Section 85 Rollover


Section 85 of the Income Tax Act (ITA) is an important tax planning tool that allows corporations to defer taxation in certain transactions that are often seen in incorporations and corporate reorganizations. Simply put, a section 85 rollover allows a taxpayer to transfer eligible property on a tax-deferred basis to a taxable Canadian corporation in situations where the capital gains on said property might otherwise have accrued and become taxable. For a section 85 rollover to be valid, three general qualifications must first be met.

First, there both the transferor and transferee must be eligible under the ITA. An eligible transferor must be a taxpayer, whether they’re an individual, a corporation, or a trust. An eligible transferee must be a Canadian corporation, meaning that it was incorporated in or a resident of Canada.

Secondly, the property that is being transferred must be eligible property. Defined under subsection 85(1.1), eligible property includes:

  1. capital property
  2. real or immovable property,
  3. Canadian resource property;
  4. foreign resource property;
  5. inventory;
  6. certain security or debt obligations; and
  7. real or immovable property owned by a non-resident used to carry on business in Canada.

Note that the ITA specifically excludes real property inventory since that would allow taxpayers to convert taxable income into capital gains.

The third requirement is that the consideration that the transferor receives from the transfer has to include shares of the transferee corporation.


When executing the section 85 rollover, the transferor and the transferee must file a joint election with the elected amount that will represent the proceeds of disposition to the transferor and the cost to the transferee. The ITA mandates upper and lower limits on the elected amount as follows:

For the upper limit, the elected amount cannot be greater than the fair market value (FMV) of the property at the time of the transfer.

For the lower limit, the elected amount cannot be less than the greater of either

  1.  the FMV of the non-share consideration received by the transferor; or
  2. both the FMV of the property and the cost amount of the property to the transferor at the time of disposition.

Complicating Factors

At face value, a section 85 rollover can seem deceptively simple. However, having a valid rollover is crucial since an invalid rollover, for whatever reason, can impose severe and immediate tax liabilities on the transferor. This can include reassessments and penalties imposed by the CRA. A prudent taxpayer should consider getting a professional valuation on the assets being transferred. They should also consider including price-adjustment clauses in the section 85 rollover agreement in the event that the CRA determines that the FMV or the cost of the transferred property is different than what was filed under the election. If you are considering transferring capital property to a corporation, consult a tax professional on whether the section 85 rollover is the right choice for your business.

Published on January 28, 2022