Anonymised, illustrative composite. The sponsor's structure put the rollover interest in a newly formed limited partnership instead of a holding company, and the seller's advisor kept reaching for section 85 to defer the gain. Section 85 does not reach a partnership at all — a different election, in a different section, was always the only route.
At a glance
A founder selling a controlling stake in a specialty packaging business agreed to roll a portion of her proceeds — rather than take full cash — into the buyer's acquisition vehicle, in exchange for a continuing minority interest and a seat on the vehicle's advisory committee. In the great majority of these deals the vehicle is a corporation and the tool is the familiar s.85(1) rollover; here the sponsor's fund structure required the acquisition vehicle to be a newly formed Ontario limited partnership, because the fund's own investors held their interests through partnership units and wanted the target folded into the same structure rather than sitting under a separate holdco.
The vendor's accountant, who had completed dozens of rollover elections, drafted the closing steps around s.85(1) without re-reading its opening words against the actual transferee. The section is explicit about what it reaches: it applies where a taxpayer “has, in a taxation year, disposed of any of the taxpayer's property that was eligible property to a taxable Canadian corporation for consideration that includes shares of the capital stock of the corporation.” Every operative term — taxable Canadian corporation, shares of the capital stock — describes a corporate transferee. A limited partnership is neither a taxable Canadian corporation nor capable of issuing shares; there is no version of an s.85(1) election that a partnership can receive, because the section was never written to reach one.
The rollover portion of the deal was $3,100,000 of the $9,800,000 total consideration, structured as a contribution of the vendor's shares (through an intervening asset step, since the target's shares themselves were not being rolled directly) into the partnership for partnership units of equivalent value. Filed as an ordinary taxable contribution rather than an elected rollover, the vendor would have recognised the full accrued gain on the rolled portion in the year of closing — roughly $2,050,000 of gain, against a partial lifetime capital gains exemption claim that covered only $971,190 of it, leaving approximately $1,078,810 taxed immediately rather than deferred into the units she was meant to be holding on a rollover basis.
The actual provision is ITA s.97(2), a self-contained election built specifically for a contribution of property to a partnership, not a cross-reference that happens to reuse s.85's form. It applies “where a taxpayer at any time disposes of any property…that is a capital property…of the taxpayer to a partnership that immediately after that time is a Canadian partnership of which the taxpayer is a member, if the taxpayer and all the other members of the partnership jointly so elect in prescribed form.” Two differences matter immediately. First, the election imports s.85(1)(a) to (f) by reference but only after substituting every corporate term for its partnership equivalent — the provision itself directs that “the references therein to ‘shareholder of the corporation’ were read as references to ‘member of the partnership,’” among other substitutions — so the elected amount and the resulting adjusted cost base are computed on the partnership regime, not simply borrowed from s.85 unchanged. Second, and the difference that actually stalled this closing, s.97(2) requires that “the taxpayer and all the other members of the partnership jointly so elect” — every partner has to sign the election, not only the transferor and the transferee the way s.85(1) works between one shareholder and one corporation.
Filing a T2057 — the s.85(1) election form — against a partnership would not have produced a defective rollover; it would have produced no rollover at all, because there is no provision under which CRA could accept it for a transferee that cannot hold shares. The vendor would have been assessed on the full gain in the year of disposition regardless of what form was filed, and the fix discovered three weeks before closing — substituting the correct election and gathering every partner's signature — would have been far more expensive to unwind after the fact, once a return had already been filed on the wrong basis and a reassessment period was running against it.
The tell was in the closing checklist itself: it named a form, T2057, before it had confirmed what kind of entity the shares were actually going into. Every experienced advisor's shortcut for a rollover is “file the 85,” because in the overwhelming majority of deals the vehicle is a corporation. The one line in the structure chart that read “Newco LP” instead of “Newco Inc.” was the entire difference, and nothing about the deal's price, purpose or documentation flagged it — only the entity type did.
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