Section 85 Rollover Calculator

Evaluate the tax implications of transferring eligible property to a taxable Canadian corporation under Section 85 of the Income Tax Act.

Visual Comparison of Values

This chart visualizes the key monetary values in the Section 85 rollover, including the FMV, ACB, Boot, and the resulting Elected Amount for tax purposes.

What is a Section 85 Rollover?

A Section 85 Rollover, as defined in the Canadian Income Tax Act, is a powerful tax planning tool that allows a taxpayer (an individual, trust, or corporation) to transfer eligible property to a taxable Canadian corporation on a tax-deferred basis. This is often called a “rollover” because you are essentially rolling your existing tax cost in an asset into the shares of the corporation you receive in exchange. The primary goal is to defer the capital gain that would otherwise be realized if the property were sold at its Fair Market Value (FMV).

This is commonly used when a sole proprietor incorporates their successful business and wants to transfer assets like equipment, goodwill, or intellectual property into the new corporation without triggering a large, immediate tax bill. It’s also critical for corporate reorganizations and estate planning, such as an estate freeze. To be valid, the person transferring the asset must receive at least one share of the corporation as part of the consideration.

The Section 85 Formula and Explanation

There isn’t one single “formula” for Section 85, but rather a set of rules that govern the “agreed amount” that the transferor and corporation elect for the transaction. This agreed amount becomes the proceeds of disposition for the transferor and the cost for the corporation. Our Section 85 calculator helps determine the optimal agreed amount and its consequences. The key is to keep the agreed amount within specific limits:

• It cannot be greater than the FMV of the property.
• It cannot be less than the ‘boot’ (non-share consideration) received.
• To achieve a full tax deferral, the elected amount should typically equal the Adjusted Cost Base (ACB) of the property. If boot is received that exceeds the ACB, a capital gain is unavoidable.

Key Variables in a Section 85 Calculation

Variable	Meaning	Unit	Typical Range
Fair Market Value (FMV)	The price the asset would sell for on the open market.	Currency ($)	Varies widely based on the asset.
Adjusted Cost Base (ACB)	The original cost of the asset for tax purposes.	Currency ($)	Typically less than or equal to FMV.
Boot (Non-Share Consideration)	Any cash or debt received by the transferor in the exchange.	Currency ($)	$0 to a value less than FMV.
Elected Amount	The value jointly elected for the transfer, determining tax consequences.	Currency ($)	Between the Boot and the FMV.

Practical Examples

Example 1: Full Tax Deferral (No Boot)

Sarah wants to transfer intellectual property from her sole proprietorship into her new Canadian corporation, “Innovate Corp.”

• Inputs:
  • FMV of Property: $250,000
  • ACB of Property: $50,000
  • Boot Received: $0
• Calculation: To defer the entire gain, Sarah and Innovate Corp. elect at the ACB. The Section 85 calculator would recommend an elected amount of $50,000.
• Results:
  • Immediate Capital Gain: $0
  • Cost Base of her new shares in Innovate Corp: $50,000
  • The potential $200,000 capital gain is deferred.

Example 2: Partial Deferral (With Boot)

David is transferring a building into his corporation, “Realty Inc.” He needs some cash for personal reasons.

• Inputs:
  • FMV of Building: $800,000
  • ACB of Building: $300,000
  • Boot Received (Cash): $350,000
• Calculation: The elected amount cannot be less than the boot. The lowest possible elected amount is $350,000. This forces a gain.
• Results from the calculator:
  • Immediate Capital Gain: $50,000 (Elected Amount $350,000 – ACB $300,000)
  • Cost Base of his new shares in Realty Inc: $0 (Elected Amount $350,000 – Boot $350,000)
  • A significant portion of the total potential gain ($500,000) is still deferred.

How to Use This Section 85 Calculator

Our tool is designed to simplify the evaluation of a Section 85 rollover. Here’s how to use it effectively:

1. Enter Fair Market Value (FMV): Input the current market value of the asset you plan to transfer. This should be a supportable figure, as the CRA can challenge it.
2. Enter Adjusted Cost Base (ACB): Input what you originally paid for the asset, plus any relevant adjustments. You can learn more about understanding Adjusted Cost Base on our blog.
3. Enter Non-Share Consideration (Boot): Input the total value of any cash, debt, or other property you are receiving from the corporation in addition to shares. If you are only receiving shares, enter 0.
4. Enter Increase in Stated Capital: Input the amount by which the stated capital of the corporation’s shares will increase. For planning purposes to avoid a deemed dividend, this is often a very small, nominal amount (e.g., $1 or $100).
5. Interpret the Results: The calculator instantly shows your immediate capital gain (if any), the valid range for your elected amount, the cost base of your new shares, and any potential deemed dividends from a high Paid-Up Capital (PUC).

Key Factors That Affect a Section 85 Rollover

• Accurate Valuation: The FMV must be accurate. If the Canada Revenue Agency (CRA) determines the FMV is different, it can invalidate the election or lead to unintended tax consequences.
• Eligible Property: The rollover only applies to specific types of property, including capital property, Canadian and foreign resource properties, and most inventory (but not real estate inventory).
• Amount of Boot: The more boot you take out, the higher the floor for the elected amount, which can force the recognition of a capital gain.
• Paid-Up Capital (PUC): The PUC of the shares you receive can have significant implications. If the PUC is too high, it can result in a “PUC grind” and an immediate deemed dividend under subsection 84(1) of the Income Tax Act. Our calculator helps identify this risk.
• Filing Requirements: A Form T2057 must be filed correctly and on time by both the transferor and the corporation. Late filing can result in significant penalties.
• Potential for Double Taxation: While Section 85 defers the initial tax, it can lead to double taxation later if not structured correctly—once at the corporate level when the asset is sold, and again at the shareholder level when the shares are sold. Proper tax planning is essential.

Frequently Asked Questions (FAQ)

1. What is the main purpose of using a Section 85 Calculator?

The main purpose is to model different scenarios for a tax-deferred transfer of property to a Canadian corporation, allowing you to see the immediate tax impact and make informed decisions about the elected amount and boot.

2. What is “boot” and how does it affect the calculation?

Boot is any consideration other than shares, such as cash or a promissory note. It sets the minimum possible elected amount. If the boot is higher than your asset’s ACB, you will trigger an immediate capital gain.

3. What happens if I elect at an amount lower than the ACB?

The Income Tax Act contains rules that automatically “grind” the elected amount. You cannot elect below the boot, and electing below ACB when you don’t have to doesn’t typically provide a benefit and may be overridden by the rules. To defer a loss, for example, is not possible in this way.

4. Can I transfer liabilities along with the asset?

Yes, liabilities can be transferred. When a liability is assumed by the corporation, it is treated as part of the boot, which can impact the calculation and potentially trigger a gain.

5. Why is the “Paid-Up Capital” (PUC) of new shares important?

PUC represents the amount that can generally be returned to a shareholder tax-free. If the PUC of the new shares exceeds the tax cost (Elected Amount minus Boot), the excess can be deemed a dividend to the shareholder, creating an immediate tax liability. This is known as a PUC grind or a s.84(1) deemed dividend.

6. Do I have to file any forms to use Section 85?

Yes. A joint election must be made by filing Form T2057 with the CRA by the earliest of the transferor’s or the corporation’s tax filing deadline for the year of the transfer.

7. What kind of property is eligible for a Section 85 rollover?

Eligible property includes capital property (like shares, land, and buildings), resource properties, and inventory (excluding real property held as inventory). This makes it a versatile tool for anyone looking into incorporating their business.

8. What is the risk of an incorrect Fair Market Value (FMV)?

If the CRA successfully challenges your stated FMV, they can adjust the values in the transaction, which can lead to unexpected capital gains or deemed dividends. It’s often wise to get a professional valuation for significant assets.

Related Tools and Internal Resources

For more detailed planning, explore our other resources:

• Guide to Canadian Corporate Tax: Understand the broader context of corporate taxation in Canada.
• Capital Gains Calculator: A general tool for calculating capital gains on various assets.
• Incorporation Services in Canada: Learn about the process and benefits of incorporating your business.
• Understanding Adjusted Cost Base (ACB): A deep dive into how ACB is calculated.
• Deemed Dividends Explained: Learn more about the risks of deemed dividends in corporate transactions.
• Canadian Tax Forms Library: Access important forms like the T2057.