Introduction: The Overlooked Power of Section 85
Section 85 of the Income Tax Act is one of the most effective yet underutilized tax strategies in Canada. It allows individuals to transfer property to a corporation on a tax-deferred basis. This mechanism plays a vital role for professionals, entrepreneurs, and family-owned businesses in controlling when—and how—tax obligations arise. When done correctly, it unlocks flexibility without giving up financial control.
Why Does Section 85 Matter?
Imagine building a successful business over several years. You’ve created brand equity, goodwill, and hold valuable real estate or intellectual property. If you want to transfer those assets into a corporation—for liability protection or to prepare for growth—you may be shocked to learn that simply moving assets from your personal name to a company can trigger capital gains tax. Section 85 allows you to defer that tax.
Eligibility and Timing
The most common error people make with Section 85 is waiting too long. The rollover must happen before the triggering transaction—such as selling a business or transferring control. Ideally, it should be part of your initial corporate setup or any major restructuring. It’s also worth noting that the rollover applies only to eligible assets and must be documented properly through CRA Form T2057.
Eligible Assets
- Real estate used in business
- Equipment and depreciable property
- Intellectual property and goodwill
- Shares of another corporation
- Inventory (subject to conditions)
The Process, Step-by-Step
- The transferor and transferee (yourself and your corporation) agree on a transaction.
- A legal transfer agreement is drafted and signed.
- Corporate resolutions authorize the transaction.
- The CRA Form T2057 is completed, filed, and supported by appropriate tax schedules.
- The company issues shares back to you in exchange—usually preferred shares matching the asset’s value.
Why Legal Structuring Matters
Choosing the right share type matters. Will these be redeemable or retractable preferred shares? Are they fixed-value shares to freeze growth for estate planning? Will they carry voting rights? These questions impact tax, control, and succession—making legal advice essential.
Section 85 in Estate Freezes
One of the most powerful applications of Section 85 is in estate freezes. A freeze involves ‘locking in’ the current value of an owner’s interest while issuing new growth shares to children or a family trust. It effectively splits future business growth across generations while minimizing tax exposure at death. Without Section 85, this strategy would result in significant upfront tax costs.
How a Freeze Works
Let’s say your business is worth $1 million. You roll the assets into a corporation and take back $1 million in preferred shares. Your children’s trust receives new common shares, which will increase in value over time. When the business is eventually sold or wound up, the tax applies only to the locked-in value—not the future growth.
Integration with Holding Companies
A holding company structure often relies on Section 85. Business owners might move assets or shares of an operating company into a HoldCo for liability shielding or income splitting. Done properly, this not only protects the core business but also creates room for new investment and generational planning.
CRA Compliance and Documentation
The CRA will scrutinize improperly documented rollovers. Filing Form T2057 late, using vague asset descriptions, or omitting corporate resolutions can cause your deferral to be denied. We ensure every step is validated with minute book updates, share ledgers, and complete filings. Precision matters.
Common Pitfalls and How to Avoid Them
- Using standard form templates without legal review
- Not understanding share class implications
- Electing the wrong transfer value
- Failing to coordinate with your accountant on tax impact
- Treating the Rollover as a ‘formality’ rather than a transaction
Why Clients Call Us After It’s Too Late
Unfortunately, we often get the call after CRA sends a reassessment. In one case, a client transferred IP into a company during a startup reorganization. No T2057 was filed. Two years later, they were audited, reassessed, and hit with a six-figure tax bill. Had they worked with us from the start, this would have been entirely preventable.
Coordinating Your Advisory Team
Section 85 Rollovers are most effective when legal, accounting, and financial teams work together. We engage with your tax accountant to ensure the elected values match their estimates, and we collaborate with estate planners to align corporate changes with long-term goals. Think of it as integrated planning, not isolated transactions.
When to Talk to a Lawyer
- You’re incorporating a business with high-value assets
- You’re restructuring ownership with family or new partners
- You’re transitioning wealth and want to defer capital gains
- You’re consolidating holdings into a holding company
- You’re cleaning up a previous transfer or rollover that was missed
Section 85 and Corporate Due Diligence
Another overlooked benefit of a properly executed Section 85 Rollover is the credibility it brings during due diligence. Whether you’re seeking outside investment, preparing for acquisition, or applying for financing, investors and lenders will scrutinize your minute book and historical structuring. A documented, compliant rollover signals professionalism and reduces transactional risk.
What Happens If You Skip It?
Skipping a Section 85 Rollover may seem harmless—until you’re faced with unexpected tax. For instance, if you transfer IP or real estate into a corporation without filing the rollover, CRA may treat it as a deemed disposition at fair market value. That means immediate tax on unrealized gains. In many cases, this can amount to tens or even hundreds of thousands of dollars.
CRA Audits and Reassessments
We’ve represented clients audited years after their DIY asset transfers. Without the T2057 and supporting legal documentation, CRA will often disallow the deferral and issue reassessments with interest and penalties. These outcomes are preventable with proper legal and accounting support at the outset.
Rollover Alternatives: Why Section 85 Stands Out
While other sections of the Income Tax Act—like 86 or 51—also deal with reorganization, Section 85 is by far the most flexible for owner-managers. It can be used across a range of situations, doesn’t require court approval, and adapts well to family trusts, holding companies, and complex share structures. It’s the Swiss Army knife of tax rollovers.
Final Thoughts
Section 85 is more than a tax tool—it’s a control lever. Used strategically, it shapes how your business is owned, operated, and passed on. But it requires clarity. Legal clarity. Structural clarity. And most importantly, the clarity to act early. At Chiummiento Law, we help you do just that—with precision, insight, and legal protection that lasts.
Ready for the Next Step?
If you’re considering a Section 85 Rollover, don’t wait until after a triggering event. Book a consultation with Chiummiento Law. We’ll review your asset structure, consult with your accountant, and build a legally sound plan that protects your business and your legacy. Don’t leave a six-figure tax problem to chance—plan ahead.
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📧 joseph@chiummiento.com