Elect the Optimal Transfer Price

The heart of every Section 85 rollover is the elected amount. You can elect anywhere between the asset's cost and its fair market value. Electing at cost defers the entire accrued gain, while a higher election can be used deliberately to trigger a small gain and use up losses or the capital gains exemption.

Use Boot Up to Cost, Tax-Free

You can take back non-share consideration – cash or a note, known as boot – up to the elected amount without triggering tax. Planning the boot lets you pull value out of the transfer while keeping the rollover fully deferred. Taking boot above the elected amount, however, creates an immediate gain.

Incorporate a Proprietorship Cleanly

A Section 85 rollover is the standard way to turn a profitable sole proprietorship into a corporation. It moves goodwill, equipment, and inventory into the company at elected amounts, so years of built-up value are not taxed on the day you incorporate.

Watch for Recapture on Depreciable Assets

When you roll depreciable property into a corporation, the elected amount cannot fall below the undepreciated capital cost without limits. Planning the election carefully avoids triggering unexpected recapture of depreciation that would be taxed as income.

Purify Shares for the Capital Gains Exemption

Before selling a business, a Section 85 rollover can strip surplus cash and passive investments out of the operating company. This keeps the shares qualified for the Lifetime Capital Gains Exemption, which can shelter over $1 million of gain per shareholder on a future sale.

File Form T2057 on Time

The rollover only works if the election is filed by the earliest tax-filing due date of any party to the transfer. A late-filed election is allowed within three years with a penalty, but missing the window entirely can invalidate the deferral. Diarize the deadline the moment the transfer is planned.

Combine Section 85 With an Estate Freeze

Paired with a section 86 or 51 reorganization, a Section 85 rollover lets you freeze today's value on your shares and shift future growth to children or a family trust. This caps the eventual capital gain on your estate and multiplies access to the exemption across the family.

Reduce PUC Where Required

The paid-up capital of the shares you receive may be ground down under the Section 85 rules so it does not exceed the tax cost of what you transferred. Understanding this adjustment avoids a later deemed dividend when capital is returned to you.

Move Real Estate Without Triggering Gain

Appreciated real estate can be rolled into a corporation or holding company on a tax-deferred basis. Plan around land transfer tax, GST/HST, and mortgage assumption before the transfer, so the rollover defers the capital gain without creating other unexpected costs.

Keep Valuations and Documents on File

A Section 85 rollover can be reviewed by CRA years later. Retaining independent valuations, the transfer agreement, director resolutions, and the filed T2057 means every elected amount is supported and the deferral holds up if it is ever questioned.