When you incorporate a business or restructure a corporation, the CRA doesn’t automatically let you move assets over for free. Without a section 85 rollover, transferring property to your corporation is treated as a disposition at fair market value. If those assets have appreciated, the tax bill arrives immediately on paper, even if no cash changes hands. This guide explains exactly how section 85 rollovers work: what qualifies, how to set the agreed amount, when to file Form T2057, and what mistakes invite a reassessment. The mechanics are learnable, and understanding them is the first step to knowing whether you need one.
What property actually qualifies for section 85 rollovers
Subsection 85(1.1) of the Income Tax Act defines what counts as eligible property. The list includes capital property (both depreciable and non-depreciable), Canadian resource property, foreign resource property, and certain types of inventory. A sole proprietor transferring equipment or resource rights to a newly incorporated company can typically use the rollover provision. Real property, such as a rental building, is subject to specific rules and exclusions under subsection 85(1.1); many real properties are excluded except in narrow statutory cases, so confirm eligibility before assuming a building qualifies. Work in progress may qualify in certain business-transfer situations where it is transferred as part of substantially all of a business, depending on how it is accounted for and subject to CRA guidance under subsection 85(1.1).
Several common assets don’t qualify, and this catches business owners off guard. Cash, prepaid expenses, and real property held as inventory are excluded from a section 85 election. Accounts receivable fall into a grey area: CRA guidance treats them as eligible only in specific business-transfer situations, not as a general category. If you try to roll over a non-qualifying asset, the election is ineffective for that property and the transfer is treated as a fair market value disposition. Knowing the exclusions before you structure the transaction prevents expensive corrections down the road.
How the agreed amount shapes your tax result
The agreed amount is the figure the transferor and the corporation jointly elect as the transfer price. It is not a free choice. Under subsection 85(1), the agreed amount must stay within a statutory range: it cannot be lower than the fair market value of any non-share consideration (boot) received, and it cannot exceed the fair market value of the transferred property itself. Within that range, the transferor can elect a number close to the adjusted cost base or undepreciated capital cost of the asset, deferring any embedded gain until the shares received are eventually sold.
What happens when the agreed amount is wrong
If the agreed amount falls below the statutory floor, the CRA deems it equal to the fair market value of the non-share consideration received, triggering the gain the rollover was supposed to defer. If it exceeds the ceiling, the agreed amount is reduced to fair market value, limiting the transferor’s proceeds. Both errors affect the transferee corporation’s cost base in the asset simultaneously. A poorly set agreed amount doesn’t cause a minor filing correction, it can collapse the tax deferral entirely and generate immediate taxable income.
When a business owner should use section 85 rollovers
The most common use case is a sole proprietor who decides to incorporate. Without a section 85 election, transferring business assets to the new corporation is a disposition at fair market value. If those assets have appreciated, the tax arrives right away. The rollover lets the transferor elect an agreed amount at or near cost, moving the embedded gain into the corporation and deferring it until a future sale. This matters most for businesses with significant capital property: equipment, intellectual property, or long-held assets with substantial accrued gains.
Section 85 rollovers also appear regularly in section 85 rollover planning, including estate freeze planning, addition of shareholders, and CCPC restructuring before a sale. An estate freeze, for example, often requires transferring growth shares or other property into a holding company at a controlled elected amount so that future appreciation accrues in the next generation’s hands. These transactions are technically demanding. The agreed amount, the share consideration structure, and the paid-up capital grind all have to align precisely, or the reorganization creates unintended tax consequences at the corporate or personal level. Getting one piece wrong doesn’t just affect that piece, it can unravel the entire structure.
Filing the T2057 election: what the CRA requires
Form T2057 is the prescribed election form for a subsection 85(1) transfer. Both the transferor and an authorized officer of the transferee corporation must sign it. The form requires the transferor’s identifying information, the corporation’s details, a description of each property transferred, the agreed elected amount, and a breakdown of the consideration received. It must be filed separately from any income tax return, not attached to it, with required signatures submitted to the CRA tax centre where the transferor files.
T2057 filing deadline and late-filing penalties
The filing deadline is the earliest date any party to the election must file an income tax return for the year of the transfer. Missing that deadline doesn’t automatically void the rollover. It does, however, attract a penalty under subsection 85(8): the lesser of (a) 0.25% of the excess of fair market value over the elected amount per month (or part of a month) late, or (b) $100 per month late, subject to a maximum of $8,000 total. Under subsection 85(7), a late election can still be filed up to three years after the original deadline, with the applicable penalty paid at the time of filing. Most practitioners file the T2057 concurrently with the return to avoid the penalty entirely.
The compliance mistakes that collapse section 85 rollovers
The CRA regularly scrutinizes section 85 elections on three fronts: fair market value support, non-share consideration calculations, and paid-up capital. If the FMV of the transferred property isn’t properly documented, the agreed amount range can shift and expose the transferor to an unexpected gain. Boot errors, where non-share consideration is mislabeled or undervalued, can push the elected amount below the statutory floor. Paid-up capital errors are arguably the most overlooked issue in these transactions. The PUC grind under subsection 85(2.1) reduces the tax PUC of shares issued in the rollover to prevent surplus stripping, and miscalculating it creates downstream dividend or capital gains exposure that surfaces years later.
Amended elections: genuine errors vs. retroactive planning
The CRA draws a sharp line between genuine errors and retroactive tax planning. CRA’s administrative position is that it will generally accept an amended election to correct a bona fide error, omission, or oversight, but not where the real purpose is locking in a better tax outcome after the return has been assessed. Courts have applied the same logic: in Brent Carlson and related decisions, amended rollover requests that looked like after-the-fact optimization were refused on the ground that they constituted retroactive planning rather than error correction. If a taxpayer files an amendment specifically to reduce the agreed amount and avoid a capital gain, the CRA will characterize it accordingly. The agreed amount and all supporting documentation must be correct before the election is filed, not revised afterward.
What proper documentation looks like for section 85 rollovers
A section 85 rollover is not a form you fill out and submit in isolation. It requires a written record of the property transferred, the FMV determination methodology, the agreed amount rationale, the consideration breakdown, the PUC grind calculation under subsection 85(2.1), and how the transaction interacts with any existing tax attributes such as RDTOH, CDA, or GRIP balances inside the corporation. ITA section references need to be explicit throughout. The documentation has to hold up to a CRA review years after the transaction closes, not just satisfy the parties at closing.
If the transfer also involves a going-concern business, a separate joint election under section 167(1) of the Excise Tax Act (Form GST44) may be needed to address GST/HST treatment. A section 85 rollover can be valid even if no GST/HST election is filed, but these are two legally distinct elections that operate independently. A qualifying business transfer that skips the GST44 may leave the corporation paying HST upfront and claiming input tax credits later, a cash flow problem that doesn’t need to exist.
Section 85 rollovers sit at the intersection of income tax, corporate law, and valuation. A generalist accountant who handles personal returns and bookkeeping is not the right person to structure one. Specialist CCPC tax planning firms deliver structured written plans with ITA section references as a matter of standard practice, that is exactly the level of documentation this election requires. If your advisor can’t produce a written plan with the agreed amount rationale, the PUC grind workings under subsection 85(2.1), and the consideration structure documented before any property changes hands, the rollover is at risk before the T2057 is even signed.
The right approach before you transfer anything
Section 85 rollovers are one of the most powerful tax deferral tools available to Canadian business owners, and one of the most technically unforgiving. The eligible property rules, the agreed amount range, the T2057 filing requirements, and the PUC grind each have to be handled correctly, in sequence, before the transaction closes. Errors after the fact are difficult and sometimes impossible to correct without triggering the very tax consequences you were trying to defer.
The right approach is to understand the mechanics, document every decision, and work with a tax professional who specializes in CCPC structures. At Adian Professional Corporation, every tax planning engagement includes a written plan with explicit ITA section references as a standard deliverable. That standard matters because this election leaves very little margin for improvisation. If you’re approaching incorporation, a reorganization, or a business sale and need to know whether a section 85 rollover belongs in the structure, get that answer before the transaction, not after.