Five places the rollover slips, from the property that qualifies to the agreed amount you elect
By Mina Alexander | Alexander Tax Law
One of the most important things a business owner needs to determine is how to move business assets out of their personal name and into the new corporation.
Here’s where it gets uncomfortable. Under section 69 of the Income Tax Act, when you transfer appreciated property to a corporation you control, the law treats it as a sale at fair market value. It doesn’t matter if you “sold” the asset to your own company for a dollar. The CRA sees fair market value, and you get taxed on the accrued gain. That triggers a tax bill, due before your corporation has earned a single dollar.
One solution may be to exercise a section 85 of the ITA, which lets you and your corporation jointly elect to transfer the property at an agreed amount that sits below fair market value, deferring the gain until the corporation eventually sells the asset.
Think of it as pausing your tax obligation.
But the rollover only works if you get the mechanics right, and there are five places where people tend to slip.
The first is the property itself. Most capital property qualifies, along with goodwill, resource property, and most inventory. Cash doesn’t, because there’s no accrued gain to defer in the first place. Real property held as inventory is also out. Parliament didn’t want developers using section 85 to dress up flip profits as capital gains, so they closed that door.
The second is the corporation on the receiving end. It has to be a taxable Canadian corporation. Rolling assets into a foreign entity will not work, because the CRA wants to keep the future gain within its taxing reach.
The third is the consideration you take back. You can receive cash, a promissory note, or have the corporation assume debt. That’s all fine. But you must also receive at least one share of the corporation. This is where do-it-yourselfers most often fall down. No share, no rollover. It really is that simple.
The fourth is the paperwork. You and the corporation file a joint election on Form T2057, or Form T2058 if a partnership is involved. The deadline is the earlier of the parties’ tax return filing deadlines for the year of the transfer. Miss it and you have a three-year late-filing window, but you’ll pay a penalty.
The fifth is the agreed amount, and this is where the real strategy lives. You can’t just pick a number. The ceiling is the property’s fair market value. The floor is the higher of the fair market value of any boot you receive and, generally, the property’s tax cost, meaning its adjusted cost base for non-depreciable property or undepreciated capital cost for depreciable property. Elect below the floor and the Act quietly pushes you back up. Most rollovers elect right at tax cost for a fully deferred transfer, but there are good reasons to elect higher, like using up expiring losses or crystallizing the lifetime capital gains exemption.
One last thing. Section 85 doesn’t sit by itself in the Act. Section 84.1 can turn what looks like a clean rollover into a surprise deemed dividend if your structure isn’t quite right.
Section 85 is one of the most powerful tools in tax planning. Used well, it moves real value into a corporation without triggering an immediate tax obligation. Used carelessly, it creates problems. The difference comes down to getting the form, the consideration, and the agreed amount right the first time.
Got Questions? Reach out! This isn’t legal advice, just general information.
Get the rollover right the first time
A section 85 election is difficult to unwind once the return is filed, and the problems usually surface years later on a sale or an audit. We handle the share structure, the consideration, the agreed amount and the T2057, and we check the transaction against section 84.1 before anything is signed.
Alexander Tax Law
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