Incorporating usually means moving assets you already own into a company you also own. Without planning, that step counts as a sale at full value, and the bill lands on your personal return. Below you will find the election that prevents it, how to complete and file the T2057, and the mistakes that cost owner-managers real money.
Key Takeaways
- The election is joint. You and your corporation both sign, and both are bound by the number you pick.
- The elected amount becomes your proceeds and the company’s cost base.
- You must take back at least one share. Cash or a note alone will not qualify.
- Boot above your cost base creates a gain in the year of the deal.
- The T2057 is due on the earliest filing due date of any party for the year of the transfer, and a late one carries a penalty of up to $8,000.
- Postponement is not forgiveness. The gain resurfaces when the company sells, or when you sell your shares.
What a Section 85 Rollover Does (and What It Doesn’t)
Move property to a corporation you control and the Income Tax Act (ITA) treats the disposition as happening at fair market value (FMV) under subsection 69(1). You would report the whole accrued gain personally, on cash you never received. Electing under ITA 85(1) overrides that default and substitutes a price you choose.
The relief is real, but narrow. It postpones the gain rather than cancelling it, will not rescue the wrong asset, and will not protect a valuation the CRA later disputes.
How a Section 85 Rollover Works: Transferor, Transferee and the Elected Amount
You are the transferor. The corporation is the transferee, and it must be a taxable Canadian corporation. Together you agree on one figure, which does double duty: it is your proceeds of disposition, and it is the company’s cost of the property. Set it at your existing cost base and no gain arises today.
What comes back to you must include shares of the corporation’s capital stock. That condition sits in the opening words of subsection 85(1), and it is absolute. Pay entirely in cash or debt and the provision does not apply, so subsection 69(1) governs instead.
How to Complete and File Form T2057 for a Section 85 Rollover
The T2057 form is the prescribed form for the election, and its current version is T2057 E (25). Answer every question on the election form: its notes warn that an incomplete election may be considered invalid.
Who signs the T2057
Part 5 carries two signatures. You sign on your own behalf, or a person you authorize signs for you, and an authorized officer or authorized person signs for the transferee corporation.
What goes on the T2057
- Part 1: your name, account number and tax year, the same for the corporation, and the names and account numbers of any co-owners.
- Part 2: the late-filing penalty, if the election is late or amended.
- Part 3: seven questions, such as whether there is a written agreement, a valuation report or a price adjustment clause, plus the paid-up capital of any private company shares you transfer.
- Part 4: the number, class, redemption value and paid-up capital of your new shares, whether they vote, and whether they are redeemable at your option.
- Schedule A: each property by type, with its market value, its cost amount, the agreed amount, the gain or income to report, and the share and non-share consideration received for it.
Keep your working papers, such as cost base calculations and the valuation method, rather than filing them; the form says you must keep them in case you are asked. Properties transferred on different dates need separate forms.
When the T2057 is due
Subsection 85(6) sets one deadline for everyone: the earliest day on which any party to the election must file a return of income for the tax year in which the transfer happened. It is not simply your date or the corporation’s: whichever return comes due first sets it.
A corporation must file within six months of its year end, and by the last day of the sixth month when the year ends on a month end. You file your own return by April 30, or by June 15 if you or your cohabiting spouse or common-law partner carried on a business that year. Line 025 of the T2057 asks whether you or your spouse were self-employed that year.
By our arithmetic, here is how the rule works out in three common cases:
| Transfer | Your return due | Corporation’s return due | T2057 due |
|---|---|---|---|
| You roll your unincorporated business into a new company on 1 December 2025; its first year ends 30 November 2026 | 15 June 2026 | 31 May 2027 | 15 June 2026 |
| You and your spouse are not self-employed, and you move operating company shares to a new holdco on 1 March 2026; its year ends 31 December 2026 | 30 April 2027 | 30 June 2027 | 30 April 2027 |
| You roll your business into a new company on 1 February 2026 and give it a short first year ending 31 July 2026 | 15 June 2027 | 31 January 2027 | 31 January 2027 |
The third row is the trap: a short first corporate year can pull the deadline months ahead of your personal return.
How to send the T2057
You can file electronically or on paper. According to the special elections and returns page, you or your representative can use Submit documents in My Account, My Business Account or Represent a Client, or an authorized service provider can file the T2057 with certified software. On paper, mail one copy to your tax centre, separately from any return. Co-owners of the same property each complete a form, and one of them files all the forms, with a list of everyone electing, at the corporation’s tax centre.
In Quebec, Revenu Québec also requires its own form: TP-518-V for a transfer by a taxpayer, or TP-529-V for a transfer by a partnership.
Partnerships use Form T2058
When a partnership transfers the property, subsection 85(2) applies and the election goes on Form T2058. The corporation and all the members of the partnership elect jointly. One member can sign for everyone under an authorizing agreement; without one, each member signs. A designated partner files it electronically or mails it to the tax centre serving the corporation, by the same deadline.
Late and amended elections, and the penalty
Missing the date is survivable. Subsection 85(7) accepts an election up to three years late if you pay an estimate of the penalty when you file. Beyond that, or to amend an election, subsection 85(7.1) leaves it to the Minister, who must consider it just and equitable, and the form requires a written explanation along with the estimated penalty.
Information Circular IC76-19R3, from 1996 and still published, says amended elections will generally be accepted when they correct an inaccurate property valuation or an amount clearly inserted in error. It rules out amendments whose main purpose is retroactive tax planning, or changing the agreed amount in a statute-barred year.
The federal penalty under subsection 85(8) is widely misquoted as “$100 per month to a maximum of $8,000”. It is the lesser of two amounts, counted for each month or part of a month late: one quarter of 1% of the spread between market value and the agreed amount, or $100, with the $100 calculation capped at $8,000. By our arithmetic, those formulas cross at a spread of $40,000. Below that point the percentage calculation wins, so a deal with a $20,000 spread filed twelve months late costs $600, not $1,200. The form also notes that daily compound interest at the prescribed rate applies to unpaid penalties.
Elected Amount Limits When You Transfer Assets into Your Corporation
Your chosen figure has to sit inside a floor and a ceiling. The ceiling is always the fair market value of the property. The floor depends on what you are moving.
| Property type | Floor: you cannot elect below |
|---|---|
| Capital property that is not depreciated (shares, land, securities) | The lesser of market value and adjusted cost base (ACB) |
| Depreciable property (equipment, vehicles, goodwill) | The least of the class’s undepreciated capital cost (UCC), the property’s cost, and its market value |
| Inventory, excluding real property | The lesser of market value and cost amount |
| Any property where you also take back boot | The value of the boot received |
Two points follow. Goodwill has sat in Class 14.1, a depreciable class, since the eligible capital property regime ended on 1 January 2017, so the UCC floor governs it rather than the ACB floor. Self-generated goodwill in a young practice usually carries nil UCC, which lets you elect at the bottom. The T2057 also states plainly that the agreed amount cannot be zero, so the practical minimum there is $1.
Boot: Taking Cash or a Note Without Breaking the Rollover
Boot is anything the corporation gives you other than shares, usually cash or a promissory note. It is useful, because a note lets you draw money out later without declaring a dividend. The catch sits in paragraph 85(1)(b): where the amount you elect falls below the value of the non-share consideration, your elected amount is deemed to equal that value.
In practice, then, your safe boot limit is your tax cost rather than the property’s worth.
Example. You move land you hold as capital property, worth $400,000 with a cost base of $60,000, and you elect $60,000. Take back a $60,000 note plus shares worth $340,000 and nothing is taxable now. Take back a $150,000 note instead and paragraph 85(1)(b) lifts your agreed amount to $150,000, crystallizing a $90,000 capital gain.
In our corporate reorganization work, boot is the single most common reason a section 85 file goes wrong. Owner-managers hear that a note comes out tax-free, then size it against what the business is worth rather than what it cost them. If you plan to draw on that note, review the shareholder loan repayment rules first.
What Counts as Eligible Property
Subsection 85(1.1) sets out the list, and it is broad: capital property of both kinds, most inventory, Canadian and foreign resource property, plus certain securities and debt obligations held by insurers, lenders and financial institutions.
The exclusions matter more. Real property held as inventory does not qualify, which rules out a developer’s lots even though the same developer’s office building would be fine. Real property owned by a non-resident is excluded too, unless it is capital property used in a business the non-resident carries on in Canada and further conditions are met.
The best candidates carry a large gain on a small tax cost, such as goodwill and other intangibles. Receivables rarely carry a gain. When you sell all or substantially all of the business’s property, a separate joint election under section 22 can move them instead, and it lets the corporation deduct any that later go bad.
Three Common Uses for Business Owners
Incorporating a sole proprietorship. You have built customer lists, equipment, and goodwill inside an unincorporated business. Section 85 carries all of it across at cost, so incorporation itself has no immediate tax consequences. If you have yet to incorporate your business, start with how to open a corporation in Ontario.
Estate freezes. You exchange your common shares for fixed-value preferred shares, and new common shares go to the next generation or a family trust. Your gain freezes at today’s worth, and future growth accrues to them. Section 85 lets you set the agreed amount on a T2057; section 86 applies to the same exchange automatically, with no election, and steps aside under subsection 86(3) whenever subsection 85(1) applies. Professionals should also read the tax rules for professional corporations, because provincial restrictions limit who may hold those growth shares.
Moving assets to a holdco. Shifting operating-company shares or surplus investments into a holding company structure is a classic creditor-protection play, and section 85 is how they get there without a tax bill.
Traps That Undo the Tax Deferral
- Section 84.1. If you, as an individual resident in Canada, roll shares of a Canadian company into another corporation you do not deal with at arm’s length, and the two companies are connected afterwards, boot above the greater of the shares’ paid-up capital and their cost base, as that section adjusts it, can become a deemed dividend. It regularly surprises owners setting up a holdco; our guide to surplus stripping in Canada explains it.
- The GST/HST side. Section 85 does nothing for sales tax. Where the company acquires all or substantially all of the property needed to carry on the business, a joint election under section 167 of the Excise Tax Act, made on Form GST44, generally means no GST/HST applies to the transfer. It is not available if you are a registrant and the company is not.
- Valuation. Paragraph 85(1)(e.2) raises your agreed amount where the deal confers a benefit on a related person, and the CRA can reassess an optimistic goodwill figure. A price adjustment clause is the standard protection, and Income Tax Folio S4-F3-C1 sets out the four conditions a clause must meet to be respected.
- Paid-up capital. Subsection 85(2.1) grinds the paid-up capital of your new shares down to the cost to the corporation of the property, less any boot. The share value you see is not what you can later return tax-free.
- Paperwork. You need a written agreement, directors’ resolutions, and share certificates that match what the T2057 reports, all kept in your corporate minute book. Mismatched documents are what auditors find first.
- Provincial land transfer tax. Rolling real property into a company is a conveyance, and Ontario’s Land Transfer Tax Act taxes it on the value of the consideration, which can include your new shares, even though no capital gains tax arises. Other provinces have their own rules.
Frequently Asked Questions
What is a Section 85 rollover?
It is a joint election that lets you move qualifying property to a taxable Canadian corporation at an agreed price rather than at market value. Because you set the price yourself, you can defer tax on the gain that an ordinary sale would trigger.
Do you have to receive shares?
Yes. Consideration must include shares in the corporation, even a single share. Cash and promissory notes may accompany them, but they cannot make up the whole payment.
What is the elected amount?
It is the single figure you and the corporation agree on. That number is your proceeds and simultaneously the company’s cost of the property, which is why setting it at your existing cost base produces no gain today.
Which assets are best to transfer under section 85?
Assets with a large gain on a small cost base benefit most, such as goodwill. Real property held as inventory, such as a developer’s land, does not qualify under subsection 85(1.1), and accounts receivable rarely carry a gain.
When is the T2057 election due?
The election is due on the earliest date any party has to file an income tax return for the tax year of the transfer. For a sole proprietor who incorporates, that is often June 15, but a company with a short first tax year can bring it forward.
Can you file a section 85 election late?
Yes. Subsection 85(7) accepts it up to three years after the due date if you pay an estimate of the penalty when you file, and that penalty cannot exceed $8,000. After three years, acceptance is at the Minister’s discretion under subsection 85(7.1), with a written explanation attached.
What is the difference between a section 85 and a section 86 rollover?
Section 85 needs a joint election on the T2057 and lets you choose the agreed amount within set limits. Section 86 applies automatically, with no election, when you exchange all your shares of a class for other shares of the same corporation in a reorganization of its capital. Subsection 86(3) turns section 86 off wherever subsection 85(1) applies.
Does the election eliminate tax permanently?
No. It shifts the gain into the shares you receive and into the company’s low cost base. Tax falls due when the corporation sells the property, or when you dispose of your shares.
Making the Rollover Work for Your Small Business
Run through this before you sign anything:
- List every asset moving across, with its market value and its cost base.
- Confirm each one qualifies under subsection 85(1.1).
- Get a defensible valuation for goodwill and any real property.
- Match the correct floor rule to each asset class.
- Size boot to cost base, never to market value.
- Check whether section 84.1 or the GST/HST election applies.
- Work out every party’s filing due date and diarize the earliest one the day the deal closes.
- Complete every part of the T2057, sign it with the corporation, and file it electronically or by mail.
Handled properly, this election turns an expensive incorporation into a neutral one. Handled loosely, it produces a gain you did not budget for and a penalty you did not need to pay. Because the right figure depends on your cost base, your draw plans, and your province, a review of your own numbers beats any general rule. Our corporate tax planning team works through these deals regularly, so book a consultation to model yours before the deadline arrives.
