The Section 85 Rollover: Growing Your Business Without the Tax Bill
How to Move Assets Into Your Corporation with Peace of Mind
The Executive Summary: A Section 85 Rollover is a powerful tax-deferral mechanism in the Income Tax Act that allows business owners to transfer assets into a corporation in exchange for shares without triggering immediate capital gains tax. Whether you are incorporating a successful sole proprietorship or restructuring into an "Opco-Holdco" model, Section 85 is the essential tool for scaling your business while protecting your hard-earned capital from an unnecessary tax hit.
In the early stages of a business, simplicity is king. Many of the most successful companies in Ontario—from tech startups in Ottawa to construction firms in Simcoe County or Muskoka—started as a person with an idea, a laptop, and a sole proprietorship.
But as your business grows, so does your liability and your tax bracket. Eventually, the "sole prop" model no longer makes sense, and you decide to incorporate. You’ve built up equipment, intellectual property, and that most valuable of intangible assets: Goodwill.
The problem? Moving those assets from you personally to your new company is legally a "disposition." Without the right strategy, the CRA will view this transfer as if you sold everything to a third party at its current value. You could wake up with a massive tax bill for a "sale" where no actual cash changed hands.
At Cabinet Sauvé Law, we believe that growth should be rewarded, not penalized. This is where the Section 85 Rollover provides the ultimate "Peace of Mind."
Section 1: What Exactly is a Section 85 Rollover?
Section 85 of the Income Tax Act is a "rollover" provision. It allows you to "roll" the value of an asset into a corporation in exchange for shares of that company.
The "magic" happens in the Elected Amount. Instead of being forced to use the Fair Market Value (FMV) of the asset, you and your corporation jointly elect to use the Adjusted Cost Base (ACB)—the price you originally paid for it.
The result: On paper, the "sale price" is the same as the "cost price." Your profit is zero, and your tax bill is zero. The tax isn't eliminated—it is deferred. You only pay that tax when you eventually sell the shares of the corporation or when the corporation sells the asset to a third party.
Section 2: Three Common Scenarios for a Rollover
In our practice, we see three primary reasons why a Section 85 Rollover is triggered.
1. Incorporating a Successful Sole Proprietorship
You’ve been a freelancer or a contractor for three years. You now have $100,000 worth of equipment and a "Client List" (Goodwill) valued at $200,000. If you just start using a corporation without a rollover, the CRA could claim you "sold" that $300,000 in assets to the company, potentially triggering a $150,000 taxable capital gain. A Section 85 Rollover moves those assets into the company for $0 in immediate tax.
2. Creating an "Opco-Holdco" Structure
As your company (the Operating Company, or "Opco") accumulates cash, it becomes a target for creditors. To protect that wealth, you might want to create a Holding Company ("Holdco") to sit above it. You use a Section 85 Rollover to move your shares of Opco into Holdco. This allows you to pay dividends up to the Holdco tax-free, keeping your excess cash safe from operational risks.
3. The "Estate Freeze"
If you are looking toward retirement, you might want to "lock in" the current value of your company to minimize future estate taxes. By rolling your common shares into fixed-value preferred shares, you allow the future growth of the company to go to your children or successors, providing Peace of Mind for the next generation.
Section 3: The "Boot" Trap – What You Can (and Can't) Take Back
When you transfer assets to a corporation, you must receive shares in return. However, you can also receive "non-share consideration," which tax lawyers colloquially call "Boot." This might be a promissory note (the company owes you money) or actual cash.
The Golden Rule of Boot: The value of the "boot" cannot exceed the tax cost (ACB) of the asset you are transferring.
- Example: If you transfer a truck that you bought for $40,000 (its ACB), you can take back a $40,000 promissory note and shares.
- The Danger: If you take back a $50,000 note for that same truck, you have just triggered $10,000 in taxable income.
Section 4: Why This Requires a Boutique Legal Strategy
A Section 85 Rollover is not a "DIY" project. It requires a high-wire act of coordination between your accountant and your lawyer.
| Feature | WITHOUT Section 85 | WITH Section 85 |
|---|---|---|
| Tax Trigger | Immediate (at Fair Market Value | Deferred (at Elected Amount) |
| Cash Flow | Drained by immediate tax bill | Presrrved for business growth |
| Paperwork | Simple Bill of Sale | Joint Election (Form T2057) + Purchase Agreement |
| CRA Risk | HIGH (Valuation disputes) | Managed (through "Price Adjustment Clauses") |
The Role of the Price Adjustment Clause (PAC)
The CRA is famous for questioning the "Fair Market Value" of intangible assets like Goodwill. If they decide your client list was worth $500,000 instead of the $200,000 you claimed, your entire rollover could fail.
At Cabinet Sauvé Law, we protect you by offering to include a Price Adjustment Clause in your transfer documents. This is a "safety valve" that says: "If the CRA determines a different value, the number of shares issued will automatically adjust to match that value." This prevents a valuation dispute from turning into a tax catastrophe.
Section 5: The "Peace of Mind" Checklist
If you are considering a corporate reorganization this quarter, here are the four things you need to have in place:
- Professional Valuation: Don't guess what your business is worth. A formal valuation for your equipment and goodwill is your shield in an audit.
- Corporate Minute Book: Your rollover isn't legal until it's recorded in your corporate records. This includes the subscription and agreement for shares and the directors' resolutions approving the transfer. We offer and recommend our full-service minute book review and secure storage solution, offering you 24/7 access to your virtual minute book whenever you require it.
- T2057 Election Form: This form must be filed with the CRA by the earliest tax filing deadline of either the individual or the corporation. Missing this deadline results in heavy late-filing penalties, and is something your accountant will generally look after.
- Asset Purchase Agreement: A formal contract between you and your corporation that outlines exactly what is being "rolled," what the "boot" is, and the "elected amounts", if any.
The Cabinet Sauvé Advantage: Integrated Corporate Thinking
At Cabinet Sauvé Law, we don't just see a "tax form." We see your life’s work. Our corporate team works hand-in-hand with our estates and real estate departments to ensure that your Section 85 Rollover doesn't just save you tax today—it sets the stage for your eventual succession and asset protection.
From our offices in Ottawa, Rockland, and Barrie, serving any and all of the surrounding areas, we provide the senior-level expertise you expect from a Bay Street firm with the personal, attentive service of a boutique practice focused on you and your needs.
Don't let the complexity of the Income Tax Act stifle your growth. Contact Cabinet Sauvé Law today to discuss how a Section 85 Rollover can provide the "Peace of Mind" you need to take your business to the next level.
