Moving a business, a building or a block of shares into a corporation is a disposition, and a disposition normally triggers tax on the accrued gain. Section 85 lets the parties elect an amount instead of using fair market value, which is how a reorganisation happens without a tax bill on day one. The mechanism is simpler than its reputation, and the conditions are strict.
Key takeaways
SECTION 01 OF 09
Suppose an owner has run a business personally for fifteen years, or holds a building that has appreciated substantially, and now wants it inside a corporation — for liability reasons, for succession, or because a buyer wants to purchase shares rather than assets.
Transferring it is a disposition at fair market value, and the accrued gain becomes taxable immediately even though no cash has changed hands. Without relief, a reorganisation that makes complete commercial sense would generate a tax bill that has to be funded from somewhere else entirely.
SECTION 02 OF 09
Income Tax Act s. 85, marginal note Transfer of property to corporation by shareholders, 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”, and the taxpayer and corporation “have jointly elected in prescribed form”.
The operative rule then follows: “the amount that the taxpayer and the corporation have agreed on in their election in respect of the property shall be deemed to be the taxpayer’s proceeds of disposition of the property and the corporation’s cost of the property”.
That single deeming provision is the whole mechanism. The parties choose a number, and the Act treats that number as both the seller’s proceeds and the corporation’s cost. Choose the tax cost of the property, and there is no gain on the transfer.
SECTION 03 OF 09
First, the property must be eligible property. Not everything qualifies, and assuming rather than checking is a real risk on a mixed transfer of a whole business.
Second, the transferee must be a taxable Canadian corporation. This is a domestic relief provision and it is not available to move property into any corporation the owner happens to control.
Third, and most often forgotten in practice, the consideration must include shares of the corporation. A transfer paid for entirely in cash or a promissory note does not meet the description, however sensible it looks commercially.
SECTION 04 OF 09
The parties agree the amount, but they do not have unlimited latitude. The section constrains the range, and the paragraphs that follow the opening rule deal with what happens when the elected amount sits below the fair market value of the non-share consideration taken back.
The practical version: if you take back cash or a note as well as shares, the elected amount interacts with the value of what you took back. Electing a low amount while extracting significant non-share value is the case the section anticipates and adjusts for.
This is why a rollover is designed rather than simply executed. The elected amount, the mix of share and non-share consideration, and the resulting cost base in the new shares are one decision, not three.
SECTION 05 OF 09
A rollover does not eliminate the gain. It moves it. The elected amount becomes the corporation’s cost of the property, and the shares taken back carry their own adjusted cost base.
That matters at the next transaction, because a low cost base carried into the corporation is a larger gain on an eventual sale. The paid-up capital of the shares issued is a separate number again, and the two are routinely conflated — Treadstone Law sets out the distinction in paid-up capital versus adjusted cost base, in the context of capital returns, where the same two concepts drive the outcome.
An owner who does a rollover and then forgets the numbers has not solved a problem; they have deferred it into a file that somebody will have to reconstruct later.
SECTION 06 OF 09
A rollover into a holding company and a sale of shares to a holding company can look similar from the outside, and they are governed by different provisions with different purposes.
Section 85 is relief: it lets property move without an immediate gain. Section 84.1 is an anti-avoidance rule: it stops a non-arm’s-length share sale being used to extract corporate surplus as a capital gain.
The two frequently appear in the same conversation because the same owner, the same holding company and the same shares can be involved. That does not make them interchangeable, and a plan that treats them as one thing is a plan that has not been checked properly.
SECTION 07 OF 09
The most common practical failure is not a technical one. It is that the reorganisation is proposed after a sale process is already under way, when the range of available structures has narrowed and the facts are no longer neutral.
Treadstone Law addresses that directly in rolling into a holdco after negotiations have already started. The general rule is unglamorous: the structuring work is worth the most at the point when nobody is yet in a hurry.
The same logic applies to pre-sale carve-outs of assets the owner intends to keep, such as real property — see carving out real estate and keeping it personally.
SECTION 08 OF 09
A rollover is a joint election in prescribed form. It is not effective because the parties intended it, or because the transfer documents describe it. It is effective because the election is properly made and filed.
This is the same shape as the other elections a business sale runs on — the receivables election in s. 22 is another joint election in prescribed form. The pattern is worth internalising: in this area, the tax outcome frequently depends on a form, and forms depend on the other party still being cooperative when it is time to sign.
Which is an argument for agreeing the elections, and attaching the forms, while the deal still needs both signatures.
SECTION 09 OF 09
Not to let anyone run their own rollover. The eligible-property test, the elected-amount range and the consideration mix are genuinely technical and the consequences of getting them wrong are expensive and slow to unwind.
It is to make the shape recognisable: property into a corporation, shares taken back, an amount elected jointly, the gain deferred rather than erased. An owner who can see that shape can ask the right question at the right time, which is the only part of this that an article can usefully do.
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