On the Roll Again – Why a Section 85 Rollover is Recommended for Holding Companies
A Section 85 rollover is one of the most effective tax-deferred strategies available to Canadian business owners. It allows you to transfer assets between entities without triggering immediate capital gains tax, offering flexibility and security during corporate restructuring. Many business owners first encounter these rules when transitioning from a sole proprietorship to a corporation, a topic we cover in detail in our guide on How to Incorporate in Ontario.
For a technical overview of rollover rules, you can also refer to the Government of Canada’s Income Tax Act, Section 85.
Why Section 85 Rollovers Aren’t Just for Sole Proprietors
While rollovers are commonly used when converting a sole proprietorship into a corporation, this is only one application. Section 85(1) is also highly effective when transferring shares from an existing operating company into a newly formed holding company.
Some business owners mistakenly believe that holding companies are only advantageous for high-net-worth individuals. This is not true. Holding companies provide meaningful benefits for any business owner who can manage the annual compliance costs (typically around $5,000 per year).
To explore the value of holding companies further, see our article on the Benefits of Holding Companies.
How a Section 85 Rollover Works for Holding Companies
A Section 85 rollover involving a holding company generally works as follows:
- You transfer your common shares of the operating company to the new holding company.
- In exchange, you receive redeemable preferred shares from the holding company.
- The fair market value (FMV) of the preferred shares matches the FMV of the shares you transferred.
- The transfer is structured on a tax-deferred basis so that no immediate capital gain is realized.
Example
If you hold 100 common shares of your operating company valued at $100,000, you may transfer these shares to your holding company and receive 100,000 preferred shares valued at $1 each, redeemable at your discretion.
Result:
- Your holding company becomes the shareholder of the operating company.
- You retain value through preferred shares.
- The transfer occurs without triggering an immediate tax event.
The Canada Revenue Agency outlines these tax-deferred rollover provisions in its technical guidance on Transfers of Property to a Corporation.
Benefits After Completing the Rollover
Once the rollover is complete, business owners can enjoy major advantages, including:
- Enhanced creditor protection
- Tax-efficient inter-corporate dividend planning
- Potential income splitting opportunities (subject to Tax on Split Income rules under the Income Tax Act)
- Improved estate planning options
- Strategic reinvestment and wealth protection
- Removal of excess funds from the operating company
To better understand how these benefits apply to your situation, our Corporate Commercial Services page provides a deeper breakdown of structures and strategies.
Speak With a Corporate Tax Lawyer Today
A Section 85 rollover is a powerful tool, but it must be executed correctly. Errors in valuation, documentation, or elections can result in unintended tax consequences.
Kalfa Law Firm has extensive experience guiding Ontario business owners through Section 85 rollovers, holding company structures, and broader corporate reorganisations.
Book a consultation with Kalfa Law Firm to protect your business value and plan your long-term growth.
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 April 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.
