As an Alberta business grows, its legal structure may need to evolve alongside its revenue. What began as a simple, single corporation may no longer provide the asset separation, tax planning flexibility, or operational structure required for a growing enterprise.
Eventually, business owners may need to move appreciating assets, such as commercial real estate, certain investments, or goodwill, into a holding company or a new operating subsidiary.
Without a rollover provision, transferring appreciated property between corporations can result in a taxable disposition and potentially trigger tax on accrued gains. However, Section 85 of the Income Tax Act allows certain eligible property to be transferred to a taxable Canadian corporation on a tax-deferred basis when the required conditions are met.
The tax is generally deferred rather than eliminated. The corporation takes the property at the applicable tax cost determined under the rollover rules, while the transferor receives shares and potentially other consideration.
Here is how businesses can use Section 85 rollovers as part of a broader corporate restructuring strategy.
A Section 85 Rollover is a provision under the Canadian Income Tax Act that allows a taxpayer to transfer eligible property to a taxable Canadian corporation in exchange for consideration that includes shares.
Instead of necessarily recognizing the property's full accrued gain immediately, the transferor and receiving corporation jointly elect an agreed-upon amount, known as the Elected Amount.
The Elected Amount generally becomes the transferor's proceeds of disposition and the corporation's tax cost of the transferred property. By selecting an appropriate elected amount, the transaction can generally occur on a tax-deferred basis.
The tax liability is not eliminated. Instead, the tax consequences associated with the property's accrued gain can be deferred until a later taxable disposition or other event.
Growing businesses rarely restructure simply for the sake of changing their corporate organization. Section 85 rollovers can form part of broader strategies designed to address ownership, investment, financing, succession, and tax-planning objectives.
If an operating company holds significant investments, cash reserves, or commercial real estate, the business owner may consider whether those assets should remain within the operating company or be held separately.
A transfer of eligible property to a separate holding company may allow certain assets to be separated from the operating company's day-to-day business activities while deferring the immediate tax consequences of the transfer.
However, Section 85 itself does not provide creditor protection. The legal and creditor-protection implications of moving assets between corporations depend on the circumstances, including corporate structure, guarantees, security interests, timing, and applicable law. Business owners should obtain appropriate legal and tax advice before undertaking a restructuring.
Business owners considering a future sale of corporate shares may also need to consider the requirements for the Lifetime Capital Gains Exemption (LCGE).
To qualify as a qualified small business corporation share, specific tests must be satisfied. These include requirements relating to the corporation's ownership and use of assets during the 24 months before the sale, as well as requirements concerning the use of corporate assets immediately before the disposition.
Excess passive investment income or other non-qualifying assets can therefore create tax-planning issues when a business owner is preparing for a potential sale.
A corporate reorganization may be one tool used to address non-qualifying assets, but the appropriate strategy depends on the company's circumstances and should be planned well in advance of a potential sale.
For high-earning unincorporated businesses, transitioning into a corporation can be an important structural step.
Section 85 may allow certain eligible business property, including qualifying equipment, inventory, and business goodwill, to be transferred to a newly incorporated company on a tax-deferred basis when the statutory requirements are satisfied.
This can help a business owner incorporate without necessarily triggering the full immediate tax consequences that could otherwise arise from transferring appreciated eligible property.
To successfully execute a Section 85 rollover, specific statutory requirements must be met.
Not every type of property qualifies. Eligible property can include certain capital property, inventory, Canadian and foreign resource property, and other property specifically identified under subsection 85(1.1) of the Income Tax Act.
Importantly, real or immovable property held as inventory is generally excluded from the definition of eligible property. This means that the specific nature and tax classification of a property must be reviewed before assuming it qualifies for a Section 85 rollover.
The transfer must include shares of the receiving taxable Canadian corporation as part of the consideration.
Section 85 is therefore not simply a mechanism for transferring an asset from one corporation to another for cash. The transaction must satisfy the statutory requirements governing the consideration received and the joint election.
The transferor may receive non-share consideration, such as cash or a promissory note, in addition to shares.
However, the amount and fair market value of this non-share consideration can affect the minimum Elected Amount and may result in an immediate taxable gain if the applicable statutory limits require the elected amount to be higher than the property's tax cost.
The precise rules vary depending on the type of property being transferred. Business owners should therefore avoid treating "boot" as having one universal tax limit based solely on the property's Adjusted Cost Base (ACB).
The Elected Amount cannot simply be chosen at random.
Section 85 contains statutory minimum and maximum limits that vary depending on the type of property being transferred.
Generally:
These rules mean that the appropriate Elected Amount must be determined based on the specific property and consideration involved rather than by applying a single formula to every Section 85 transaction.
A Section 85 rollover is not automatically recognized simply because an asset changes hands. The transaction must satisfy the statutory requirements, and the required election must be properly completed and filed.
The process generally involves three key steps:
The transferor, such as an individual, partnership, or corporation, transfers eligible property to the receiving taxable Canadian corporation.
In exchange for the property, the receiving corporation issues shares to the transferor, potentially alongside permitted non-share consideration such as cash or a promissory note.
The transferor and receiving corporation jointly complete the prescribed election, generally using CRA Form T2057 for a subsection 85(1) transfer.
The election identifies the property being transferred and the agreed Elected Amount. Under Section 85, that elected amount becomes the transferor's proceeds of disposition and the corporation's cost of the property, subject to the statutory rules.
The Section 85 election is generally due on or before the earliest date on which any taxpayer making the election is required to file an income tax return for the taxation year in which the transaction occurred.
Late elections may be accepted in certain circumstances. Under the Income Tax Act, a late election can generally be filed within three years of the original deadline if the prescribed requirements are met and the applicable penalty is paid.
In certain circumstances, the Minister may also permit an election or amended election after that three-year period where the statutory conditions are satisfied.
Because late elections can result in penalties and additional complications, businesses should have the Section 85 election prepared and filed within the applicable deadline whenever possible.
Section 85 can be a valuable tool for corporate restructuring, but the rules are technical and the tax consequences depend heavily on the type of property transferred, the consideration received, the corporate structure, and the Elected Amount.
Errors in valuation, share consideration, property classification, or the election itself can result in unintended tax consequences.
At Jensen CPA, we help Alberta businesses navigate corporate tax planning, restructuring, and ongoing financial management.
If your business is growing, holding significant investments or real estate, or preparing for a future sale or ownership transition, our Calgary corporate tax team can help you evaluate the tax implications and structure your next steps appropriately. Our Fractional CFO & Controller Services can also provide ongoing financial planning and forecasting support as your business grows.
Government of Canada — Income Tax Act, Section 85: Exchanges of Property for Shares
Provides the legislation governing Section 85 rollovers, including eligible property, elected amounts, non-share consideration, and the requirements for making a joint election.
Canada Revenue Agency — Transfer of Property to a Corporation Under Section 85 (IC76-19R3)
Explains how Section 85 elections work, including eligible property, consideration received, elected amounts, and common requirements when transferring property to a corporation.
Canada Revenue Agency — Qualified Small Business Corporation Shares
Explains the requirements for shares to qualify as qualified small business corporation shares, including the 24-month asset-use tests and active-business asset requirements relevant to the Lifetime Capital Gains Exemption.
Canada Revenue Agency — Form T2057: Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation
Provides the prescribed CRA form used by taxpayers and taxable Canadian corporations to make a joint Section 85 election.
Canada Revenue Agency — Income Tax Audit Manual: Transfers of Property to a Corporation Under Section 85
Provides CRA technical guidance on Section 85 transfers, including eligible property, elected-amount limits, non-share consideration, and the tax treatment of different types of property.
Author: Written by the Jensen CPA Editorial Team, reviewed & approved by Managing Partner Kevin Jensen.
Disclaimer: The information provided in this article is for general informational and educational purposes only and does not constitute professional accounting, tax, financial, investment, or legal advice. Reading this article does not create an accountant-client relationship with Jensen CPA. Canadian and Alberta tax laws are complex and subject to change. Always consult a qualified CPA or other appropriate professional regarding your specific business or financial situation. Read our full Terms of Use.
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