Are you transferring real estate, equipment, investments or a business to a corporation you control? Even when no cash is received, the tax rules may treat the property as disposed of at fair market value. A subsection 85(1) rollover can, when its conditions are met, defer all or part of the gain through an agreed amount jointly elected by the taxpayer and the corporation.
The mechanism is useful, but it does not turn a poorly valued transaction into a consequence-free transfer. The property, fair market value, tax cost, consideration received, shares issued and election form must all describe the same transaction.
Why fair market value remains central
Fair market value is generally the price informed and independent parties would accept in an open market. It measures the value transferred and helps determine whether the consideration is reasonable. A value that is too low may shift value to a corporation or other shareholders; an excessive value can create a gain, artificial tax cost or financing issue.
A public security may be easy to value. Private shares, real estate, goodwill and an operating business usually require support for the assumptions, income, assets, liabilities and comparable transactions. The valuation is not merely a number entered on a form; it supports the tax and legal consequences of the transfer.
How a subsection 85(1) rollover works
The taxpayer transfers eligible property to a taxable Canadian corporation and receives at least one share as consideration. The parties file a joint election, generally on Form T2057, choosing an agreed amount within the statutory limits. That amount affects both the transferor’s proceeds and the corporation’s tax cost of the property.
Non-share consideration—cash, a promissory note or an assumed debt, for example—limits the available deferral. The election must also respect the property’s tax cost and fair market value. Selecting the lowest number is therefore not a strategy; the permitted range and the consideration must be calculated for each property.
- Inventory the property and distinguish capital property, depreciable property, inventory and items that follow different rules.
- Establish value and tax cost using the records, valuations and adjustments required.
- Define the consideration, including share classes, promissory notes, assumed debt and the rights attached to the shares.
- Coordinate the documents so the tax, accounting and legal records use the same values and effective dates.
Errors that can undermine the deferral
Common problems include a late election, incomplete property descriptions, an unsupported valuation, liabilities allocated incorrectly or legal documents signed with different figures. A business transfer often needs to be allocated asset by asset because each item has its own tax cost and election limits.
The post-transfer consequences also matter. The corporation acquires a tax cost determined by the election, while the shares received have their own cost. A later sale, reorganization or payment of the note can expose an inconsistency that was not apparent when the rollover was filed.
When a rollover may be useful—and when it may not be
Subsection 85(1) can support an incorporation, the introduction of a holding company, a corporate reorganization, an estate freeze or preparation for a sale. It may transfer property without recognizing the entire gain immediately. The deferral is not an exemption: the tax exposure is generally carried into the shares received or a later disposition.
Before signing, a corporate and tax reorganization should be modelled using the values, liabilities and commercial objectives. Broader tax planning should also consider sales taxes, financing, shareholders and the legal documentation.
Prepare the election as a transaction, not an isolated form
Assemble the property list, tax costs, valuations, liabilities, current structure and proposed consideration. The strategy can then be tested before the documents are signed.
Impôts Ici can coordinate the calculations, election and accounting entries with the other professionals. To have a transfer reviewed, contact our team before the transaction’s effective date.
