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Share Exchange Under Section 85 (Roll Over)

Transferring property from yourself to your corporation or from one corporation that you own to another could result in a tax liability if not done correctly.  This is usually done through a section 85 rollover, however there are several considerations within these rules that should be considered.

The transfer of an asset by a taxpayer to a corporation owned by the taxpayer results in a deemed disposition at fair market value under s. 69(5) and a capital gain under s. 84(2).  S. 85 provides a provision to defer the capital gain.

Tracking the adjusted cost base (ACB) and paid up capital (PUC) within a reorganization that include a series of steps becomes important.  S. 85(1) allows a taxpayer to transfer certain property to a taxable Canadian corporation while minimizing the tax impact. If it were not for this section, the transfer of property from one taxpayer to another would result in a gain or loss based on the fair market value of the property less the cost base of that property.

Using s. 85, the transferor of the property can dispose the property to a transferee for an “agreed amount” which may be less than the fair market value of this property.  This transfer price must fall within a calculated range. The agreed amount then generally becomes the proceeds of disposition of the property to the transferor and the cost to the transferee. Consideration receivable by the transferor will be based on the agreed amount.

The following conditions must be met for this section to apply.

  • Transferee is a taxable Canadian corporation which means a Canadian Corporation that is not exempt from Part I tax.
  • The property disposed of is “eligible property” described in s. 85(1.1), which in this case is defined under paragraph 85(1.1) (a) as a Capital property.
  • A joint election form (T2057) is filed by the transferor and transferee.
  • The consideration received by the transferor should include at least one share of the capital stock of the transferee (Chartered Professional Accountants Canada, 2015).

The transferor is the party that is giving up the asset.  The transferor could be an individual, corporation, trust or partner in a partnership that wants to incorporate.  The transferee is the recipient of the assets.  This must be a taxable Canadian corporation.

For property to be transferred using section 85, the property must be eligible property.  Eligible property is defined in s85(1.1) and includes the following:

  • Capital property (both depreciable and non-depreciable);
  • Canadian and foreign resource properties;
  • Inventory (other than real property inventory); or
  • Real estate owned by a non-resident that is used in a Canadian business

Specifically excluded from eligible property is the following:

  • Inventory of real property
  • Real estate owned by non-residents (unless used in a Canadian business)

It should also be noted that cash and accounts receivable are not considered capital property for purposes of eligible property within this section.


As the transferor will be providing an asset to the transferee, the transferee must pay consideration in return for the asset.  The use of section 85 requires at least one share in the transferee corporation to be provided to the transferor.  There may also be non-share consideration paid to the transferor – non-share consideration is considered “boot” (Chartered Professional Accountants Canada, 2015).

The shares may include common or preferred shares.  The common shares are for the most part growth shares.  Preferred shares are traditionally non-growth shares.  The growth refers to the increase in value and profits of the corporation on a go forward basis.

Boot may consist of cash, other assets or debt.

To effectively use section 85. the total fair market value of the consideration (shares + boot) should not exceed the fair market value of the assets transferred to the transferee.  There are tax implications where the total consideration exceeds the fair market value of the assets transferred.

The section 85 election is a joint election with the transferor and the transferee.  The prescribed form to make the election is a T2057 and all assets transferred must be listed on this form.  Any assets not listed would be deemed to be transferred at fair market value.  Late and amended elections are permitted, with a penalty of up to $100 per month for a maximum of $8,000 (Chartered Professional Accountants Canada, 2015).

The amount elected will be the transfer price and determine if there is any tax owed by the transferor on the disposition.  This amount will also determine the adjusted cost base for the transferor.

The elected amount must fall within a range.

Upper limit is the fair market value of the assets transferred.

The lower limit is the greater of two amounts:

  1. Boot or the non-share consideration; or
  2. Adjusted cost base of the property transferred (or if the property is depreciable property, the UCC balance of the class of the property transferred).

The ACB to the transferor is determined by the following sequence of allocating the elected amount:

  • Boot
  • Preferred shares
  • Common shares (residual amount if any)


PUC is the legal stated capital, or the fair market value of the consideration given for the shares.  This amount can be returned to the shareholder tax free.  Recognizing the possibility of a lower elected amount would result in a higher tax-free return of capital otherwise, section 85 includes a PUC reduction calculation as follows:

(A – B) (C/A)


A is the increase in legal stated capital of all the shares

B is the elected amount less boot

C is the fair market value of the class of shares

The first part of the calculation (A – B) determines the total PUC reduction.  The second part of the calculation (C / A) allocates the total PUC reduction between the share classes issued in a roll over transfer and is only necessary when more than one class of share is issued in the roll over transaction.

Without the PUC reduction calculation, the shareholder could receive an amount higher than the ACB of the shares on a tax-free return of capital.

The reduction will result in the total PUC to equal the total ACB of the shares.  As such, the corporation could repurchase the shares from the shareholder tax free at the reduced amount that would equal the ACB.

The economic substance of this transaction is real.  Property has been provided.  Any boot taken will decrease the ACB and PUC.  However, the elected amount allows for a deferral of the gain.  The taxpayer contributing the property is given the opportunity to realize the capital gain on the property contributed now or sometime in the future (Duff, 2019).

Where the s 85 is used correctly, the tax deferral received can be extremely lucrative to the transferor of the asset.  Of course, a tax professional should be used to ensure this transaction is done correctly.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. © 2022 Shajani LLP.

Shajani LLP is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.

Nizam Shajani, Partner, LLM, CPA, CA, TEP, MBA

I enjoy formulating plans that help my clients meet their objectives. It's this sense of pride in service that facilitates client success which forms the culture of Shajani CPA.

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