Tax Rollover (Section 85)
Tax mechanism (Section 85 of the Income Tax Act) that allows assets to be transferred to a corporation without triggering immediate tax. Used before a sale to restructure ownership, notably when transferring shares to a holding company.
Definition
The Section 85 rollover, provided under Section 85 of the Income Tax Act of Canada, allows property (shares, business assets, real estate) to be transferred to a taxable Canadian corporation without triggering an immediate capital gain.
In French-language Quebec documentation, you’ll see roulement fiscal (article 85) used for the same concept.
In concrete terms, the transfer happens at an amount agreed between the parties (the “elected amount”), which can be as low as the tax cost of the property. Tax isn’t eliminated — it’s deferred to a future disposition.
For an SME owner preparing to sell their business, the Section 85 rollover is a pre-sale planning tool you can’t do without. It lets you, for example, transfer the shares of your operating company to a holding company you control, without paying tax at the time of the transfer.
Why the Section 85 rollover matters in a business sale
Most pre-sale planning strategies rest, at some point, on a Section 85 rollover. If you personally hold the shares of your business and want to interpose a holding company before the sale, Section 85 lets you do that with no immediate tax consequence.
Without that mechanism, simply transferring your shares to a new corporation would trigger a taxable capital gain — a cost that would reduce your net proceeds before the sale even happens.
The Section 85 rollover is also at the heart of the estate freeze. By “freezing” the value of your shares at their current fair market value and issuing new growth shares to your children or to a family trust, you can transfer future appreciation to the next generation. Here again, Section 85 makes that operation possible without immediate tax.
It’s essential to understand that a Section 85 rollover must be planned in advance. The CRA requires that Form T2057 (or TP-518 for Revenu Québec) be filed within the prescribed deadlines.
A rollover can’t be done retroactively. If you wait for an offer to be on the table, it’ll be too late to restructure your ownership in a tax-efficient way.
What every seller should know
- The Section 85 rollover defers tax — it doesn’t eliminate it. When the transferred shares or assets are eventually sold, the capital gain will be calculated from the original tax cost.
- Form T2057 (federal) and TP-518 (Quebec) must be filed on time. A late or poorly documented rollover can be denied by the CRA or Revenu Québec.
- The choice of elected amount is critical. An amount that’s too low or too high can trigger unintended tax consequences, including the “price adjustment” rules.
- Ideally, start planning your restructuring at least 24 months before going to market. That window lets you meet the holding-period conditions required for the Lifetime Capital Gains Exemption.
This content is informational. Consult a tax advisor for your specific situation.