What is a Section 85 Rollover?

A section 85 rollover is a formal election of a specific kind of tax treatment on the disposition of an asset. It is designed to allow for the deferral of what would otherwise be an immediate tax liability arising from a legal transaction.

For example, say you were originally operating a business as a sole proprietorship and that the sole proprietorship had some value. If you later decide to incorporate the business, since the incorporated business would technically be a separate legal person from you, in order for that new corporation to own the assets of the sole-proprietorship, the assets of the sole-proprietorship would need to be transferred to the corporation.

Technically, this would amount to a deemed disposition and would be a taxable event, even if no money changed hands. Since this would also be somewhat counter-intuitive to the intent of what the parties are doing, simply converting from one form of business to another, section 85 of the Canada Income Tax Act (ITA) allows for the rollover of the tax liability of the proprietor from the deemed disposition to the corporation. In this case, in exchange for the assets of the proprietorship (which the company receives) the proprietor will receive shares in the corporation.

Similarly, a section 85 rollover is used where a person transfers an asset, for example, a car, to a corporation in exchange for the consideration of shares or a promissory note.

Modern entity management software is designed to simplify the process to reflect, document and file with the government the election of a section 85 rollover.