What is a tax rollover for a corporation?

A tax rollover is a powerful strategy that allows business owners to transfer assets or shares to a corporation without triggering immediate tax consequences. Regulated by Section 85 of the Income Tax Act (ITA), a rollover allows you to defer capital gains tax that would otherwise be payable upon the disposition of property.

Whether you’re incorporating, restructuring, or transferring property between related corporations, a Section 85 rollover can help you optimize your tax planning, preserve cash flow, and avoid unnecessary tax burdens in the short term.

How does tax rollover work under Section 85 of the Income Tax Act?

Under section 85 of the Income Tax Act (ITA), a transferor (e.g., a business owner) can transfer eligible property, such as real estate, business assets, or inventory, to a taxable Canadian corporation (the transferee) in exchange for at least one share of the corporation’s capital stock. This exchange must occur at an agreed transfer value, often equal to the adjusted cost base or less than fair market value (FMV), and must be formalized using Form T2057.

This tax deferral mechanism delays the recognition of the capital gain until the asset is sold later by the corporation or the shares are disposed of by the transferor.

Common situations where a tax rollover is used:

• At incorporation, to move personal business assets into the newly formed corporation;
• During a corporate reorganization, to transfer assets between related entities;
• For estate planning purposes, such as intergenerational business transfers.

If the property has increased in value, but the proceeds of disposition are set below fair market value (FMV) as allowed by Section 85, no immediate tax will apply. Tax will only be triggered upon a future disposition of property.

Tax rollover between two corporations (section 85.1 or 88 of the ITA)

Suppose Corporation A wants to transfer certain capital property to Corporation B in exchange for shares. Without a rollover, this would trigger a capital gain, resulting in taxes owing.

By electing under Section 85, Corporation A can transfer the assets to Corporation B in exchange for shares, while deferring the tax that would otherwise be due. The rollover provisions require the transaction to be clearly documented in a tax memo and reported via Form T2057.

Direct tax benefits include:

• Corporation A retains cash flow by deferring the tax;
• Corporation B gets a cost base that reflects the tax-deferred value, possibly lowering future tax liabilities.

Section 85 rollover between an individual and their corporation

Let’s take the example of Mr. Yves, who owns a building purchased for $100,000. Its FMV is now $200,000, and he wishes to transfer this non-depreciable capital property to his corporation.

Without a rollover, transferring the property would result in a capital gain and an immediate tax bill. Using Section 85, Mr. Yves can transfer the property to the corporation at an agreed value equal to its ACB, in exchange for shares.

He can then:

• Defer taxes and avoid triggering a capital gain immediately;
• Reinvest the capital within the corporation to fund growth;
• Retain control and maximize tax efficiency by choosing when to realize the gain through a future disposition of shares.

Conditions for a valid tax rollover

To benefit from a tax rollover, specific conditions must be met:

• Eligible transferor and transferee: The transferor must be a taxpayer (individual or corporation) and the transferee must be a taxable Canadian corporation;
• Eligible property: Includes capital property, inventory, and certain rights or interests;
• Section 85 election: You must properly complete and submit Form T2057 by the tax return due date for the year in which the rollover occurs;
• Fair consideration: The value and consideration must be reasonable and justifiable;
• Proper documentation: Maintain supporting documents for CRA review and ensure the transfer complies with applicable rules and anti-avoidance provisions.

What are the benefits of a tax rollover?

A well-structured Section 85 rollover can significantly improve your corporate tax strategy. Here's how:

Reduced immediate tax burden

The tax rollover, governed by section 85 of the ITA, allows you to defer the taxation normally due on the transfer of assets or shares. In other words, you can transfer your assets at a value corresponding to their tax cost, or at a value agreed between you (shareholder) and your company. The result: no immediate tax liability.

Image

Tax optimization and flexibility

A rollover provides greater tax deferral options. You can defer the capital gains tax until a later tax year, allowing you to time your disposition when it’s most advantageous. This gives you flexibility to manage your tax liabilities according to business needs.

Working with a lawyer and tax advisor who understands the technical aspects of rollovers under the Income Tax Act ensures that your transaction is compliant and optimized for your specific case.

Ideal for business succession or restructuring

Whether you're transferring business assets to the new corporation, restructuring ownership, or preparing for a generational handover, a Section 85 rollover offers legal and financial clarity. By issuing at least one share as consideration, the corporation ensures continuity without triggering an immediate tax event.

By documenting every step, share issuance, IOUs, agreements, you not only comply with CRA standards, but also reduce the risk of disputes or audits.

Why choose T2inc.ca for your corporate tax needs?

Tax rollovers are a powerful tax planning tool, but also a complex one. While it allows assets or shares to be transferred without triggering immediate tax, it raises a number of accounting and tax issues, particularly in relation to a company's tax return. For entrepreneurs, it is therefore essential to ensure that this type of transaction is well documented and properly integrated into the T2 return at the federal level or the CO-17 return at the Quebec level.

At T2inc.ca, we specialize in corporate tax returns (T2 and CO-17), whether active or inactive. If you've recently completed a tax rollover with the help of a tax professional or professional partner, our team can take over to ensure that all tax impacts are accurately addressed in your returns.

Need help filing your return after a tax rollover? Contact us today for a quote or to speak with a specialist about your business tax situation.

FAQ — Tax rollover

What is a tax rollover?

A tax rollover is a provision under Section 85 of the Income Tax Act that allows taxpayers to transfer property to a corporation without triggering immediate capital gains tax.

Who can qualify for a Section 85 rollover?

Business owners, entrepreneurs, and corporations looking to transfer assets or restructure operations without incurring immediate tax can benefit.

Does a rollover eliminate tax altogether?

No. It defers tax to a future date, typically when the asset or share is sold.

Is form T2057 mandatory?

Yes. To elect under Section 85, Form T2057 must be submitted on time. Otherwise, the transfer will be fully taxable.

Can I do a rollover without a tax specialist?

Technically, yes. But it's highly discouraged. Due to the complexity of rollover provisions and potential errors, working with a professional is essential.