If you are a business owner in Mississauga, Oakville, or the broader Greater Toronto Area, you have likely spent years building something of real value. Whether that means a growing consulting practice, a family-owned manufacturing operation, or a thriving retail brand, your business represents not just your livelihood but your legacy. The moment you decide to incorporate or to transfer assets into an existing corporation, the Canada Revenue Agency takes notice. Without careful planning, that transfer can trigger a significant and entirely avoidable tax bill. This is where Section 85 of the Income Tax Act becomes one of the most powerful tools in a Canadian business owner’s legal and financial arsenal.
Section 85 of the Income Tax Act allows you to transfer eligible property to a Canadian corporation on a tax-deferred basis. In plain language: rather than triggering a capital gain or recaptured depreciation the moment you move an asset, you can elect a transfer price (sometimes as low as the asset’s cost base) so that tax is deferred until a later event actually triggers a disposition. This election is frequently a cornerstone of incorporation planning, estate freezes, and business succession strategies. Understanding how it works, who qualifies, and when to use it is essential knowledge for any serious business owner.
What Is a Section 85 Rollover and How Does It Actually Work?
At its core, a Section 85 rollover is a joint election filed by both the transferor (you, the business owner or individual transferring the asset) and the transferee corporation. By filing this election, both parties agree to an “elected amount”, a notional transfer price that governs the tax consequences of the transaction. The beauty of the mechanism is that this elected amount can be set anywhere within a prescribed range, giving you and your tax and legal advisors a meaningful degree of control over the timing and extent of any resulting tax liability.
The eligible property that can be rolled over is broad and covers most capital assets that a business owner would commonly transfer. This includes capital property (such as buildings or land held as capital property), shares of a corporation, eligible depreciable property (think equipment, vehicles, or machinery), inventory (other than real property inventory), and resource properties. Notably, cash does not qualify for the rollover, and accounts receivable is typically excluded in favour of a separate Section 22 election to preserve favourable bad-debt treatment. This is why careful pre-transfer planning (ideally with both a business lawyer and a chartered professional accountant) is critical. A well-structured rollover considers not just what you are transferring, but the legal form in which you hold the asset and the corporation’s own tax attributes.
In exchange for the transferred property, the corporation typically issues consideration back to the transferor. This consideration almost always includes shares in the corporation, and this is a key structural requirement. The CRA requires that at least some of the consideration be shares of the corporation receiving the property. Beyond shares, the corporation may also issue promissory notes (boot) or assume liabilities. The interplay between the elected amount, the fair market value of shares issued, and any boot received is where the real technical complexity lies, and where an experienced business law firm can make a material difference to your outcome.
Why Business Owners in Mississauga and Oakville Use Section 85 Rollovers
Deferring Capital Gains Tax
The most straightforward reason to use a Section 85 rollover is to defer capital gains tax when incorporating a sole proprietorship or transferring assets into a holding company or operating company.
Business Succession Planning
Beyond initial incorporation, Section 85 rollovers are frequently used in the context of estate freezes and business succession planning. An estate freeze is a strategy whereby a business owner “freezes” the current value of their interest in a business, typically by exchanging growth shares for fixed-value preferred shares, so that future growth accrues to the next generation or to key employees through new common shares. Section 85 is the legal mechanism that allows the freeze to be implemented without triggering immediate tax on accrued gains. For family businesses in Oakville or Mississauga with complex ownership structures, this can preserve enormous amounts of family wealth across generations and facilitate a smooth leadership transition.
Corporate Reorganizations
Section 85 rollovers also play a central role in corporate reorganizations and amalgamations. When business owners in the GTA restructure their corporate groups, whether to consolidate operations, bring in a new partner, prepare for a sale, or separate business lines, Section 85 elections can facilitate the movement of assets between related corporations without triggering unintended tax consequences at each step.
They are equally useful when an owner wishes to crystallize the lifetime capital gains exemption (LCGE), which in 2026 shelters over $1.275 million in capital gains on qualifying small business corporation shares from federal tax. Structuring a crystallization correctly, however, requires careful attention to the qualified small business corporation (QSBC) share rules; yet another reason to work with a business lawyer who understands both the tax and corporate law dimensions of these transactions.
Critical Requirements, Common Pitfalls, and the Importance of Legal Counsel
For a Section 85 rollover to be valid, several strict conditions must be met, and the consequences of getting them wrong can be severe.
Transferee Must Be a Taxable Canadian Corporation
The transferee must be a taxable Canadian corporation. Transfers to non-resident corporations, trusts, or partnerships do not qualify (though related provisions exist for partnerships within the Income Tax Act).
Elected Amount Must Be Within the Required Range
The elected amount must fall within the permissible range: it cannot be less than the lesser of the property’s fair market value or its tax cost (or cost base), and it generally cannot exceed fair market value. Setting the elected amount outside this corridor results in the CRA substituting a different value, potentially triggering exactly the tax you were trying to avoid.
Share Structure Matters
Another common and costly error involves the structure of the consideration received. If the corporation issues too much “boot” (that is, non-share consideration such as promissory notes or assumed liabilities in excess of the elected amount), the excess is treated as proceeds of disposition, triggering immediate tax. Many business owners and even some accountants overlook this nuance, particularly when the transfer involves depreciable property subject to the potential recapture of capital cost allowance.
Similarly, the shares received must be carefully structured to ensure the rollover achieves its intended purpose: a poorly designed share structure can inadvertently collapse the deferral or create unexpected income inclusion down the road.
Filing Deadlines
The filing deadline is another area where professional guidance is indispensable. The requisite forms must generally be filed by the earliest of the filing due dates for either the transferor’s or the transferee’s tax return for the year in which the transfer occurs. Missing this deadline can be catastrophic, as late elections are only accepted at the CRA’s discretion and often come with financial penalties.
Proper Valuation of Transferred Property
The valuation of the transferred property, particularly goodwill, shares of private corporations, or specialized equipment, must be supportable if the CRA reviews the transaction. Working with an experienced business lawyer and accountant is the most reliable way to ensure every element of the rollover is properly documented, defensible, and optimized for your specific circumstances.
Ready to Protect Your Business Assets in Mississauga or Oakville? Contact Bader Law
A Section 85 rollover is one of the most effective tax-planning tools available to Canadian business owners, but it must be executed precisely, documented thoroughly, and integrated into a broader corporate and estate plan. Whether you are incorporating your sole proprietorship, restructuring your corporate group, planning a business succession in Mississauga, or preparing your Oakville family business for the next generation, Bader Law has the knowledge to guide you through every step of the process.
Our dynamic business lawyers serve entrepreneurs, incorporated professionals, and family business owners throughout Mississauga, Oakville, and all surrounding areas. Do not leave your hard-earned business equity exposed to unnecessary tax. Contact us online or call (289) 652-9092 to schedule a consultation today.