Section 85 rollover: moving a sole proprietorship into a corporation
This guide explains how a section 85 rollover moves the assets of a sole proprietorship into a new corporation without triggering a taxable gain: what can be moved, how the elected amount works, the T2057 deadline and the penalties for filing late. We prepare and file your articles of incorporation for $35.00, HST included. The government fee is separate and charged at cost: $200.00 to Corporations Canada, or $300.00 to the Ontario Business Registry. Open Corporation for $35 is a department of Gondaliya CPA.
Why moving a business into a corporation can create tax
A sole proprietorship is not a separate legal person. The business assets belong to you. When you incorporate, those assets have to be transferred to the corporation.
The Income Tax Act treats a transfer to your own corporation as a sale at fair market value. If an asset is worth more than its tax cost, you have a taxable gain, even though no cash changed hands.
That catches most established businesses. Goodwill built up over years usually has no tax cost, so its whole value would be a gain. Equipment that has been depreciated may trigger recapture of depreciation already claimed.
| Asset | What a transfer at full value could trigger |
|---|---|
| Goodwill and client list | A capital gain on the full value, because the tax cost is usually nil |
| Equipment and vehicles | Recapture of depreciation already claimed |
| Inventory | Business income on the difference between cost and value |
Section 85 avoids that by letting you choose a lower transfer price. Our guide to what happens after you incorporate covers the other steps.
What section 85 does
Subsection 85(1) of the Income Tax Act lets you and a taxable Canadian corporation jointly elect a transfer price for each asset, called the elected amount or agreed amount. The elected amount becomes your selling price and the corporation’s cost.
Choose an elected amount equal to the asset’s tax cost and you report no gain. The gain is not forgiven. It is deferred, because the corporation takes the asset at that lower cost and the gain arises when it later sells.
There are conditions. The corporation must be a taxable Canadian corporation, the asset must be eligible property, and you must receive at least one share of the corporation as part of the payment.
The election is made on form T2057, signed by you and the corporation. Partnerships use form T2058.
| Condition | What it means |
|---|---|
| Taxable Canadian corporation | A corporation resident in Canada and subject to tax, such as a new federal or Ontario corporation |
| Eligible property | Most business assets, with some exceptions set out below |
| Shares as payment | You must receive at least one share of the corporation |
| Joint election | Form T2057, signed by you and the corporation |
We incorporate your business for $35.00, HST included
Government fee shown separately at cost. A CPA plans the rollover before the corporation is formed.
What can be rolled over
Eligible property is defined in subsection 85(1.1). It covers most of what a sole proprietorship owns.
| Asset | Eligible? |
|---|---|
| Equipment, vehicles and other depreciable property | Yes |
| Goodwill and other intangibles, now in Class 14.1 | Yes |
| Inventory other than real estate | Yes |
| Capital property such as shares or land held as an investment | Yes |
| Real estate held as inventory, such as a builder’s homes for sale | No |
| Capital real estate owned by a non-resident | No |
Goodwill used to be called eligible capital property. Since 2017 it is depreciable property in Class 14.1, and it can be rolled over like other depreciable property.
Cash and accounts receivable are usually moved outside the election. Cash can simply be deposited, and receivables are often left with you to collect or transferred under a separate election.
Choosing the elected amount
The elected amount is not open-ended. Section 85 sets a floor and a ceiling for each asset.
The ceiling is the asset’s fair market value. The floor depends on the type of asset and on any non-share payment you take back, called boot. Boot is cash, a promissory note or the corporation taking over a debt.
| Asset | Lowest amount you can elect | Highest amount you can elect |
|---|---|---|
| Capital property such as land or shares | The lesser of its tax cost and its fair market value | Fair market value |
| Depreciable property such as equipment | The least of the undepreciated capital cost of the class, its cost and its fair market value | Fair market value |
| Inventory | The lesser of its cost and its fair market value | Fair market value |
| Any asset where you take back boot | Not less than the value of the boot | Fair market value |
If you elect below the boot, the elected amount is raised to the boot. Where the boot floor and the cost floor conflict, the higher of the two applies.
That is why the boot is planned with the elected amount. Taking back a note equal to the tax cost of the assets lets you withdraw that amount from the corporation later without tax, while still reporting no gain now.
If the assets are worth more than everything you receive, and part of the excess goes to a related person, such as a spouse who owns shares, a special rule can raise the elected amount. The value of the shares you receive should match the value of what you transfer.
The T2057 deadline and late filing
Form T2057 is due on the earliest date any party to the election must file an income tax return for the tax year in which the transfer happened. For most owners that is the earlier of your personal return due date and the corporation’s T2 due date.
Since March 1, 2023, T2057 can be filed electronically through Submit Documents in a Canada Revenue Agency account or through certified software.
A late election is accepted up to three years after the due date, if the estimated penalty is paid when it is filed. After three years, the Canada Revenue Agency may accept it only if it considers that just and equitable.
| Item | Rule |
|---|---|
| Due date | The earliest return due date of any party, for the year of the transfer |
| Electronic filing | Available since March 1, 2023 |
| Late filing allowed | Up to three years after the due date, with the penalty paid |
| Penalty for each month or part month late | The lesser of one quarter of 1 percent of the amount by which the asset’s value exceeds the elected amount, and $100 |
| Maximum penalty | $8,000 |
A missed election is not just a penalty. Without a valid election the transfer is taxed at fair market value, which is the outcome the rollover was meant to prevent.
Protecting the values: price adjustment clauses
Section 85 depends on fair market values, and the Canada Revenue Agency can disagree with yours. A price adjustment clause in the transfer agreement deals with that risk.
The clause says that if the Canada Revenue Agency or a court finds a different value, the price is adjusted to that value. The Canada Revenue Agency’s position on these clauses is set out in Income Tax Folio S4-F3-C1.
The clause is respected where there was a genuine intention to transfer at fair market value and the value was set by a fair and reasonable method. A professional valuation of goodwill is the usual way to show both.
GST/HST on the transfer
Moving business assets into a corporation is also a sale for GST/HST. Without a relief, the corporation would pay HST on the transfer and then claim it back as an input tax credit.
Section 167 of the Excise Tax Act lets the buyer and seller elect, on form GST44, that no tax applies when a business is sold. The buyer must acquire all or substantially all of the property needed to carry on the business. The Canada Revenue Agency’s guideline is 90 percent or more.
The election is not available when the seller is registered for GST/HST and the buyer is not, so the new corporation should be registered before the transfer. Our GST/HST registration guide explains that step.
| Item | Rule |
|---|---|
| Election | Section 167 of the Excise Tax Act, form GST44 |
| Condition | The corporation acquires all or substantially all the property needed to carry on the business |
| When it is filed | By the due date of the buyer’s GST/HST return for the first period in which tax would otherwise have been payable |
For whether incorporating is right at all, see our corporation against partnership comparison, and our pricing page for every fee.
What incorporating costs
A rollover needs a corporation to receive the assets, and our fee to form one is fixed. Government fees are charged at cost.
| Item | Amount | HST | Total | Who charges it |
|---|---|---|---|---|
| Our incorporation filing fee | $35.00 | Included | $35.00 | Open Corporation for $35 |
| Federal articles of incorporation | $200.00 | Not applicable | $200.00 | Corporations Canada |
| Ontario articles of incorporation | $300.00 | Not applicable | $300.00 | Ontario Business Registry |
Our $35.00 fee includes HST and government fees are passed through at cost with no mark-up. Every figure is on our full pricing page. Open Corporation for $35 is a department of Gondaliya CPA.
What a CPA checks before a rollover
This guide explains the rules. It cannot set your elected amounts, because they depend on what your assets cost, what they are worth today and what you want to take out.
We start with the list of assets. We separate what can be rolled over from what cannot, and we confirm the tax cost of each item from your records.
Then the value. We agree a fair market value for each asset, including goodwill, and add a price adjustment clause to the transfer agreement.
Then the consideration. We decide how many shares the corporation issues to you and whether you take back a note, keeping any cash or note within the elected amount. Our share structure guide explains the share classes.
Last, the filings. We complete form T2057, file it before the deadline and deal with the GST/HST election. The parent firm’s tax planning checklist covers the wider planning. Open Corporation for $35 is a department of Gondaliya CPA.
Case studies
Three sole proprietors who moved their business into a corporation, and what we did.
A consulting practice with goodwill
The situation: A consultant had built a client list over eight years as a sole proprietor and wanted to incorporate without paying tax on the goodwill.
What we did: We valued the goodwill, transferred it to the new corporation for shares and elected an amount equal to its nil tax cost.
The result:
- No gain reported on the transfer
- Goodwill now owned by the corporation
- Election filed on time
A trades business with a truck and tools
The situation: A contractor wanted the corporation to own the work truck and equipment the business already used.
What we did: We used the undepreciated capital cost of each class as the elected amount and took back a note for part of the value, within that amount.
The result:
- Equipment moved with no recapture
- Note repayable to the owner tax-free
- Depreciation continued in the corporation
A late election
The situation: An owner had moved their business into a corporation two years earlier, but no election had been filed.
What we did: We prepared the T2057 as a late election within the three-year window and calculated the penalty to file with it.
The result:
- Election accepted
- Penalty kept to the statutory amount
- Gain deferred as originally intended
Book a free consultation call
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Frequently asked questions
These are the questions sole proprietors ask about the section 85 rollover. Each answer can be read on its own.
What is a section 85 rollover?
Do I have to take shares in the corporation?
Can goodwill be transferred under section 85?
What property cannot be rolled over?
When is form T2057 due?
What is the penalty for filing T2057 late?
Is there GST/HST when I move my business into a corporation?
What does it cost to incorporate?
The CPAs who review this guide
A Chartered Professional Accountant reviews your structure before anything is filed. Open Corporation for $35 is a department of Gondaliya CPA.
What our clients say
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Incorporate your business and roll it over correctly
Send the intake form and we will plan the rollover, the share issue and the elected amounts before anything is filed. Our fee is $35.00, HST included, and the government fee is shown separately at cost. Payment is by Interac e-Transfer to info@gondaliyacpa.ca, and the security question is Not Applicable because auto-deposit is enabled.
No legal advice
Gondaliya CPA Professional Corporation is a firm of Chartered Professional Accountants licensed by CPA Ontario, firm registration number 61330051. It is not a law firm. We prepare and file corporate documents and we provide accounting and tax advice. Nothing on this page is legal advice, and reading it creates no solicitor and client relationship. For legal advice on the transfer agreement or on assigning contracts and leases, consult a lawyer licensed in your province.
Open Corporation for $35 is a department of Gondaliya CPA.
