Transfers to the Corporation: Section 85 Rollovers


S.85(1) of the Income Tax Act (Canada) (the “ITA”)[1] allows a person to transfer property to a taxable Canadian corporation on a tax-deferred basis.  This rollover allows a person to defer the recognition of income, capital gains and/or recapture.


The eligibility requirements for a tax-deferred transfer under s.85(1) are discussed below.

     A.     TRANSFEROR

The person transferring the property must be a taxpayer as defined in the ITA.[2]  This includes individuals, corporations and trusts regardless of whether they are resident or non-resident of Canada.

     B.     TRANSFEREE

The person receiving the property must be a taxable Canadian corporation[3] which is a Canadian corporation (incorporated in Canada or resident in Canada since June 18, 1971)[4] and not exempt from income tax.

The transferee must issue shares as consideration for the property received from the transferor.


The property transferred by the transferor must be eligible property.[5] Eligible property includes capital property (including real property and depreciable property, subject to certain restrictions on real property interests held by non-residents), resource property, eligible capital property (such as goodwill) and inventory (other than real property inventory).

Real property that is inventory can be transferred indirectly through a partnership subject to the general anti-avoidance rule (GAAR).[6]

A non-resident transferor can transfer real property that is capital property under s.85(1)    provided that it was used by the transferor in a business carried on in Canada, the    disposition is part of a transaction (or series of transactions) in which all or substantially       all of the property used in that business is disposed of to the corporation, and          immediately after the transfer the transferee is controlled by the non-resident transferor.[7]


To qualify for a transfer under s.85(1), the transferor and transferee must jointly elect on a T2057 (Election on disposition of property by a taxpayer to a taxable Canadian corporation) form that must be filed by the transferor separate from the tax return within a certain time period. If multiple properties are being transferred, this election can be done on an asset-by-asset basis.

The deadline to file the T2057 is the earliest date in which the transferor or transferee is required to file a tax return.[8]  The T2057 can be filed up to three years late after the deadline (subject to a penalty)[9] and an additional three years (subject to a penalty and the Minister’s discretion).[10]



The agreed amount is deemed to be the transferor’s proceeds of disposition and the cost of the property to the transferee corporation.[11]  If the agreed amount exceeds the transferor’s adjusted cost base of capital property, a capital gain will be triggered for the transferor.  Sometimes the transferor may wish to trigger a gain if it has unused capital losses, non-capital losses or wishes to crystalize his or her lifetime capital gains exemption.

          1.     General limits

The agreed amount cannot be less than the non-share consideration received by the transferor. Non-share consideration includes assumption of liabilities, indebtedness (e.g., mortgage), notes and accounts payable.[12]

The agreed amount cannot be greater than the fair market value of the property transferred.[13]  A taxable shareholder benefit may arise for the transferor to the extent that the agreed amount exceeds the fair market value of the property transferred.[14], [15]

          2.     Specific limits

There are specific limits on the agreed amount depending on the type of property transferred to prevent the creation of a loss. For example, for depreciable property, the agreed amount must be at least equal to the lesser of the undepreciated capital cost, the cost and the fair market value of the property.[16]  For inventory and capital property, the agreed amount must be at least equal to the lesser of the fair market value and cost amount of the property.[17]


The consideration received by the transferor must include treasury shares of the transferee. The adjusted cost base of the consideration received by the transferor is allocated first to any non-share consideration, then to preferred shares and lastly to common shares of the transferee.[18], [19]

The transferor should ensure that the fair market value of the property transferred by the transferor does not exceed the fair market value of the consideration received (i.e., ensure there is no excess). If this occurs and it can reasonably be regarded that any part of the excess was a benefit that the transferor conferred on a person related to the transferor, then the indirect benefit rule in s.85(1)(e.2) would be triggered.  Application of s.85(1)(e.2) would result in the agreed amount being increased by the amount of the excess benefit resulting in a gain for the transferor and increased cost of the property to the transferee but no corresponding increase in cost of the shares received.  To avoid the application of s.85(1)(e.2), the parties should consider a price-adjustment clause.

S.85(2.1) contains rules that effectively restrict increases in the paid-up capital of the shares of the transferee received by the transferor on a s.85(1) transfer (as paid-up capital can be returned to the transferor as a tax-free return of capital). This provision does not apply if s.84.1 or s.212.1 apply (discussed below).


In the context of s.85(1), s.84.1 applies where an individual transferor transfers shares of a corporation (the subject corporation) to a transferee corporation with which the individual transferor does not deal at arm’s length and immediately after the disposition, the transferee corporation and subject corporation are connected.[20]  If this situation arises and the non-share consideration received by the individual transferor exceeds the greater of the paid-up capital of transferred shares and the individual transferor’s arm’s length hard cost, a deemed dividend would arise.[21]

S.212.1 operates with similar effect in respect of transfers of shares by non-residents who might otherwise be able to take advantage of treaty-exempt taxable capital gains to effect a surplus strip.


A s.85(1) transfer requires consideration of issues outside the ITA. For example, the federal goods and services tax (GST) and provincial sales tax (PST) should be considered to determine whether GST or PST would be applicable to the transfer, whether the GST is recoverable and whether any elections can be made to avoid cash flow issues.  Furthermore, if the s.85(1) transfer includes real property, property transfer tax needs to be considered.  If the transferor and transferee are affiliated, various stop-loss rules should also be examined.


A valid s.85(1) transfer requires that shares of the transferee corporation be issued. However, the shares of the transferee do not have to be contemporaneously issued on a transfer for s.85(1) to apply.  In Dale,[22] the Federal Court of Appeal held that the transferee shares do not have to be issued simultaneously.

…The expression “consideration that includes shares” [in the s.85(1) preamble] does not, as counsel suggests, imply that the share must necessarily be issued simultaneously with the transfer of property to the company or indeed within the same taxation year. What is essential is that there be either an actual issuance of shares or a binding obligation to do so at the time of transfer and that the shares be issued within a period of time that, in all circumstances is reasonable….[23]


[1] R.S.C. 1985, c.1 (5th Supp.), as amended.  All references herein refer to the Income Tax Act (Canada).

[2] S.85(1) and s.248(1).

[3] S.85(1), s.248(1) and s.89(1).

[4] S.89(1).

[5] S.85(1.1).

[6]  See 1990 CRA Round Table where the Canada Revenue Agency (CRA) stated that an interest in a partnership is not considered an interest in its underlying assets (e.g., real estate inventory).  GAAR may apply if a partnership is formed as part of the series of steps designed to circumvent s.85(1.1).

[7] S.85(1.1)(h) and s.85(1.2).

[8] S.85(6).

[9] S.85(7).

[10] S.85(7.1).

[11] S.85(1)(a).

[12] S.85(1)(b). Where a business is transferred, it may be beneficial to rely on s.22 for the transfer of accounts receivable.

[13] S.85(1)(c).

[14] S.15(1).

[15] The taxable benefit would be added to the cost base of the non-share consideration received by the transferor pursuant to s.52(1).

[16] S.85(1)(e).

[17] S.85(1)(c.1).

[18] S.85(1)(f), (g) and (h).

[19] See definition of “common share” in s.248(1).

[20] In general terms, the corporations will be connected if the transferee corporation (on its own or together with non-arm’s length persons) controls the subject corporation or the transferee corporation owns shares of the subject corporation representing more than 10% of the voting rights and fair market value of the subject corporation’s shares.

[21] S.84.1(1)(b).

[22] Dale v. MNR, 97 D.T.C. 5252 (FCA).

[23] Dale v. MNR, 94 D.T.C. 1100 (TCC), referred to in 97 D.T.C. 5252 at para. 9 (FCA).