Section 85 of the Income Tax Act is one of the most-used provisions in Canadian corporate tax planning. It's the mechanic behind estate freezes, business incorporations, holdco creations, and most pre-sale restructurings — yet many business owners never see the form and don't know what it does. Here's the plain-English explanation.
What it does
Section 85 lets a taxpayer transfer property to a Canadian corporation in exchange for shares of that corporation, with the parties jointly electing the "agreed amount" of the transfer — any value between the taxpayer's adjusted cost base and the property's fair market value. The election is filed on Form T2057.
The mechanic is simple: by choosing an agreed amount equal to the taxpayer's cost base, the transferor recognizes zero gain on the transfer. The corporation takes the property at the cost base. If the corporation later sells the property at FMV, the gain accrues to the corporation, not the original transferor.
The four most common uses
1. Incorporating a sole proprietorship. When a self-employed individual moves their business into a corporation, Section 85 lets them transfer the business assets (goodwill, equipment, inventory, accounts receivable) to the new corporation in exchange for shares — without triggering tax on the accrued appreciation. The corporation takes the assets at the individual's basis; the individual's shares of the corporation take a basis equal to the agreed amount. The transition is tax-deferred.
2. Creating an opco-holdco structure. An owner-manager who wants to add a holding company above the operating company transfers their opco shares to a new holdco under Section 85. The owner now owns shares of the holdco; the holdco owns the opco. Cost base flows through correctly. No tax is triggered at the rollover.
3. Estate-freeze rollover. The owner transfers their common shares of the operating company to a newly-incorporated holdco in exchange for preferred shares of the holdco. Combined with the issuance of new common growth shares of the holdco to a family trust, the structure executes an estate freeze. The Section 85 rollover handles the tax-deferred mechanics; Section 86 handles single-corporation freezes without a holdco.
4. Pre-sale restructuring. Before a third-party share sale, the seller may want to separate the operating business from non-saleable assets (real estate, investment portfolio, a separate line of business). Section 85 rollovers can move the non-saleable assets to a separate holdco or sister company, leaving the operating company clean for sale.
The election form (T2057)
The Section 85 election is made jointly by the transferor and the corporation on Form T2057. The form must be filed by the earlier of the two parties' tax-return due dates for the year of the transfer. For a transfer made June 1, 2026, the form is typically filed with the corporation's T2 (which is due 6 months after fiscal year-end) and with the individual's T1 (due April 30 the following year for non-self-employed).
Late-filing relief is available under Section 85(7) — the form can be filed within three years of the original due date with a penalty of $100/month (capped at $8,000). Filing more than three years late requires Minister's discretion; the position is not assured.
The "boot" question
Beyond shares of the corporation, the transferor may also receive non-share consideration (cash, debt assumed, promissory notes). This non-share consideration is called "boot." The Section 85 mechanic allows boot up to the amount of the property's cost base. Boot received in excess of cost base triggers a deemed dividend at the agreed amount — which can be useful in certain planning contexts, but is usually inadvertent.
The mechanics:
- Boot ≤ cost base: the agreed amount must be at least equal to the boot. Beyond that, the transfer is tax-deferred.
- Boot > cost base: the excess boot is treated as if the corporation paid a dividend, triggering tax in the transferor's hands.
What can be rolled in?
Section 85 applies to most categories of property:
- Capital property (shares, real estate, partnership interests, art).
- Resource property and timber resource property.
- Eligible capital property (goodwill, customer lists, intangibles).
- Inventory.
- Depreciable property (subject to specific rules for the agreed amount).
It does NOT apply to:
- Property of a non-resident.
- Real property situated outside Canada.
- Shares of a non-Canadian corporation if the rollover is to a non-resident corporation.
The price-adjustment clause
Most Section 85 transactions include a price-adjustment clause in the underlying documents: if the CRA later challenges the FMV used in the rollover (and reassesses to a different value), the parties' agreed amount is automatically adjusted to the reassessed FMV, retroactively. Without a price-adjustment clause, a CRA reassessment of FMV upward can produce immediate gain to the transferor without the corresponding shift in the agreed amount.
How we work the file
Section 85 transactions at Barrett Tax Law are normally part of a broader restructuring engagement — estate freeze, incorporation, holdco creation, pre-sale prep. We draft the corporate documents, prepare Form T2057, coordinate with the corporation's accountants on the basis tracking, and handle any later CRA inquiries on the rollover. Fixed fees for the planning and implementation.