Section 85 Rollover: Transferring Assets into Your Corporation Without Immediate Tax — CPA Firm Near You, Montreal

Introduction

When a business owner in Quebec incorporates, they often need to transfer assets such as equipment, vehicles, contracts, goodwill, or inventory from themselves (as a sole proprietor) into the new corporation. Without proper planning, this transfer can trigger an immediate capital gain or recapture of depreciation. The Section 85 rollover is a powerful tax tool that allows you to transfer assets to your corporation on a tax-deferred basis. This guide explains how Section 85 works, when to use it, and how a CPA near you in Montreal can help execute it correctly.

Legal and Regulatory Framework

Section 85 of the Income Tax Act allows taxpayers to transfer eligible property to a corporation in exchange for shares, while choosing an elected transfer value to defer tax. Eligible assets include inventory, real estate, vehicles, equipment, intellectual property, and goodwill. A joint election must be filed using Form T2057 (and TP-518 in Quebec). The transfer must be supported by resolutions, share issuances, and detailed documentation. Incorrect valuations or missing elections can trigger immediate tax on the transfer. Corporations must update their minute books to reflect the transaction.

Key Court Decisions

Courts have ruled that inaccurate valuations or undocumented transfers invalidate Section 85 elections. Judges confirmed that taxpayers cannot retroactively apply a rollover without proper forms filed on time or late-filed with penalties. In several cases, taxpayers transferred assets at incorrect values, resulting in capital gains, denied elections, or shareholder benefit assessments. Courts emphasize that Section 85 must reflect commercial reality and be properly documented.

Why CRA and Revenu Québec Scrutinize Section 85 Rollovers

Section 85 elections often involve subjective valuations, goodwill transfers, and related-party transactions. CRA reviews whether the elected amount is reasonable, whether assets were actually transferred, whether consideration was issued properly (shares, promissory notes), and whether tax deferral is justified. Revenu Québec examines whether inventory values are correct, depreciation records are accurate, and GST/QST treatment is compliant. Errors increase audit risk significantly.

When to Use Section 85

Transitioning from sole proprietor to corporation

Avoid immediate tax on transferring business assets.

Moving investment assets into a holding company

Defer capital gains when reorganizing for asset protection or succession.

Corporate reorganizations

Used during estate freezes or share restructurings.

Transferring real estate

Allows tax deferral when moving properties into a corporation.

How Section 85 Works: Step-by-Step

Step 1: Identify eligible assets

Inventory, equipment, vehicles, contracts, goodwill, or investments.

Step 2: Determine fair market value

A CPA calculates values to avoid triggering gains or penalties.

Step 3: Choose the elected amount

This determines whether tax is deferred or partially recognized.

Step 4: Exchange assets for shares

The corporation issues shares (and possibly a promissory note).

Step 5: File Form T2057 and TP-518

Both forms must be filed on time with CRA and Revenu Québec.

Step 6: Update minute books

Record resolutions, share issuances, and transfer agreements.

Common Pitfalls

Missing or late elections

Late filing creates penalties or loss of rollover eligibility.

Incorrect valuations

Undervalued or overvalued property leads to reassessments.

Missing share consideration

Assets must be exchanged for shares; otherwise, it is a taxable transfer.

GST/QST confusion

Some asset transfers require GST/QST documentation.

Goodwill inaccuracies

Goodwill values must be substantiated to avoid disputes.

Mackisen Strategy

At Mackisen CPA Montreal, we prepare and file Section 85 rollovers, calculate valuations, draft resolutions, issue shares, and complete all CRA and Revenu Québec forms. We ensure transfers are documented correctly, reflect commercial reality, and avoid triggering unexpected tax. We also integrate Section 85 into larger incorporation, holding company, or succession planning strategies.

Real Client Experience

A Montreal consultant incorporated but forgot to file a Section 85 election for transferred equipment, triggering taxable recapture. We negotiated a late-election penalty and corrected the valuation. Another client reorganized assets for a holding company but undervalued goodwill; CRA reassessed. We rebuilt valuations and defended the taxpayer through the objection.

Common Questions

Is Section 85 always required when incorporating?

Only if transferring assets with accrued gains or depreciation.

Can I file Section 85 myself?

No. Errors in valuation or forms can cause significant tax.

Does Section 85 apply to real estate?

Yes, but requires careful GST/QST analysis.

Can I transfer a vehicle under Section 85?

Yes, if used for business.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal executes Section 85 rollovers strategically and precisely, protecting clients from costly tax errors and ensuring compliant, audit-ready documentation.