Section 85 Rollover Calculator

An essential tool for Canadian business owners planning a tax-deferred transfer of assets to a corporation. This calculator helps you evaluate the potential tax implications of a Section 85 election.

Tax Implications Summary

Item	Transferor (You)	Transferee (Corporation)

This table summarizes the key tax outcomes for both the individual transferring the asset and the corporation receiving it under the Section 85 Rollover Calculator.

What is a Section 85 Rollover?

A Section 85 Rollover is a provision in the Canadian Income Tax Act that allows a taxpayer (an individual, trust, or corporation) to transfer eligible property to a taxable Canadian corporation on a tax-deferred basis. Essentially, it lets you “roll over” an asset into your corporation without immediately paying tax on the capital gains that have accrued on that asset. This is a cornerstone of Canadian tax planning, especially for small business owners looking to incorporate a sole proprietorship or transfer personal assets into their existing corporation. Without this election, such a transfer would be treated as a sale at Fair Market Value (FMV), potentially triggering a significant tax bill. The Section 85 Rollover Calculator is designed to help you model this exact scenario.

Who Should Use a Section 85 Rollover?

This election is commonly used in several situations:

• Incorporating a Sole Proprietorship: When a successful unincorporated business is moved into a new corporate structure.
• Estate Freezing: As part of estate planning to pass future growth to the next generation while capping the current owner’s tax liability.
• Asset Protection: Moving valuable personal assets like real estate or intellectual property into a corporation.
• Corporate Reorganizations: Transferring assets between related companies as part of a larger restructuring plan.

Common Misconceptions

A frequent misunderstanding is that a Section 85 rollover eliminates tax forever. This is not true; it defers the tax. The accrued capital gain is transferred to the shares you receive from the corporation, and the tax will be payable when you ultimately sell those shares or wind up the company. Another point of confusion is the “elected amount.” It’s not an arbitrary number; it must fall within a specific range defined by the Income Tax Act, a core function of this Section 85 Rollover Calculator.

Section 85 Rollover Formula and Mathematical Explanation

The core of a Section 85 election is the “Elected Amount.” This is the value that you and the corporation jointly agree upon for the transfer. For tax purposes, this amount becomes your proceeds of disposition (what you “sold” the asset for) and the corporation’s cost for the asset. The rules are designed to prevent abuse and set strict limits on this amount. Our Section 85 Rollover Calculator automates these rules.

The Elected Amount must be:

• NOT greater than the Fair Market Value (FMV) of the transferred property.
• NOT less than the Fair Market Value of the non-share consideration (the “boot”) you receive.

To achieve a full tax deferral (a $0 immediate capital gain), you typically want to set the Elected Amount equal to the Adjusted Cost Base (ACB) of the property. However, if the boot you receive is higher than your ACB, you cannot elect below the boot’s value. In that case, the Elected Amount will equal the boot, and you will trigger an immediate capital gain.

The optimal Elected Amount is therefore: Min(FMV, Max(ACB, Boot)).

Variables Table

Variable	Meaning	Unit	Typical Range
FMV	Fair Market Value: The price the asset would sell for on the open market.	CAD ($)	$1,000 – $10,000,000+
ACB	Adjusted Cost Base: The original purchase price of the asset, plus any capital improvements.	CAD ($)	$0 – FMV
Boot	Non-Share Consideration: Any payment received that is not shares (e.g., cash, promissory note).	CAD ($)	$0 – FMV
Elected Amount	The agreed-upon transfer price for tax purposes.	CAD ($)	Boot ≤ Elected Amount ≤ FMV

Practical Examples (Real-World Use Cases)

Example 1: Incorporating a Business with Goodwill (Full Deferral)

Sarah is a graphic designer operating as a sole proprietor. Her business has grown, and she has built significant brand value (“goodwill”). Her accountant advises her to incorporate. The goodwill is valued at an FMV of $150,000, but its ACB is $0. She transfers the goodwill to her new corporation, “Sarah Designs Inc.” In return, she takes back shares only (no boot).

• FMV: $150,000
• ACB: $0
• Boot: $0

Using the Section 85 Rollover Calculator, the optimal Elected Amount is $0 (the greater of ACB and boot). The result: Sarah triggers no immediate capital gain. The entire $150,000 gain is deferred. The ACB of her new shares in Sarah Designs Inc. is $0.

Example 2: Transferring Real Estate with Boot (Partial Deferral)

Tom owns a commercial property he bought for $300,000 (ACB). It’s now worth $800,000 (FMV). He wants to transfer it to his corporation, “Tom Holdings Inc.” To get some liquidity, he wants the corporation to give him $100,000 in cash (boot) and the rest in shares.

• FMV: $800,000
• ACB: $300,000
• Boot: $100,000

The Elected Amount cannot be lower than the boot ($100,000) or his ACB ($300,000). To maximize the deferral, he elects at $300,000.
The Section 85 Rollover Calculator shows:

• Elected Amount: $300,000 (Max of ACB and Boot)
• Immediate Capital Gain: $0 ($300,000 Elected Amount – $300,000 ACB)
• Deferred Capital Gain: $500,000 (Total Gain of $500,000 – $0 Immediate Gain)
• ACB of his new shares: $200,000 ($300,000 Elected Amount – $100,000 Boot)

How to Use This Section 85 Rollover Calculator

This tool simplifies a complex tax election. Here’s a step-by-step guide:

1. Enter Fair Market Value (FMV): Input the current market value of the asset you’re transferring. This requires a reasonable valuation.
2. Enter Adjusted Cost Base (ACB): Input the asset’s cost for tax purposes. For help, you might consult a capital gains calculator.
3. Enter Non-Share Consideration (Boot): Input the total value of any cash, debt, or other assets you will receive from the corporation. If you’re only taking back shares, enter 0.
4. Review the Results: The Section 85 Rollover Calculator instantly updates. The “Total Deferred Capital Gain” is the primary result, showing the tax liability you are pushing into the future.
5. Analyze Intermediate Values: Pay attention to the “Immediate Capital Gain.” If this is above zero, a portion of your gain is being taxed now. The “ACB of New Shares” is critical for calculating your tax liability when you sell these shares in the future.

Key Factors That Affect Section 85 Rollover Results

The outcome of a Section 85 election is sensitive to several factors. Understanding them is key to effective tax-deferred asset transfer planning.

1. Accuracy of Fair Market Value (FMV)

The Canada Revenue Agency (CRA) can challenge your FMV assessment. An incorrect valuation can lead to unintended tax consequences. For significant assets, a professional valuation is recommended.

2. The Amount of “Boot” Taken

As the boot increases, the potential for an immediate capital gain rises. If the boot exceeds the asset’s ACB, a capital gain is unavoidable. This is a critical input for any Section 85 Rollover Calculator.

3. The Nature of the Asset

The rules can differ for capital property, depreciable property (like equipment), and inventory. This calculator is designed for capital property, the most common use case for a corporate reorganization Canada strategy.

4. Eligibility of the Corporation

The transferee corporation must be a “taxable Canadian corporation.” Transferring assets to a foreign corporation does not qualify for a Section 85 election.

5. Filing a Timely Election

The T2057 form must be filed with the CRA by the earlier of your personal tax filing deadline or the corporation’s tax filing deadline for the year of the transfer. Late filing can result in significant penalties.

6. Paid-Up Capital (PUC) of New Shares

This is an advanced topic, but the legal stated capital of the shares you receive can have tax implications. The PUC of the new shares is generally ground down to avoid the tax-free extraction of corporate surplus. A professional should be consulted on this matter when executing a formal Section 85 election.

Frequently Asked Questions (FAQ)

1. What is the main benefit of a Section 85 Rollover?

The primary benefit is tax deferral. It allows you to move an appreciated asset into a corporation without having to pay the capital gains tax immediately, preserving cash for business operations or investment. Any good Section 85 Rollover Calculator will highlight this deferred amount.

2. Can I use a Section 85 rollover for an asset that has a loss?

No, a Section 85 election cannot be used to transfer an asset with an accrued loss. The asset must be disposed of at FMV to realize the capital loss.

3. What happens if I file the T2057 election form late?

The CRA charges penalties for late-filed elections. The penalty is calculated based on the number of months the filing is late and can be substantial, up to a maximum of $8,000.

4. Do I need a lawyer or accountant to do a Section 85 election?

While a Section 85 Rollover Calculator is useful for planning, a formal election is a complex legal and tax process. It is highly recommended to engage a professional tax accountant and/or lawyer to ensure the paperwork is filed correctly and the transaction is structured properly.

5. What is “boot”?

“Boot” is the term for any consideration received from the corporation other than its own shares. This includes cash, debt (a promissory note), or other property. It’s a critical variable in the calculation.

6. Can I transfer real estate I own personally into my corporation?

Yes, real estate is a common asset transferred using a Section 85 rollover, allowing you to separate personal assets from business operations and potentially shelter rental income at corporate tax rates. It’s a key strategy for any small business corporation.

7. What’s the difference between ACB and FMV?

ACB (Adjusted Cost Base) is what you paid for the asset, its historical cost for tax purposes. FMV (Fair Market Value) is what the asset is worth today. The difference between them is the capital gain or loss.

8. Does the calculator handle depreciable capital property?

This Section 85 Rollover Calculator is optimized for non-depreciable capital property like stocks, land, or goodwill. The rules for depreciable property involve Undepreciated Capital Cost (UCC) and are more complex, often requiring professional advice on capital gains deferral.