What the section 85 rollover does.
It lets a Canadian taxpayer transfer eligible property to a taxable Canadian corporation and choose proceeds equal to tax cost — so no capital gain is realized on the transfer, even though the property may have appreciated significantly.
Without s.85, contributing appreciated property to a corporation in exchange for shares would be a deemed disposition at fair market value under s.69 — triggering tax on the embedded gain. Section 85 overrides that result. The transferor and the corporation file a joint election (Form T2057) selecting an "elected amount" that, within statutory limits, becomes both the transferor's proceeds of disposition and the corporation's cost of the property.
The elected amount.
The election sets a single number — the elected amount — that drives the entire transaction. It becomes the transferor's deemed proceeds, the corporation's deemed cost, and (subject to ordering rules) the ACB of the shares issued. Subsection 85(1) imposes three limits:
| Limit | Rule | What it means |
|---|---|---|
| Upper | ≤ fair market value | You cannot elect higher than what the property is actually worth. |
| Lower (boot) | ≥ FMV of non-share consideration | If you take back a $100,000 promissory note, the elected amount must be at least $100,000. |
| Lower (tax cost) | ≥ ACB / UCC / cost amount | You cannot elect below the property's existing tax cost — preventing the creation of artificial losses. |
Choose elected amount = tax cost and the transfer is fully deferred. Choose a higher elected amount and you crystallize gain on purpose — almost always done to use the LCGE while it is available.
What you can roll.
Subsection 85(1.1) defines "eligible property." In practice:
Generally eligible
Capital property (including shares of another corporation, both public and private), Canadian and foreign resource property, eligible capital property (now Class 14.1), depreciable property, and inventory of an active business other than real property held as inventory. Real property used in an active business is eligible if held as capital property.
Excluded
Cash (nothing to defer), real property inventory of a non-resident, accounts receivable (usually elected separately under s.22 rather than s.85), and certain partnership interests. Personal-use property is technically eligible but rarely sensible to roll.
Boot and shares.
The corporation must issue at least one share. In practice, the consideration is a deliberate mix of boot and preferred shares.
Boot (non-share consideration)
A promissory note or assumed liability equal to the property's tax cost. This pulls cost out of the corporation tax-free over time — the transferor has effectively converted appreciated property into a loan receivable equal to ACB, plus shares equal to the embedded gain.
Freeze shares
Retractable, non-cumulative preferred shares with a fixed redemption amount equal to FMV of the property minus the boot. Standard design: voting (or non-voting) preferred shares, redeemable and retractable at a fixed price, with appropriate price-adjustment clauses to handle later CRA valuation challenges.
Price-adjustment clause
Every well-drafted s.85 transaction includes a price-adjustment clause in the share terms and the election: if CRA later determines a different FMV, the redemption amount of the preferred shares adjusts automatically, preserving the rollover.
The four patterns.
| Pattern | What's transferred | Why s.85 is used |
|---|---|---|
| Incorporation of a sole proprietorship | Business assets, goodwill, inventory | Move the business into a CCPC without triggering tax on built-in gain or recapture. |
| Estate freeze | Opco shares (to a new holdco) | Lock the founder's value into fixed-FMV preferred shares; let new common shares (issued to a family trust) capture future growth. |
| LCGE crystallization | QSBC shares (to a new holdco) | Elect at FMV to trigger gain today, shelter it with the Lifetime Capital Gains Exemption, and step up the share ACB. |
| Corporate reorganization | Shares or assets between related corporations | Move property to position for sale, a butterfly, or post-mortem pipeline planning without realizing gain. |
The freeze, step by step.
The most common HNW use of s.85. Founder owns 100 common shares of Opco worth $5M with $100 of ACB.
- New Holdco is incorporated. A family trust subscribes for new common (growth) shares for nominal value.
- Founder transfers the 100 Opco common shares to Holdco under s.85, receiving back: a small promissory note (≤ $100 ACB) and retractable preferred shares with a redemption amount of $5M.
- Elected amount = $100 (ACB). No gain. Founder's value is now frozen in the preferred shares at $5M. All future growth accrues to the family trust's common shares.
- On death, the founder's deemed disposition is on the $5M preferred shares only — the post-freeze growth is taxed in the next generation's hands, decades later.
See the dedicated Estate Freeze strategy page for the planning framework, and the Trusts guide for the family trust mechanics.
Crystallizing the LCGE.
Same mechanics as the freeze — but the elected amount is set above ACB on purpose. If QSBC shares with $1.25M of accrued gain are rolled to a new holdco and the elected amount is FMV (not ACB), the entire gain is triggered today. The transferor claims the Lifetime Capital Gains Exemption on the personal return to shelter it, and the new preferred shares have a stepped-up ACB equal to FMV.
Crystallization is the answer to the question: "What if the LCGE rules change before I sell?" Triggering the gain at today's rules under a fully voluntary s.85 transaction is the conservative response — and is a routine year-end planning item for owners of QSBC-eligible companies.
Crystallization triggers AMT exposure on the personal return and may have CNIL implications. The transaction should always be modelled before filing.
Where s.85 transactions go wrong.
Boot exceeds tax cost
The most common error. If the promissory note or assumed liability exceeds the property's ACB, s.85(1)(b) deems the elected amount to equal the boot — triggering a gain even though the transferor intended a tax-deferred rollover.
Missed T2057 filing
The election is not automatic. It must be filed on Form T2057 by the earlier of the transferor's and corporation's tax return due date for the year of transfer. Late-filing within three years carries a penalty of the lesser of $100 per month or $8,000.
No price-adjustment clause
If CRA reassesses FMV upward, the absence of a price-adjustment clause causes a deemed shareholder benefit under s.15(1) and partial loss of the rollover. The clause must be in both the share conditions and the election.
Inadequate share consideration
The corporation must actually issue shares (at least one). Receiving only debt makes s.85 unavailable. Even a single nominal share suffices if drafted properly.
Stop-loss and ordering rules
Where the elected amount creates a small remaining gain, s.85(1)(g.1), s.84.1 and the affiliated-person stop-loss rules can recharacterize results in unintended ways. Always model.
The T2057.
Form T2057 is filed by the transferor (T2058 if the transferor is a partnership). One form per property — or one summary form with a detailed schedule. The form requires the elected amount, the FMV, the consideration received (boot and shares broken out), and the property description. Both the transferor and the corporation sign.
Documentation that should sit with the T2057: the asset purchase or share-transfer agreement with the price-adjustment clause; the corporate resolutions issuing the preferred shares and authorizing the boot; the FMV valuation supporting the elected amount; and the shareholders' ledger reflecting the new share issuance.
FAQ
Yes. The transferor and the corporation simply have to agree on the consideration and jointly file the election. In practice, transfers to unrelated corporations are rare — most s.85 rollovers happen within a single owner's group of related entities (incorporating a sole prop, or moving shares between owner-related holdcos).
Yes if held as capital property and used in an active business (or as a long-term capital asset). Real property held as inventory by a non-resident is excluded. Rolling personally held investment real estate into a corporation is mechanically possible but raises GST/HST, land transfer tax, and mortgage assumability issues — model these before filing.
Amended elections are permitted in narrow circumstances under s.85(7.1) where the original election produced an unintended result. CRA's discretion is required and the amendment must be filed within prescribed timelines.
When non-arm's length parties transfer shares to a corporation under s.85, s.84.1 can deem a dividend and grind ACB if the consideration exceeds the greater of PUC and "hard ACB." This is the principal reason DIY s.85 transactions go wrong — always coordinate with the CPA before signing.
A non-resident transferor can use s.85 only for taxable Canadian property and certain other limited items. Most non-residents incorporating Canadian operations use other mechanisms.
Footnote
This publication is protected by copyright. Goald & Co Financial Inc. is not engaged in rendering tax or legal advice. This guide contains a general discussion of certain tax and legal developments and should not be construed as tax or legal advice. Should you wish to discuss this or any other Goald & Co guide, please contact info@goald.ca.
Continue with the related references.
Section 85 rarely stands alone — it is one tool inside a larger planning sequence. These references explain what comes next.
A 30-minute strategy call.
Send us a summary of the corporate structure and the property in question. We will walk through the elected amount, the boot/share split, and how the s.85 election sits inside your larger freeze, LCGE or succession plan.
Book a strategy callPrimary sources cited in this guide
Every link below points to the specific statute, CRA technical publication, form, or court decision that supports a factual claim made in this guide. Analysis, opinions, and illustrative figures are Goald & Co's own and are not attributed to these sources.
Disclaimer. This guide is an educational reference compiled by Goald & Co Financial Inc. Section 85 rollovers depend on detailed facts and the interaction of multiple Income Tax Act provisions, and must be implemented in coordination with the taxpayer's CPA and tax counsel. Nothing here is tax, legal, accounting or investment advice.