A section 85 rollover is an election under the Income Tax Act that lets a taxpayer transfer eligible property — including the assets of a business, or shares of one corporation into another — into a taxable Canadian corporation in exchange for shares, without triggering an immediate tax bill on the property's built-in gain.
The trigger and the election are both spelled out in the Act. ITA s. 85(1) applies where a taxpayer disposes of “eligible property” “to a taxable Canadian corporation for consideration that includes shares of the capital stock of the corporation” and the parties “have jointly elected in prescribed form.” The elected amount then does the work: it is deemed to be the taxpayer's proceeds of disposition and the corporation's cost of the property (paragraph (a)); it is bumped up to the fair market value of any non-share “boot” received alongside the shares (paragraph (b)); and it can never exceed the property's own fair market value (paragraph (c)).
The election is not limited to deals with an outside buyer. The same s. 85(1) mechanism is what a sole proprietor uses to incorporate an existing business tax-free, what a family uses inside an internal reorganization, and what a seller uses to defer tax on the reinvested portion of a rollover-equity structure — the statute doesn't distinguish between them, only between share consideration (deferrable) and boot (not).
It sits alongside — and is distinct from — the extended-deferral routes elsewhere in the Act. Where a disposition instead qualifies as an intergenerational business transfer or a sale to an employee ownership trust, the taxpayer can claim a ten-year capital gains reserve under ITA s. 40(1.2)–(1.3) instead of the ordinary five-year maximum — a s. 85 rollover on its own does not carry that extended reserve; the two mechanisms solve different timing problems.
A sole proprietor incorporates her mortgage-referral business, transferring $400,000 of eligible business assets — receivables, equipment and goodwill — with a combined cost base of $60,000 into a newly formed CCPC solely in exchange for common shares. She and the corporation jointly elect an amount of $60,000 under s. 85(1), equal to her cost base, so no gain is recognized on the transfer: her $60,000 cost base carries into the shares, and the $340,000 built-in gain is deferred until she eventually disposes of those shares rather than being taxed on incorporation.
See also: Rollover equity · Purchase price allocation · Share purchase agreement.
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