Section 85 Rollovers: A Complete Guide for Canadian Taxpayers
Brief Summary
Section 85 of the Income Tax Act (ITA) is a powerful tax planning tool that allows taxpayers to defer tax when transferring eligible property to a Canadian corporation. Frequently used during incorporation or corporate restructuring, a Section 85 rollover helps individuals and businesses move assets without triggering immediate tax consequences.
Purpose of Section 85 Rollovers
A Section 85 rollover enables a taxpayer, whether an individual, corporation, or trust, to transfer capital property to a corporation on a tax-deferred basis. The election allows the transferor and transferee to jointly select an elected amount, which determines the tax consequences of the transfer.
This rollover is particularly beneficial for sole proprietors incorporating their business and for owners restructuring corporate groups or moving assets among affiliated companies.
Without Section 85, transferring business assets into a corporation could result in immediate taxable gains. The rollover ensures the transfer can occur on a tax-neutral basis, allowing tax to be deferred until a later event, typically when the shares issued in exchange for the property are sold or redeemed.
Example: Incorporating a Sole Proprietorship
A self-employed individual transferring business assets into a newly formed corporation can use a Section 85 rollover to avoid immediate tax on the transfer. In exchange, the individual typically receives fixed-value preference shares equal to the asset values. These shares may later be redeemed tax-free to the extent of their adjusted cost base (ACB), or as deemed dividends for the amount exceeding ACB up to fair market value (FMV).
For additional guidance on incorporating your business, see our article on “Incorporating a Business in Ontario”.
Important Terminology
Eligible Property – ITA s. 85(1.1)
Eligible property includes depreciable capital property (including eligible capital property), non-depreciable capital property, Canadian resource properties, foreign resource properties, inventory, and real estate owned by a non-resident but used in a business carried on in Canada.
Consideration to Transferor – ITA s. 85(1)
The corporation receiving the property must provide consideration, which must include at least one share of the corporation. Consideration may consist of shares, cash, promissory notes, or assumption of debt.
Non-Share Consideration (Boot)
Cash or debt provided as part of the consideration is called “boot.” Boot is crucial when determining allowable elected amounts because the elected amount cannot be lower than the boot, and boot may result in immediate tax consequences.
Elected Amount and Transfer Price
The elected amount is jointly chosen by the transferor and transferee and determines both the transferor’s proceeds of disposition and the transferee’s cost of the property.
General Rule – ITA s. 85(1)(a)
The elected amount is deemed to be both the transfer price for the transferor and the acquisition cost for the corporation.
Floor Value – ITA s. 85(1) (b)
The elected amount cannot be less than the Boot.
Ceiling Value – ITA s. 85(1) (c)
The elected amount cannot exceed the property’s FMV.
Specific Limits Based on Property Type
1. Inventory and Non-Depreciable Capital Property – ITA s. 85(1)(c.1)
The elected amount cannot be below the lesser of the FMV and the cost amount.
2. Depreciable Property – ITA s. 85(1)(e)
The elected amount cannot be below the lesser of the FMV, the cost amount, and the Undepreciated Capital Cost (UCC).
Cost of Consideration
Non-Share Consideration (Boot) – ITA s. 85(1)(f)
When a boot consists of only one item, its cost is its FMV. If multiple items are included, the cost is the lesser of the FMV of the property received and the proportional share of Boot based on the FMV of all assets received.
Why Section 85 Rollovers Matter
Section 85 rollovers are essential for tax-efficient incorporation, inter-corporate transfers, holding company structures, succession planning, and corporate reorganizations.
If you are structuring a holding company, see our related article on Section 85 for Holding Companies on Kalfa Law Firm.
For general insights into corporate reorganizations, explore external CRA guidance on Tax-Deferred Rollovers from the Government of Canada.
A Section 85 rollover can save thousands of dollars in immediate tax but only when structured correctly. Kalfa Law Firm’s corporate and tax lawyers can help you determine the right elected amounts, prepare the required forms, and ensure your rollover is compliant with the Income Tax Act.
Book a consultation with Kalfa Law Firm to protect your assets and optimize your corporate structure.
FAQs:
-Christopher Manderville, Associate Lawyer
Christopher’s practice is primarily focused on corporate-commercial law, including business formations, corporate reorganizations, shareholder agreements, commercial contracts, the purchase and sale of businesses, as well as secured lending transactions. Christopher graduated from Queen’s Law School in 2019. Christopher also completed his undergraduate degree at Queen’s University where he majored in Political Science and graduated as a member of the Dean’s Honour List. Christopher is a lawyer licensed to practice law by the Law Society of Ontario and is a member of the Canadian Bar Association.
© Kalfa Law Firm 2021, updated July 2026
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.
