The Section 85 Rollover, Explained for Ontario Business Owners

If you already run a business as a sole proprietor and decide to incorporate later, or you want to move property you own personally — shares, real estate, equipment — into a corporation, a plain sale would normally trigger tax immediately on any gain in value. The section 85 rollover is the mechanism the Income Tax Act provides to avoid that immediate tax hit, letting you transfer eligible property into a corporation you control in exchange for shares, with the tax on any built-in gain deferred rather than eliminated.

It's one of the most commonly used provisions in Canadian corporate tax planning, and also one of the more technical ones. This guide explains the basic mechanics, when it's typically used, and why it's not something to attempt without professional help.

The Problem It Solves

Normally, when you dispose of property — by selling it, gifting it, or transferring it into a corporation — you're treated as having sold it for its fair market value, and any gain over what you originally paid (your cost, or "adjusted cost base") is taxed in the year of the transfer. If you've built up meaningful value in an asset or an unincorporated business over the years, moving it into a corporation at fair market value would mean paying tax on that built-up gain right away, even though you haven't actually cashed out — you've just changed the legal form the business or asset is held in.

A section 85 rollover lets you sidestep that immediate tax bill by allowing you and the corporation to jointly elect an amount — the "elected amount" — somewhere between your original cost and the property's fair market value, as the deemed proceeds of the transfer. The gain that would otherwise be taxed immediately is deferred instead, generally until you eventually dispose of the shares you received (or the corporation later disposes of the underlying property).

How the Mechanism Works, Step by Step

1. You (or your existing unincorporated business) own eligible property — this commonly includes shares, real estate used in a business, equipment, and other business assets, though not every type of property qualifies.
2. You transfer that property to a corporation you control, typically a newly incorporated company set up to hold the business going forward.
3. The corporation issues you shares as consideration for the property — this is the core requirement of the rollover; at least some share consideration generally has to be part of what you receive back.
4. You and the corporation jointly elect an amount between the property's original cost and its fair market value, which becomes the deemed proceeds of disposition for you and the corporation's deemed cost for the property.
5. You and the corporation file the joint election with the CRA using the prescribed election form, within a deadline tied to your tax filing due dates — this filing step is not optional, and missing it can undo the intended tax deferral.
6. The deferred gain becomes embedded in the shares you hold. When you eventually sell or otherwise dispose of those shares, the deferred gain (or part of it) generally comes back into play at that point.

When Business Owners Typically Use It

• Incorporating an existing sole proprietorship or partnership that has grown in value, without triggering immediate tax on goodwill, equipment, or other assets that have appreciated.
• Transferring appreciated real estate or investments into a corporation, such as consolidating personally held rental property into a corporate structure.
• Reorganizing a corporate group, where assets need to move between related corporations as part of a broader restructuring without an immediate tax cost.
• Estate and succession planning, where a rollover is often one building block in a larger plan to pass a business to the next generation or to a trust.

Why This Isn't a Do-It-Yourself Election

A section 85 rollover looks simple in outline but is unforgiving in the details:

• Choosing the wrong elected amount can trigger an immediate tax result you were trying to avoid, or produce an unintended outcome for the corporation's future tax position.
• Not receiving enough — or the right kind of — share consideration can disqualify the transaction from rollover treatment entirely.
• Missing the election filing deadline can undo the deferral you thought you'd locked in, and correcting a missed or defective election after the fact is far harder than filing it correctly the first time.
• Interaction with other rules — including anti-avoidance provisions and the tax treatment of any non-share consideration ("boot") you receive alongside the shares — can change the analysis depending on exactly what's being transferred and how.

Because the stakes include both the tax deferral itself and potential penalties for an incorrect filing, a section 85 rollover should be planned and documented with a tax lawyer and accountant working together, not attempted from a template.

Frequently asked questions