Tax carryover (section 85)

The tax rollover under Section 85 is a rule that allows you to transfer an asset (a business, shares, or real estate) to your corporation without paying tax immediately. You and the company jointly choose a transfer value that defers the tax to a later date by completing forms T2057 and TP-518.

At a glance

Transferring an asset to your company without immediate tax liability
A Common Scenario: Incorporating (converting into a corporation) a business in your name that has increased in value
The transfer value (the “agreed amount”) must fall between a minimum and a maximum set by law
Two forms to file by the deadline: T2057 for the CRA (Canada Revenue Agency) and TP-518 for Revenu Québec
Tight Deadline: Form T2057 must be filed no later than the filing deadline for the first of the parties involved; otherwise, penalties will accrue

Why it matters

Let’s say you’ve been selling T-shirts on your own for five years and your small business, which you built from the ground up, is now worth $200,000. Incorporating without a tax rollover is like selling all of that to the tax authorities at its full value: immediate tax on a profit you haven’t even received yet. Section 85 prevents exactly that by deferring the tax to a later date by filing Form T2057 to the CRA and the TP-518 to Revenu Québec. It is also used in the Inheritance freezes (freezing the value to prepare for succession), reorganizations, the addition of a management company, and often to consolidate shares in preparation for the LCGE. Be mindful of the consideration received: the portion paid in a form other than shares may leave a balance of Shareholder loan Keep an eye on this. A tax rollover that’s filled out incorrectly or submitted late can be costly. We’re here to help: Bankeo will connect you, for free, with a vetted accountant or Chartered Professional Accountant to help structure your incorporation.

Frequently asked questions

What exactly is the article 85 rollover?

It is a legal way to transfer an asset to your company without paying tax immediately. It is mainly used when incorporating (converting into a corporation) a business in your name that has appreciated in value, placing shares in an investment management company, or restructuring the business prior to an estate freeze or a sale. As soon as an asset is worth more than what you paid for it, a rollover allows you to transfer it to a corporation without incurring an immediate tax liability.

What is the “agreed amount”?

This is the value at which you and the company agree that the transfer is made. By setting it at the tax basis of the asset (what it cost you in the eyes of the tax authorities), you defer all tax liability until a later date. The law sets a minimum and a maximum amount. In exchange for the asset, you receive company stock, and sometimes another form of payment, which should be carefully balanced.

What pitfalls should you avoid?

Forgetting to file Form TP-518 in Quebec, missing deadlines, misvaluing the transferred asset, or receiving too much payment other than in shares: any of these mistakes can trigger the tax you were trying to defer. Correcting a choice after the fact is possible, but costly. We’re here to support you: Bankeo will connect you, for free, with a vetted accountant or CPA to help structure your incorporation or reorganization.