Introduction
When an individual transfers property to their corporation, the general rule is that the transfer occurs at fair market value — triggering any accrued gain at the time of transfer. For a sole proprietor who has been running a business for years and has accumulated significant goodwill, equipment, or other business assets, transferring those assets to a newly incorporated corporation at fair market value would crystallise all of that gain and generate an immediate tax bill.
The section 85 rollover provides an alternative: a mechanism to transfer eligible property to a corporation at a deferred tax cost, postponing the gain until the corporation ultimately disposes of the property.
What Is a Section 85 Rollover?
Section 85 of the Income Tax Act allows a taxpayer (an individual, a partnership, or another corporation) to jointly elect with the transferee corporation to have eligible property transferred at an "elected amount" between certain floor and ceiling values — rather than automatically at fair market value.
The elected amount becomes both the transferor's proceeds of disposition and the corporation's cost of the transferred property. By setting the elected amount equal to the transferor's cost base (the adjusted cost base or undepreciated capital cost), the transferor's gain on the transfer is deferred — the gain is not triggered at the time of transfer.
In exchange for the transferred property, the transferor receives consideration from the corporation — typically shares. The specific share consideration and elected amount determine whether any residual gain is triggered at the time of transfer.
What Property Qualifies?
Eligible property for a section 85 rollover includes:
• Capital property (shares, real estate, investments)
• Depreciable property (equipment, vehicles, buildings)
• Eligible capital property (goodwill, trademarks, customer lists — now captured in Class 14.1)
• Canadian and foreign resource properties
• Inventory in certain circumstances
Property that does not qualify includes most types of debt obligations and certain other excluded property.
The Floor and Ceiling Constraints
The elected amount cannot be below a statutory floor or above a statutory ceiling:
Floor: The greater of (i) the fair market value of any non-share consideration received, and (ii) the lesser of the property's cost amount (ACB or UCC) and its fair market value.
Ceiling: The fair market value of the transferred property.
Where the elected amount is set at the cost amount (at or above the floor), the transfer defers the entire gain. Where the floor forces the elected amount above the cost amount, a partial gain is triggered.
The Typical Section 85 Scenario: Incorporating a Business
The most common application of a section 85 rollover is the incorporation of a sole proprietorship. A sole proprietor who has operated for several years has accumulated business assets — goodwill, customer lists, equipment — that may have significant fair market value above their cost base. Incorporating without a section 85 election would trigger all of that gain immediately.
With a section 85 election, the proprietor transfers the business assets to the new corporation at their cost amount (elected amount), receiving shares of the corporation in return. No gain is triggered at the time of transfer. The corporation now holds the assets at the elected amount — the future gain is embedded in the corporation's asset base and will be triggered when the corporation eventually sells those assets.
The Joint Election Requirement
A section 85 election must be filed by both the transferor and the transferee corporation — it is a joint election. The deadline is the earlier of the transferor's tax return due date for the year of transfer and the corporation's tax return due date for its first taxation year that includes the transfer date.
Late elections are permitted but require CRA approval and a late-filing penalty (typically $100 per month to a maximum of $8,000). Given the importance of getting the election right and on time, this is an area where CPA involvement is essential — not optional.
When to Speak With a CPA
Any taxpayer planning to transfer property — particularly a business — to a corporation should engage a CPA before the transfer takes place. The elected amount, the structure of the share consideration, and the timing of the election are all planning decisions that affect both the immediate tax position and the corporation's future cost base for the transferred assets.