Section 85 of the Income Tax Act (ITA) provides a powerful mechanism for deferring tax liabilities associated with the transfer of assets to a Canadian corporation. Commonly used in corporate reorganizations, succession planning, and incorporations, Section 85 rollovers enable taxpayers—whether individuals, corporations, or trusts—to transfer eligible assets to a corporation on a tax-deferred basis. This article outlines the key concepts, legal framework, and practical applications of Section 85 rollovers, emphasizing their strategic value in planning transactions.

Purpose of Section 85 Rollovers

The primary goal of a Section 85 rollover is to allow the tax-deferred transfer of assets from a taxpayer to a Canadian corporation. This provision is especially beneficial for sole proprietors looking to incorporate their business without immediately realizing capital gains. By using this mechanism, taxpayers can preserve liquidity and manage tax liabilities more efficiently.

Eligible Property

To qualify for a Section 85 rollover, the property being transferred must fall within the categories of “eligible property” as defined in Section 85(1.1) of the ITA. These include:

• Depreciable capital property (including eligible capital property)
• Non-depreciable capital property
• Canadian resource properties
• Foreign resource properties
• Inventory
• Real estate owned by a non-resident, if used in a Canadian business

Consideration to the Transferor

Under the rollover, the transferor must receive at least one share in the capital of the transferee corporation. In addition to shares, the transferor may receive non-share consideration, often referred to as “boot.” Boot may include cash or debt obligations issued by the transferee. The fair market value of the boot is critical for determining the minimum value (floor) of the elected amount.

Elected Amount and Transfer Price

The “elected amount” is the agreed value at which the transferor disposes of the property and the corporation acquires it. According to Section 85(1)(a) of the ITA, this amount is deemed to be the transferor’s proceeds of disposition and the transferee’s cost of acquisition. The elected amount must fall within certain limits:

• Floor value (ITA s. 85(1)(b)): Cannot be less than the value of the non-share consideration (boot)
• Ceiling value (ITA s. 85(1)(c)): Cannot exceed the fair market value of the property

Specific asset types also impose further restrictions:

• Non-depreciable property: Elected amount cannot be less than the lesser of fair market value or cost
• Depreciable property: Elected amount cannot be less than the lesser of fair market value, cost, or Undepreciated Capital Cost

Cost of Consideration

When boot is received as part of the consideration, its cost must be carefully determined. If a single item is received, its cost equals its fair market value. For multiple items, the cost is allocated based on the relative fair market value of each asset received.

Analysis

Section 85 rollovers provide a valuable opportunity for tax planning by enabling the deferral of capital gains. This is particularly advantageous for sole proprietors transitioning into a corporate structure or for reorganizations among affiliated corporations. The ability to structure the transaction using a mix of share and non-share consideration adds flexibility but must be handled with care to ensure compliance with ITA provisions.

Eligible property definitions are broad, though the exclusion of non-resident real estate not used in Canadian business ensures that the benefit of the rollover primarily serves Canadian operations. The elected amount is a pivotal part of the transaction and must be calculated within prescribed boundaries to avoid adverse tax consequences.

Conclusion

Section 85 rollovers are an effective tool for facilitating tax-deferred transfers of property to a Canadian corporation. By adhering to the ITA’s provisions around eligible property, elected amounts, and consideration, taxpayers can avoid immediate tax liabilities while achieving important business objectives such as incorporation, succession, or internal restructuring. Legal and tax advice should be sought to properly implement a rollover and ensure the transaction aligns with both business strategy and tax compliance requirements.

Disclaimer

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