Section 85 Rollover

A Section 85 rollover is a tax-deferral mechanism under section 85 of the Income Tax Act that allows a Canadian taxpayer to transfer eligible property — including shares, business assets, and intellectual property — to a Canadian corporation on a tax-deferred basis at an elected amount between the property's adjusted cost base and its fair market value.

The primary use of the Section 85 rollover in business succession planning is to facilitate an estate freeze: the business owner transfers existing shares to a new holding corporation in exchange for preferred shares, electing a transfer price that defers the capital gain. The children then subscribe for common shares of the holding company at nominal value, and all future appreciation in the business accrues to the common shares.

The rollover requires filing a joint election (form T2057 for individuals) between the transferor and the receiving corporation within the applicable filing deadline. The elected amount must fall within the permitted range specified in subsection 85(1), which varies depending on the type of property transferred.

See also: Estate Freeze, LCGE, QSBC, Capital Gains, Capital Dividend Account.