If you are incorporating a business, creating a holding company, or reorganizing your structure, one of the most valuable tools available is a Section 85 rollover. This mechanism lets you transfer property into a corporation without paying tax immediately, which preserves cash and avoids unnecessary tax bills during a transition.

This article explains the concept and shows when you should consider using it.

What Does a Section 85 Rollover Do? 

A Section 85 rollover lets you transfer assets (such as equipment, real estate, goodwill, or shares) into a corporation at a value you choose, as long as it fits within the rules.

The key benefit: You can avoid triggering a capital gain today and defer that tax until a future sale.

Think of it like packing your assets into a new corporate “box” without paying tax just because you changed how you hold them.

How It Works 

When you move an asset into a corporation:

1. You choose a transfer value within a permitted range. The transfer value must be above the asset’s adjusted cost base (the amount you initially paid for the asset) and below the asset’s the fair market value (what you would make if you sole the asset in the current market).
2. That value determines how much (if any) taxable gain is recognized today. 
3. In exchange, the corporation gives you shares and non-share compensation (such as a promissory note).
4. The tax on any gain is deferred until the asset (or the shares you received) is sold later.

This gives you control over when tax becomes payable. Control over this timing is especially beneficial during corporate reorganizations, succession planning or investment structuring. 

Why Business Owners Use Section 85

Section 85 is one of the most flexible tools in the Income Tax Act. Most small and medium-sized business reorganizations rely on it at some point.

Common uses include:

• Incorporating a Company

Move your operating assets into a corporation without triggering tax.

• Creating a Holding Company

Transfer shares into a new holdco to allow income splitting, creditor protection, or future planning.

• Estate Freezes

Lock in today’s value and shift future growth to the next generation.

• Bringing in Investors or Co-Owners

Move assets into a corporation before issuing new shares.

• Simplifying Complex Ownership Structures

Useful when moving assets between related companies.

Why It Matters to Your Tax Strategy

A properly executed Section 85 rollover can:

• Defer capital gains tax
• Preserve your lifetime capital gains exemption
• Avoid unexpected tax consequences during restructuring
• Give you control over timing and planning
• Avoid triggering tax on assets that have grown in value

Choosing the wrong value or using the wrong structure can create long-term problems that are expensive to unwind.

When You Should Use Section 85

Use it when you need to move assets into a corporation. If the transaction involves anything other than exchanging shares for new shares, Section 85 is almost always the correct tool.

Get It Right the First Time

Section 85 rollovers are powerful but technical. Errors with valuations, elections, or share structure can create tax liabilities that defeat the purpose of the rollover entirely.

Our firm regularly structures these transactions and works directly with your accountant to ensure:

• The elected values are correct
• The share structure supports your long-term goals
• The rollover preserves access to tax advantages

 

Contact Du Plooy Law if you are incorporating, reorganizing, or preparing for succession. Doing this properly today protects you from unnecessary tax tomorrow.