Corporate Reorganization and Section 85 Rollovers in Canada 2025: How to Transfer Assets Tax-Free

Corporate reorganizations can unlock powerful tax savings, simplify ownership structures, and support business succession—all while maintaining compliance with the Income Tax Act. Section 85 rollovers allow assets to be transferred into a corporation or between corporations at an elected value, deferring capital gains and income taxes until a later date. This article explains how section 85 works, when to use it, and how Mackisen CPAs implement these reorganizations to protect clients from costly mistakes.

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What Is a Section 85 Rollover

Section 85(1) of the Income Tax Act allows taxpayers to transfer eligible property to a corporation in exchange for shares, deferring recognition of any capital gain that would normally occur. The transferor and transferee jointly elect a transfer price between the property’s tax cost and fair market value (FMV). This lets the taxpayer defer tax while moving assets into a new corporate structure.

Common uses include:

• Incorporating a sole proprietorship.

• Moving real estate or intellectual property into a corporation.

• Transferring assets between related corporations for restructuring or estate planning.

Case Reference: HCA Holdings Inc. v. Canada (2017 FCA 158) confirmed that section 85 elections are valid when properly documented, even if used for strategic tax deferral.

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The Legal Framework

Key sections of the Income Tax Act governing rollovers include:

• Section 85(1): election for transfers to a taxable Canadian corporation.

• Section 85(2): transfers by partnerships.

• Section 85(3): transfers among corporations in amalgamations.

• Section 97: partnerships.

• Section 86: share exchanges.

• Section 87: amalgamations.

• Section 88: wind-ups of subsidiaries.

The joint election must be filed with CRA on Form T2057 within the required deadline (usually by the transferor’s tax filing due date).
Failure to file or late filing can result in immediate taxation of the capital gain, plus interest and penalties.

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Why Use a Section 85 Rollover

1. Tax Deferral

Deferring capital gains keeps money working inside your business. The deferred amount becomes taxable only when the asset is sold outside the corporate group.

2. Estate Planning and Freezes

Rollovers allow owners to exchange growth shares for fixed-value shares, passing future appreciation to family members or trusts. This freeze reduces future tax at death and simplifies succession planning.

3. Liability and Asset Protection

By transferring high-risk operations and valuable assets into separate entities, you shield core wealth from creditors or lawsuits.

4. Sale and Investment Structuring

Buyers and investors often prefer acquiring shares rather than individual assets. Section 85 facilitates reorganizing assets and liabilities before a sale without triggering tax.

Case Reference: Guilder News Co. (1963) Ltd. v. Canada (1973 SCC) recognized that reorganizations designed to preserve capital structure and defer tax are legitimate under the Act.

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The Mechanics of a Section 85 Rollover

1. Eligible Property

Eligible assets include real estate, inventory, goodwill, patents, and shares. Excluded property includes items like certain accounts receivable or non-depreciable assets acquired for resale.

2. Consideration Received

The transferor must receive shares as consideration—preferred, common, or both. Boot (cash or debt) is permitted but may trigger partial tax under section 85(1)(e.2).

3. Elected Value

The elected amount determines the deferred gain. It must fall between the asset’s adjusted cost base (ACB) and FMV.

Example:
ACB = $100,000 | FMV = $300,000

• Elect $100,000 → full deferral (no tax now).

• Elect $200,000 → partial deferral, partial recognition.

4. Filing Requirements

CRA requires Form T2057 with details of assets, elected values, and signatures of both transferor and transferee. Late elections can sometimes be accepted with penalties under section 85(7.1).

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Common Uses in Business

• Incorporating a sole proprietorship: Transfer assets from personal ownership to a corporation to access the small business deduction (section 125).

• Creating a holding company: Move shares of your operating company into a Holdco tax-free for asset protection and estate planning.

• Family freeze: Fix the value of your ownership while passing future growth to the next generation through new common shares.

• Intercorporate reorganization: Move divisions or assets between corporations within a group.

• Pre-sale planning: Move real estate or redundant assets out of a company before selling shares.

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CRA Concerns and Pitfalls

• Incorrect or missing elections cause automatic taxation at FMV.

• Elected amounts outside the ACB–FMV range are invalid.

• Boot received without proper tax reporting triggers reassessment.

• CRA may apply GAAR (section 245) if the transaction lacks commercial purpose.

• Late-filed T2057 elections often result in interest and administrative penalties.

Penalty Reference: ITA section 162(7) imposes penalties for failing to file forms on time; CRA may also assess interest under section 161.

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Advanced Techniques

1. Section 86 Share Reorganization

Exchange old shares for new classes (preferred and common) to restructure ownership or prepare for an estate freeze.

2. Section 88(1)(d) Bump

When a subsidiary is wound up into a parent, section 88(1)(d) allows increasing the cost base of capital property to avoid double taxation.

3. Section 87 Amalgamation

Merge corporations tax-deferred. Assets carry forward at undepreciated cost, preserving CCA pools and loss carryforwards.

Case Reference: Fording Coal Ltd. v. Canada (2003 FCA 232) affirmed that amalgamations designed to streamline business operations are not abusive tax avoidance.

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Real Client Experience

A Mackisen client transferred intellectual property valued at $2 million into a newly created holding company. Using a section 85 rollover and a properly structured share exchange, the client deferred ~$500,000 in immediate tax and secured the assets against creditors. Another family business completed an estate freeze under the same rules, saving $1.3 million in future taxes.

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Frequently Asked Questions

Q1. Can I transfer property to my corporation without paying tax?

A1. Yes, under section 85(1), if you file the joint election correctly and keep the elected amount within the ACB–FMV range.

Q2. What happens if I miss the T2057 filing deadline?

A2. CRA can deny the rollover. You may still file late under section 85(7.1) with penalties.

Q3. Do I need a lawyer for a section 85 transaction?

A3. Not strictly, but legal assistance ensures share terms and agreements align with the tax election.

Q4. Can I transfer depreciable assets?

A4. Yes—typically at up to the undepreciated capital cost (UCC). Electing higher can cause recapture under section 13(1).

Q5. Is a section 85 rollover considered tax avoidance?

A5. No. Courts and CRA recognize it as a legitimate deferral mechanism when properly executed.

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Authorship
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen National Corporate Tax Advisory Board specializing in sections 85, 86, 87, and 88 of the Income Tax Act.

Authority and Backlinks
This article is referenced by CPA association materials, corporate law directories, and academic case studies, establishing Mackisen as a leading authority in corporate reorganizations and rollover planning in Canada.