Section 85 Rollovers: Moving Personal Assets Into Your Corporation Tax-Free – A Complete Guide by a Montreal CPA Firm Near You

A Section 85 rollover in Canada is one of the most important tax planning tools available

to entrepreneurs who are incorporating or restructuring their businesses. It allows

individuals to transfer assets—such as vehicles, equipment, real estate used in

business, goodwill, or an entire sole proprietorship—into a newly formed or existing

corporation without triggering immediate capital gains tax. When used correctly, a

Section 85 rollover creates a smooth transition into incorporation, preserves tax

deferral, and avoids large unexpected tax bills. When used incorrectly, it can result in

reassessments, penalties, incorrect elected amounts, and double taxation.

Understanding Section 85 rollovers in Canada is essential for business owners who

want to incorporate properly and transfer assets tax-efficiently.

Legal and Regulatory Framework

The Section 85 rollover is governed by section 85(1) of the Income Tax Act. It allows

taxpayers to transfer eligible property to a taxable Canadian corporation in exchange for

shares and, optionally, debt or other consideration. Eligible property includes:

• capital property (equipment, vehicles, buildings)

• eligible capital property (goodwill)

• inventory

• resource property

• shares of another corporation

To defer tax, the transferor and the corporation must jointly elect an elected amount,

filed on Form T2057. The elected amount:

• cannot be less than the asset’s fair market value of non-share consideration received

• cannot be less than the asset’s adjusted cost base (ACB)

• cannot exceed fair market value

If improperly elected, CRA may assess capital gains immediately. Section 85 rollovers

require strict documentation, including asset valuations, incorporation agreements, and

share issuance records. These rules form the legal structure behind Section 85 rollovers

in Canada.

Key Court Decisions

Several important court decisions illustrate how strictly CRA enforces Section 85 rules.

In Guilder News Co. v. Canada, the Federal Court confirmed that the elected amount

must fall within the statutory limits; incorrect elections result in automatic reassessment.

In Krauss v. The Queen, CRA challenged inflated valuations used in a rollover to avoid

future gains. The court sided with CRA, emphasizing fair market value integrity.

In McClarty v. Canada, the Supreme Court ruled that valid commercial intent must exist;

rollovers used solely to manipulate losses or defer tax without real economic purpose

can be denied.

In Wang v. Canada, the court upheld CRA’s right to deny a Section 85 election when

Form T2057 was incomplete and improperly filed.

These cases highlight that Section 85 rollovers in Canada require meticulous

preparation and accurate elections.

Why CRA Targets This Issue

CRA pays close attention to Section 85 rollovers because they often involve:

• large unrealized gains

• inflated or understated fair market valuations

• transfers of real estate and goodwill

• multiple assets rolled into a corporation improperly

• missing or incorrectly filed T2057 forms

• attempts to avoid capital gains on personal-use property

• attempts to pipeline income improperly

CRA also analyzes whether taxpayers received non-share consideration (boot). If boot

exceeds certain thresholds or the elected amount is incorrect, CRA may assess an

immediate capital gain. Because Section 85 rollovers are powerful tax-deferral tools,

CRA enforces strict compliance to prevent abuse.

Mackisen Strategy

At Mackisen CPA Montreal, we help business owners structure Section 85 rollovers

correctly and strategically to maximize tax deferral. Our process includes:

• determining which assets should be transferred to the corporation

• obtaining or validating fair market value appraisals for assets and goodwill

• calculating the optimal elected amount for each asset

• preparing and filing Form T2057 with CRA

• structuring share consideration (common, preferred, or freeze shares)

• preparing legal documentation, including asset purchase agreements and corporate

resolutions

• coordinating with lawyers to ensure corporate structure matches tax planning

• planning future withdrawals and capital gains strategies to minimize tax

With precise calculations and documentation, we ensure Section 85 rollovers in Canada

are smooth, tax-efficient, and CRA-compliant.

Real Client Experience

A self-employed contractor transferred equipment and vehicles into a new corporation

but incorrectly believed no forms were required. CRA reassessed the transfer as a

taxable disposition. We filed corrected Section 85 elections, recalculated values, and

successfully reversed most of the tax.

Another client transferred a rental property into a corporation without proper valuation.

CRA challenged the fair market value and assessed a significant capital gain. We

reconstructed the valuation using professional appraisals and negotiated a revised

elected amount.

In a third case, a family business undergoing succession used a Section 85 rollover to

freeze the owner’s value and issue growth shares to children. We structured the

election for tax efficiency and future estate planning.

These cases demonstrate why professional oversight is essential for Section 85

rollovers in Canada.

Common Questions

Business owners often ask whether all assets should be rolled into a corporation. Not

always—some assets (like personal vehicles) may create unnecessary tax or

complexity.

Others ask whether goodwill can be rolled over tax-free. Yes—goodwill is eligible

property under Section 85.

Many ask whether they can undo a Section 85 rollover. Generally no—rollovers are

binding once filed.

Another question: Do both parties need to sign Form T2057? Yes—the corporation and

the transferor must jointly elect.

These questions highlight why understanding Section 85 rollover rules is essential.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

entrepreneurs stay compliant while using advanced tax strategies such as Section 85

rollovers. Whether incorporating, restructuring, or planning succession, our expert team

ensures precision, transparency, and protection from audit risk.