Section 85 Rollover Tax Calculator Canada 2026
Calculate the allowable elected amount range, the maximum boot you can take tax free, the gain triggered now versus deferred, and your T2057 filing deadline — before you transfer your sole proprietorship or partnership assets into a corporation.
Fair Market Value
Tax Cost (ACB / UCC)
$330,000
tax deferred
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Elected Amount by Asset Class
| Asset Class | Fair Market Value | Tax Cost | Elected Amount | Gain Triggered | Character |
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Form T2057 Filing Deadline
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Planning Suggestion
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Disclaimer: This calculator provides estimates based on 2026 federal and provincial published personal tax rates and a 50% capital gains inclusion rate. It allocates boot to the assets that produce the lowest tax result, assumes fair market value is not below original capital cost on depreciable property, and does not model the lifetime capital gains exemption, section 22 accounts receivable elections, GST/HST section 167 elections, land transfer tax, attribution rules or provincial elections. For personalised advice, please consult a Registered CPA before signing any transfer agreement or filing Form T2057.
Section 85 Rollover — Transferring a Business into a Corporation Without Triggering Tax
When a sole proprietor or partner incorporates an established business, the transfer of assets to the new corporation is treated by the Canada Revenue Agency as a disposition at fair market value between non-arm’s length parties. Without planning, that deemed disposition can create a large capital gain on goodwill, recapture on equipment and business income on inventory — all taxable personally in the year of transfer, with no cash received to pay the resulting bill.
Section 85 of the Income Tax Act solves this. It allows the transferor and the corporation to jointly elect a transfer price — the elected amount — that sits somewhere between the tax cost of the property and its fair market value. The elected amount becomes the transferor’s proceeds of disposition and the corporation’s cost of the property. Choose the elected amount correctly and the accrued gain is deferred into the shares received rather than taxed immediately.
Who Uses a Section 85 Rollover
- Sole proprietors incorporating an established practice or trade with real goodwill value
- Partners rolling a partnership interest or partnership property into a corporation
- Owners moving appreciated equipment, vehicles or intellectual property into a corporation
- Shareholders reorganising a group by transferring shares into a holding corporation
- Owners creating a holding structure to protect retained earnings from operating risk
Eligible Property and the Basic Conditions
A section 85 rollover is only available where four conditions are met. All four must hold or the election is invalid and the transfer defaults to fair market value.
| Condition | Requirement |
|---|---|
| Eligible property | Capital property, Canadian resource property, eligible capital property under Class 14.1, and inventory other than real property held as inventory |
| Eligible transferee | The corporation must be a taxable Canadian corporation |
| Share consideration | At least one share of the corporation must form part of the consideration received |
| Joint election | Form T2057 must be signed by the transferor and the corporation and filed on time |
Accounts receivable: Trade receivables are generally excluded from the section 85 election and handled instead through a separate section 22 election, which allows the corporation to claim the bad debt deduction and the transferor to deduct the loss on transfer. Real property held as inventory by a builder or developer is also excluded from section 85 entirely.
The Elected Amount — Floor and Ceiling Rules
The elected amount cannot be chosen freely. Subsection 85(1) sets a ceiling and a floor for every asset transferred, applied asset by asset rather than to the transfer as a whole. Elect above the ceiling and the CRA deems the elected amount to be the ceiling. Elect below the floor and the CRA deems it to be the floor. Either way, the tax result is the one the statute imposes, not the one on the agreement.
| Property Type | Elected Amount Floor | Elected Amount Ceiling |
|---|---|---|
| Non-depreciable capital property | Greater of boot allocated and the lesser of adjusted cost base and fair market value | Fair market value |
| Depreciable property | Greater of boot allocated and the least of undepreciated capital cost, original capital cost and fair market value | Fair market value |
| Goodwill and Class 14.1 property | Greater of boot allocated and the least of undepreciated capital cost, original capital cost and fair market value | Fair market value |
| Inventory | Greater of boot allocated and the lesser of cost amount and fair market value | Fair market value |
The practical result is straightforward. Where no boot is taken, the elected amount can be set at the tax cost of each asset and no gain arises. Where boot is taken, the floor rises to the boot amount for the assets that boot is allocated against — and any boot exceeding tax cost forces a gain.
Boot — How Much Cash You Can Take Out Tax Free
Boot is non-share consideration: cash, a promissory note, or business debt assumed by the corporation. Boot is attractive because it can be withdrawn from the corporation later without further personal tax. The limit is set by the tax cost of the property transferred.
The rule in one line: total boot up to the aggregate tax cost of the transferred property can be taken with no immediate tax. Every dollar of boot above that figure triggers an immediate gain, dollar for dollar.
This is where an established sole proprietorship with substantial goodwill runs into a constraint. Internally built goodwill almost always has a nil tax cost, so it supports no tax-free boot at all. The tax-free boot capacity comes from the undepreciated capital cost of equipment, the cost of inventory and the adjusted cost base of land — usually a much smaller number than the owner expects.
| Consideration Structure | Immediate Tax | Later Access to Funds |
|---|---|---|
| All shares, no boot | Nil, full deferral | Dividends or share redemption, taxable |
| Boot equal to tax cost | Nil, full deferral | Note repaid tax free as cash allows |
| Boot above tax cost | Gain on the excess | Note repaid tax free, tax paid up front |
| Boot above fair market value | Shareholder benefit under 85(1)(e.2) | Punitive, avoid entirely |
Paid-Up Capital Grind Under Subsection 85(2.1)
Paid-up capital is the amount a shareholder can withdraw from a corporation as a tax-free return of capital. Subsection 85(2.1) prevents a section 85 rollover from creating artificial paid-up capital. The paid-up capital of the shares issued is ground down so that it never exceeds the elected amount less the boot taken.
The corporate law stated capital of the shares may be far higher than the tax paid-up capital after the grind. The two figures must be tracked separately in the minute book and the corporate tax records for the life of the corporation, and the difference matters on any future redemption, wind-up or sale.
Form T2057 — Filing Deadline and Late Filing Penalty
The election is only effective if Form T2057 is filed. It is a joint election signed by both the transferor and the corporation, and it must be filed on or before the earliest of the days on which any party to the election is required to file an income tax return for the year in which the transfer occurred.
| Filing Position | Timing | Penalty |
|---|---|---|
| On time | By the earliest filing due date of any party | Nil |
| Late filed | Within three years after the due date | Lesser of $100 per complete month late and $8,000 |
| Amended election | Within three years, or later with CRA acceptance | Same late filing penalty applies |
| Beyond three years | Up to ten years after the due date | Accepted only where just and equitable, penalty applies |
Penalty is payable on filing: the late filing penalty must be paid at the time the late election is submitted. The CRA will not process a late T2057 without payment, and the deferral remains unavailable until the election is accepted.
What the Calculator Does Not Model
The calculator gives the elected amount range, the boot capacity and the immediate tax cost. A complete rollover engagement also addresses the following, and each of them can change the result materially:
- Section 22 election: separate joint election for accounts receivable, filed with both returns
- GST/HST section 167 election: Form GST44 to transfer the business assets without GST/HST, filed with the corporation’s first return
- Land transfer tax: real property transferred to a corporation attracts land transfer tax in Ontario unless an exemption applies
- Price adjustment clause: essential protection where fair market value is based on a valuation the CRA may later challenge
- Subsection 85(4) and affiliated person rules: capital losses on transfers to a controlled corporation are denied, not deferred
- Subsection 74.4(2) corporate attribution: applies where shares are issued to a spouse or minor as part of the structure
- Lifetime capital gains exemption: whether to crystallise the exemption on the rollover or preserve it for a future share sale
- Quebec Form TP-518: a separate provincial election is required for Quebec residents
- Share attributes: the class, redemption value and voting rights of the shares issued must match the elected amount and boot structure
Sequence matters: the transfer agreement, share subscription, directors’ resolutions and Form T2057 must all describe the same property, the same consideration and the same elected amount. A rollover that is correct on the tax form and wrong in the minute book is a rollover the CRA can unwind on audit. We prepare the election and the supporting corporate documents together, in one incorporation engagement.
Frequently Asked Questions
Common questions from Canadian sole proprietors and partners incorporating an established business.
Related Calculators and Tax Guides
More tools and guides for Canadian incorporated business owners.
Planning an Incorporation Rollover This Year?
The calculator gives you the elected amount range and the boot limit. A Registered CPA prepares the valuation support, the transfer agreement, the share structure, Form T2057 and the GST/HST section 167 election as one complete engagement.