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Why a Section 85 Rollover is Recommended for Holding Companies
section 85 for holding companies

On the Roll Again – Why a Section 85 Rollover is Recommended for Holding Companies

Section 85 rollovers are a preferred method of transferring assets from one entity to another on a tax deferred basis. The most common use of this type of transaction is when rolling over the assets from a sole proprietorship to a new corporation. You can find more information on rollovers here and here.

Although rolling over the value from your sole proprietorship into a new corporation is the most common use of the section 85 rules – this is largely due to sheer volume of business owners who begin their companies as sole proprietorships because of the upstart costs of incorporation – it is by no means the only use. Indeed, a section 85 rollover is an exceptionally effective method of safely transferring the value an individual holds in their current corporation (i.e. an operating company) into a new holding company.

Many business owners who are reading this article may think that holding companies are legal structures reserved for the wealthy and elite. This is a fallacy. Provided that one can afford the ongoing costs of compliance (~$5,000/year), holding companies can be exceptionally effective tools for optimizing any business’ corporate structure.

In general, the manner in which any section 85 transaction of this nature would work would be to rollover an individual’s shares held in their operating company into the holding company in exchange for redeemable preference shares. To use a rough example, say you hold 100 shares in your operating company valued at $100,000 and you want to move those shares into a new holding company. What you would do is transfer your common shares to the holding company in exchange for 100,000 preference shares valued at $1/share and redeemable upon request. The end result is that the holding company is the new owner of the operating company and meanwhile the business owner has locked in their value in the operating company on a tax deferred basis.

Once the rollover is complete, business owners can thereafter enjoy the significant benefits which holding companies provide them. For information on the benefits of holding companies click here .

-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

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.

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