Resources · Corporate reorganizations

Section 85 rollovers, moving assets without the tax hit.

Ready to incorporate your business? There’s a catch: moving your assets into the new company normally counts as selling them at fair market value — which can trigger tax on years of built-up gains before you’ve seen a dollar. A Section 85 rollover is the election that lets you move them across at their tax cost instead, deferring that tax. Here’s how it works, walked through with a landscaping company and five real assets.

Where to start: read how the election works and the one dial you choose, then open the landscaping example and click through each asset to see how gains, recapture and losses are handled differently.

The concept

Sell it to your corporation — at a price you choose

Section 85 of the Income Tax Act lets you transfer eligible property to your own taxable Canadian corporation and jointly elect the transfer price — the “elected amount” (sometimes called the agreed amount). That figure becomes both your proceeds and the corporation’s cost. Elect at your tax cost and there’s no gain to report — the tax is deferred, not erased.

It’s a joint election

You and the corporation both sign Form T2057 and file it with the CRA. It’s due by the earliest return-filing date of either party for the year of the transfer (a late election is possible for about three years, with a penalty).

You must take back a share

The consideration you receive has to include at least one share of the corporation. Beyond that you can also take “boot” — cash or a promissory note — within limits (more below).

Only eligible property

Capital property, depreciable assets, goodwill and most inventory qualify. Cash doesn’t need rolling, and land held as inventory to resell is excluded — but ordinary business assets are fine.

Why bother? To incorporate an existing proprietorship without a tax bill on accrued gains, to move assets for creditor protection, or to set up income-splitting and future salary-vs-dividend planning. None of it works without clean records — here’s how solid bookkeeping makes the asset values defensible.

The one dial

The elected amount: from tax cost to fair value

You can pick any elected amount between two limits: the asset’s tax cost (the floor) and its fair market value (the ceiling). Where you land decides how much tax is deferred versus triggered today.

↓ Floor · tax cost

Full deferral. Proceeds equal your tax cost (ACB or UCC), so no gain or recapture is reported now.

↔ Anywhere in between

Elect higher to deliberately realize some gain — useful to soak up losses, credits or a low-income year.

↑ Ceiling · fair value

Fully taxable. Proceeds equal FMV, so the entire accrued gain and recapture is realized today.

The boot rule. You can take back cash or a note (“boot”) as part of the deal — but the boot can’t exceed the elected amount. Keep boot at or below your tax cost and the rollover stays fully deferred; take more, and the excess is an immediate gain. That’s the lever that lets you pull value out of the business tax-free — the note you take back becomes a shareholder loan the corporation can repay to you later, tax-free.

Worked example · interactive

Green Valley Landscaping incorporates

Sam runs Green Valley Landscaping as a sole proprietor and is rolling the business into Green Valley Landscaping Ltd. under Section 85. Five assets are coming across — each with a different relationship between tax cost and fair value. Click each one to see how it’s handled.

👈 Pick an asset. Green tags are accrued gains, red is an accrued loss, navy is a wash.

The whole picture

All five assets, side by side

Elect each asset at its tax cost (the truck is the exception — it’s squeezed to fair value). Here’s how the full rollover nets out.

Asset	Tax cost	Fair value	Accrued	Elect at	Result
Goodwill Class 14.1	$0	$50,000	+$50,000	$0	Gain deferred into shares
Equipment Class 8	$25,000 UCC	$32,000	+$7,000 recap.	$25,000	Recapture deferred
Storage-yard land Non-depreciable capital	$70,000	$110,000	+$40,000	$70,000	Capital gain deferred
Truck & trailer Class 10	$34,000 UCC	$28,000	($6,000)	$28,000	Terminal loss denied & deferred
Inventory Plants, mulch, stock	$12,000	$12,000	—	$12,000	Clean transfer
Totals	—	$232,000	—	$135,000	$0 tax today

Boot Sam can take tax-free

up to $135,000

Value carried in the shares

$97,000

Tax triggered on the rollover

Sam takes back a $135,000 promissory note (equal to the total elected amount) plus shares for the $97,000 balance. No tax is due on the transfer. The $97,000 of accrued gains now sits inside the shares — deferred until they’re eventually sold — and that $135,000 note becomes a shareholder loan the company can pay back over time, tax-free.

Valuing the intangible

Where does the $50,000 of goodwill come from?

Goodwill is the slice of a business’s value that doesn’t sit in any one asset — reputation, repeat customers, a trained crew. In the example it’s the $50,000 premium the business is worth above its identifiable assets ($232,000 value − $182,000 of assets). Because Sam built it rather than bought it, its tax cost is $0 — so the whole $50,000 is an accrued gain the rollover defers.

How is that $50,000 actually calculated? Goodwill falls out of valuing the whole business — and there’s more than one method. Our full guide walks through the three main ways to value a business with worked examples, how goodwill is calculated, and what a defensible number needs to hold up to the CRA (which is also why a price-adjustment clause matters).

Read: What’s a business actually worth? →

The trap worth knowing

You can’t roll a loss into your own corporation

The truck showed it: when an asset is worth less than its tax cost, it’s tempting to roll it in and claim the loss. It doesn’t work. Because you and a corporation you control are “affiliated” for tax purposes, the stop-loss rules deny the loss on the transfer — the same idea that stops you from selling a losing stock to your own company just to book the loss.

The loss isn’t gone forever — it’s suspended or parked in the corporation, and may be recognized later when the asset truly leaves the group.
But you get no deduction today, which is usually the whole reason someone hoped to include it.
So loss assets are often better left out of the rollover — kept personally, or sold to an arm’s-length buyer if the loss genuinely matters.

Which assets to include, and at what elected amounts, is exactly the judgment call worth making with your CPA before Form T2057 is filed.

Before you file

Three ways a rollover goes wrong

Missing the T2057 deadline

The election is due by the earliest return-filing date of either party. Miss it and you’re into late-filing penalties — or, past the window, CRA’s discretion.

Taking too much boot

Cash or a note above the elected amount turns your tax-free deferral into an immediate gain. Boot has to stay at or below the tax cost.

No price-adjustment clause

If CRA later revalues an asset, a price-adjustment clause in the agreement lets the numbers self-correct — without it, a bad estimate can mean an unexpected shareholder benefit.

From proprietorship to corporation

Thinking about incorporating?

A Section 85 rollover is powerful, but it’s all in the details — which assets to include, the elected amounts, the boot, and the T2057 filed on time. We handle the whole reorganization end to end. Start by seeing whether incorporating even makes sense with our sole-proprietor-vs-incorporation calculator, then let’s talk.

Book a 30-min chat Send us an email

A conversation starter, not advice. Section 85 is one of the more technical corners of the Income Tax Act, and the numbers here are a simplified illustration. Eligible property, elected amounts, boot limits, the stop-loss rules and the T2057 filing all depend on your specific facts — and the consequences of getting them wrong are real. Use this to understand the shape of a rollover, then let’s structure yours properly before anything is filed.

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