Question 1

What is the difference between a Section 85 rollover and a Section 86 reorganization?

Accepted Answer

A Section 85 rollover involves transferring eligible property — shares, capital assets, or goodwill — from a taxpayer to a corporation on a tax-deferred basis. The taxpayer receives shares of the transferee corporation as part of the consideration, and both parties file a joint election on CRA Form T2057 to set the elected transfer amount. A Section 86 reorganization involves restructuring the share capital of an existing corporation — the shareholder exchanges one class of shares for a different class within the same corporation. No new corporation is required. Section 86 is the primary mechanism for executing an estate freeze: the common shareholder exchanges their common shares for fixed-value preferred shares, and the corporation issues new common shares to the next generation or a family trust. In practice, the two mechanisms are often used together in complex reorganizations. Section 85 is used when property moves between entities. Section 86 is used when the share structure within a single corporation is restructured.

Question 2

What is a Section 85 rollover and how does it work?

Accepted Answer

A Section 85 rollover is a tax-deferred transaction under the Income Tax Act that allows a taxpayer to transfer eligible property to a taxable Canadian corporation without triggering an immediate capital gain. The transferor and the receiving corporation jointly elect an amount on CRA Form T2057 — this elected amount becomes the proceeds to the transferor and the cost base of the property to the corporation. By electing at the property's adjusted cost base (ACB), the capital gain is deferred entirely until the corporation eventually disposes of the property. The most common application is adding a holding company above an operating CCPC: you transfer your operating company shares to a new holdco at ACB, deferring any capital gain while achieving creditor protection and income splitting flexibility. The T2057 election must be filed by the earlier of the transferor's and the transferee's tax return filing deadline for the year of transfer. Late elections attract a penalty of $100 per month (maximum $8,000) and must be accepted by CRA.

Question 3

Does a Section 85 rollover eliminate the capital gain or only defer it?

Accepted Answer

It defers the gain — it does not eliminate it. The accrued gain on the transferred property is embedded in the shares or other consideration received. It becomes taxable when those shares are eventually sold, redeemed, or deemed disposed of on death. The economic value of the deferral is significant: tax deferred for 10 to 30 years has a materially lower present value than tax paid today. In some cases — particularly where the LCGE is available on a future qualifying share sale — the deferred gain may ultimately be sheltered entirely. But that outcome requires advance planning; it does not happen automatically from the rollover alone.

Question 4

What is an estate freeze and when should a CCPC owner consider one?

Accepted Answer

An estate freeze is a corporate reorganization in which the current owner exchanges their common shares — which carry all future growth in corporate value — for fixed-value preferred shares under Section 86 of the Income Tax Act. New common shares are then issued to the next generation or a discretionary family trust. The effect is to lock in the current owner's capital gain at today's value. All future appreciation accrues to the new common shareholders rather than increasing the original owner's taxable estate. The frozen preferred shares can be redeemed over time to provide retirement income. An estate freeze is typically worth considering when: the business has meaningful current value; the owner has identified successors or wants to involve family members; LCGE planning is relevant (new common shares must be held 24 months before LCGE applies); or when the owner wants to cap the capital gain that will arise on their death. Because the new common shares require a 24-month holding period for LCGE purposes, an estate freeze should be implemented well before any anticipated sale or succession event.

Question 5

What is CCPC purification and why does it matter before a sale?

Accepted Answer

CCPC purification is the process of restructuring the corporation's asset composition before a share sale to ensure the shares qualify as Qualified Small Business Corporation (QSBC) shares eligible for the Lifetime Capital Gains Exemption (LCGE). The 90% asset test requires that at least 90% of the corporation's assets (by fair market value) be used principally in an active business in Canada at the time of sale. Passive assets — excess cash, GIC investments, portfolio securities, and non-business real estate — count against this test. The 50% test applies throughout the 24-month period before the sale. Purification typically involves stripping excess passive assets to a holding company via tax-free intercorporate dividends under Section 112 of the Income Tax Act. The assets remain in the corporate group — they are simply moved to the holdco rather than sitting in the operating company. Purification must be completed well before the sale to satisfy the 24-month historical asset test.

Question 6

What is a butterfly reorganization and when is it used?

Accepted Answer

A butterfly reorganization uses Section 55(3) of the Income Tax Act to split a corporation into two or more separate entities by distributing assets to shareholders on a tax-free basis — avoiding the intercorporate dividend deemed inclusion that would normally arise under Section 55(2). Butterfly reorganizations are used when co-shareholders want to separate their interests (a 'business divorce'), when a company wants to split two business lines into standalone entities, or as pre-sale preparation to separate qualifying from non-qualifying assets. The anti-avoidance provisions in Section 55 are complex and require careful navigation. We do not execute butterfly reorganizations without a detailed written plan and the involvement of corporate counsel.

Question 7

Do I need a corporate lawyer as well as a CPA for a corporate reorganization?

Accepted Answer

Yes — for any reorganization that involves incorporating a new entity, amending articles of incorporation, issuing new share classes, or transferring shares between parties, you need both a corporate lawyer and a CPA. Our role is to design the tax structure, prepare the CRA elections (Form T2057, T2054, and others), and advise on the tax consequences and timing. The lawyer's role is to draft share subscription agreements, prepare corporate minutes, update the minute book, and amend articles if required. We coordinate directly with your corporate counsel. If you do not have existing corporate counsel, we can refer you to GTA-based corporate counsel.

Question 8

What happens if the Form T2057 election is filed late?

Accepted Answer

A late T2057 election may be accepted by CRA with a penalty of $100 per month for each month of delay, up to a maximum of $8,000 per late election. CRA has the discretion to accept or refuse late elections. If CRA refuses the late election, the transfer is treated as if no election was made — meaning the property is deemed disposed of at fair market value, and the full capital gain is recognized in the year of transfer. This can result in significant, unexpected tax. We file T2057 elections on a timely basis and coordinate filing deadlines as part of every reorganization engagement.

Question 9

What is the General Anti-Avoidance Rule (GAAR) and does it apply to corporate reorganizations?

Accepted Answer

The General Anti-Avoidance Rule (GAAR) under Section 245 of the Income Tax Act allows CRA to deny the tax benefits of transactions considered abusive tax avoidance. The 2024 federal budget amendments introduced a new economic substance test and a 25% penalty on denied tax benefits — creating a materially higher-risk environment for transactions lacking commercial rationale. Well-established reorganization structures — Section 85 rollovers, estate freezes, holding company introductions, and CCPC purifications — have decades of CRA technical interpretations and advance tax rulings supporting their use when properly structured. GAAR risk is managed by ensuring the reorganization has clear business purposes beyond tax reduction, is implemented in accordance with CRA guidance, and is documented with a written tax plan before execution. We assess GAAR exposure as part of every reorganization engagement.

Question 10

How long does a corporate reorganization typically take?

Accepted Answer

A straightforward holding company introduction using a Section 85 rollover typically takes 4 to 8 weeks from engagement to completion — including plan preparation, legal documentation, share issuances, and election filing. More complex reorganizations involving multiple entities, share class restructuring, or capital dividend elections can take 8 to 16 weeks. We provide a realistic timeline estimate at the engagement outset and coordinate with your corporate counsel to keep the process moving.

Reorganization Type	What It Involves and Why It Is Done
Section 85 holdco insertion	Move operating company shares to a new holding company at ACB, tax-deferred, so section 112 intercorporate dividends move cash tax-free and away from business creditors (Form T2057).
Estate freeze (section 86)	Exchange common shares for fixed-value preferred shares so future growth goes to children or a family trust.
CCPC purification	Move excess cash and passive investments to a holdco to meet the 90% and 50% QSBC asset tests for the lifetime capital gains exemption.
Butterfly reorganization (section 55(3))	Split a corporation tax-free for shareholder separations or pre-sale asset separation.
Incorporating a sole proprietorship	Roll business assets into a corporation at an elected amount to defer gains and access the small business deduction.
Capital dividend account planning	Pay out the CDA tax-free using Schedule 89 and Form T2054.
Post-reorganization T2 compliance	Update Schedules 50, 89 and 11 for the new structure.

Corporate Reorganization in Mississauga, ON

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