Section 85 Rollover — Transferring Assets to a Corporation

Introduction
Understanding the Section 85 rollover is essential for entrepreneurs, incorporated professionals and businesses transitioning from a sole proprietorship or partnership to a corporation. When business owners transfer assets—such as equipment, vehicles, goodwill, inventory or entire business operations—to a corporation, the CRA normally treats the transfer as a taxable disposition at fair market value. This can trigger significant capital gains or recapture of depreciation. However, Section 85 rollover rules allow Canadians to defer these taxes legally by electing to transfer assets at an agreed-upon value. Québec applies similar rules under provincial law, creating additional compliance steps. Because transferring assets to a corporation involves complex valuations, elections and legal documents, a complete understanding of the Section 85 rollover ensures businesses maximize tax deferral while maintaining full legal compliance.

Legal and Regulatory Framework
The Section 85 rollover is established under section 85 of the Income Tax Act and Québec’s Taxation Act. It allows a taxpayer to transfer eligible property to a corporation on a tax-deferred basis. Eligible property includes:

• depreciable property (equipment, machinery, vehicles)
• non-depreciable property (land, certain investments)
• inventory (in many cases)
• goodwill and intangible business value

The rollover works by allowing the transfer at an “elected amount,” chosen jointly by the taxpayer and the corporation. The elected amount must fall between:

• the asset’s fair market value (FMV), and
• its tax cost or undepreciated capital cost (UCC)

In exchange for transferring the asset, the corporation must issue consideration—typically shares, debt, or a combination—to the taxpayer. A properly structured Section 85 rollover ensures no immediate tax is triggered, allowing the taxpayer to defer gains until the shares are sold later or assets are disposed of.

Québec requires its own provincial election forms that mirror federal rollover rules. Understanding transferring assets to a corporation using the Section 85 rollover requires careful compliance with both federal and provincial law.

Key Court Decisions
Court decisions surrounding the Section 85 rollover highlight its complexity. In several rulings, courts confirmed that improperly prepared elections—incorrect elected amounts, missing signatures, or late filing—invalidate the rollover and result in full taxation at FMV. Courts have also ruled that consideration must be properly structured; if shares or promissory notes do not match the elected amount, the rollover may be denied.

Cases involving goodwill clarified that goodwill qualifies as eligible property, provided documentation and valuation support exist. Other decisions examined whether partial rollovers complied with rules, reinforcing that each asset must be listed correctly. Québec courts also issued rulings dealing with improper provincial rollover filings, confirming that taxpayers must meet deadlines and valuation requirements.

These decisions prove the importance of applying the Section 85 rollover accurately to avoid costly reassessments.

Why CRA Targets This Issue
The CRA reviews Section 85 rollovers because they involve intentional tax deferral and potential manipulation of asset values. Common CRA audit triggers include:

• undervaluing assets to reduce future capital gains
• mismatched share consideration vs elected amounts
• failing to include all transferred assets in the election
• incorrect or inconsistent FMV valuations
• missing or late-filed T2057/T2058 election forms
• overuse of promissory notes or shareholder loans
• artificially low elected amounts to avoid immediate gains

The CRA uses valuation experts, financial records, historical income statements and independent appraisals to verify compliance. Québec also checks CO-1029.8.36.TM rollover forms for accuracy. Because Section 85 rollover elections affect long-term tax liabilities, compliance is heavily enforced.

Mackisen Strategy
Mackisen CPA provides a complete and precise approach to the Section 85 rollover. Our strategy includes:

• determining whether incorporation is the right time for the rollover
• identifying eligible assets and preparing FMV valuations
• calculating optimal elected amounts to maximize tax deferral
• preparing federal (T2057, T2058) and Québec election forms
• drafting consideration structures (shares, debt notes, Class A/Class B shares)
• coordinating with lawyers for corporate resolutions and minute book updates
• ensuring the corporation’s paid-up capital aligns with tax goals
• reviewing GST/QST consequences for transferred inventory or equipment
• ensuring the rollover aligns with future planning (LCGE, holding company setup, succession)

We also ensure the Section 85 rollover supports long-term goals such as selling shares under the LCGE or restructuring corporate ownership. Our approach ensures full compliance and maximum tax efficiency.

Real Client Experience
Many entrepreneurs come to Mackisen after attempting a Section 85 rollover incorrectly. One client incorporated their business but failed to file T2057 forms on time, triggering a deemed disposition at FMV. Mackisen filed a late election request with detailed justification, preventing a large tax bill.

Another client undervalued goodwill significantly. CRA questioned the FMV, and we collaborated with valuation experts to support a corrected elected amount. For a Québec business, provincial filings were incomplete, leading to a review letter. Mackisen corrected all CO-1029.8.36.TM provincial elections and ensured alignment with federal values.

A contractor transferred only equipment but forgot inventory and work-in-progress. CRA reassessed the partial transfer; Mackisen amended the elections and reconciled corporate balances. Another seller preparing for LCGE eligibility required a purification and restructuring. We integrated a Section 85 rollover into a holding company strategy, preserving LCGE eligibility. These cases show the importance of professional guidance when transferring assets to a corporation.

Common Questions
Taxpayers often ask what assets qualify for Section 85 rollover. Eligible property includes equipment, vehicles, inventory and goodwill. They also ask whether real estate qualifies. Land qualifies; buildings qualify; personal-use property does not.

Another common question involves consideration: must shares be issued? Yes—shares must be part of the consideration, but promissory notes can also be used. Others ask how long they have to file the election. The deadline is the corporation’s filing date, typically nine months after year-end.

Québec taxpayers ask whether they must file separate forms. Yes—Québec requires specific provincial elections. These questions help clarify how to apply the Section 85 rollover effectively.

Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency and protection from audit risk. When preparing a Section 85 rollover, Mackisen provides full valuation support, calculation of elected amounts, integration with long-term planning and complete CRA and Québec compliance so clients can incorporate smoothly and tax-efficiently.