the shareholder to:
- Calculate future gains tax with certainty
- Obtain life insurance to cover the tax liability
- Ensure the business remains within the family
Section 85 Rollover vs. Section 86 Estate Freeze
| Section 85 Rollover | Section 86 Estate Freeze |
| Used to transfer assets into a corporation | Used to freeze share value |
| Common during incorporation | Common in succession planning |
| Defers immediate tax | Shifts future growth to next generation |
| Requires CRA election | Requires corporate reorganization |
Both tools are often used together as part of a comprehensive tax and estate plan.
Why Legal Advice Is Critical
While these tools offer substantial tax benefits, they are highly technical and subject to strict compliance requirements under the Income Tax Act. Errors can result in unintended tax consequences, penalties, or loss of deferral benefits.
A qualified tax and business lawyer can ensure that these strategies are properly implemented and aligned with your long-term objectives.
Speak With a Tax Lawyer at Kalfa Law Firm
If you are incorporating a business, planning for succession, or seeking to minimize future tax exposure, a Section 85 Rollover or Section 86 Estate Freeze may be appropriate.
We’re Here To Help.
Contact Kalfa Law Firm to speak with an experienced tax and business lawyer who can help you maximize tax deferral while minimizing risk.
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-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law Firm 2020, updated May 2026.
