Section 85 Rollover: Transfer Real Estate to a Corporation Tax-Free in Canada

You’ve built a portfolio of rental properties in your personal name. Cash flow is solid. Equity is growing. And now your accountant is telling you it might be time to move everything into a corporation.

Great idea — until you realize that transferring a property normally means selling it. And selling triggers capital gains. On paper, you haven’t actually sold anything. You still own the same building. But CRA doesn’t care. A transfer is a disposition, and a disposition means taxes.

Unless you use Section 85.

This is one of the most powerful tools in Canadian tax law for real estate investors, and most people have never heard of it. Let me break it down.

What Is a Section 85 Rollover?

Section 85 of the Income Tax Act lets you transfer “eligible property” to a Canadian corporation on a tax-deferred basis. You’re not avoiding the tax forever — you’re deferring it until the corporation eventually sells the property.

Here’s the basic idea: instead of transferring the property at fair market value (which triggers a gain), you and the corporation jointly elect a transfer price. That elected amount can be as low as your adjusted cost base, which means zero taxable gain at the time of transfer.

In exchange for the property, the corporation gives you shares (and sometimes other consideration). The tax cost of the property carries over to the corporation. The gain is baked into the shares you receive.

Think of it as moving money from your left pocket to your right pocket. Nothing changes economically — but the tax event gets pushed into the future.

Why Would You Want to Do This?

There are several reasons an investor would transfer personal properties into a corporation:

Lower tax rates on retained earnings. The small business tax rate in Canada is roughly 12.2% (combined federal-provincial, varies by province). If you’re in a personal tax bracket of 50%+, that’s a massive difference on rental income you don’t need to spend right now.

Liability protection. A corporation creates a legal wall between your rental properties and your personal assets. If a tenant sues over a slip-and-fall, they’re suing the corporation — not you personally.

Income splitting opportunities. With proper planning, a corporation allows you to pay dividends to family members who are shareholders (subject to TOSI rules — more on that later).

Estate planning. Corporate structures can make it easier to transfer wealth to the next generation through estate freezes and other strategies.

Portfolio credibility. If you’re raising capital from joint venture partners, operating through a corporation signals that you’re running a real business.

The problem? If you hold properties personally that have appreciated significantly, transferring them at fair market value could cost you tens or hundreds of thousands in tax. Section 85 solves that.

Who Is Eligible?

Not every situation qualifies. Here are the requirements:

You must be a Canadian taxpayer. The transferor needs to be a Canadian resident (individual, trust, partnership, or another corporation).

The recipient must be a taxable Canadian corporation. This means a standard Canadian-controlled private corporation (CCPC). You can set up a new corporation specifically for this purpose.

The property must be “eligible property.” For real estate investors, this includes capital property (your rental buildings), inventory, and eligible capital property. Land and buildings used in a rental business qualify.

You must receive at least one share. The consideration you receive from the corporation must include at least one share of any class. You can also receive non-share consideration (called “boot”), but it’s limited — I’ll explain below.

Both parties must jointly file the election. This is done on Form T2057. Both you and the corporation sign it.

One thing to watch: if your property is held as inventory (you’re a builder or flipper), the rules are slightly different. The elected amount floor changes. Talk to your accountant about your specific situation.

The Elected Amount: Where the Magic Happens

The elected amount is the transfer price you and the corporation agree on. It becomes:

• Your proceeds of disposition (personally)
• The corporation’s cost of the property

You have a range to choose from:

Floor (minimum): The greater of (a) the fair market value of any non-share consideration (boot) you receive, and (b) the lesser of the fair market value and the cost amount of the property.

Ceiling (maximum): The fair market value of the property.

In plain English: you can elect a transfer price as low as your tax cost (adjusted cost base for capital property), which means no gain is triggered.

Example With Real Numbers

Let’s say you own a duplex:

• Original purchase price: $400,000
• Current fair market value: $700,000
• Undepreciated capital cost (UCC): $320,000 (you’ve been claiming CCA)
• Mortgage balance: $280,000

You set up a new corporation and transfer the duplex using Section 85.

If you elect at the adjusted cost base of $400,000:

• Your proceeds of disposition = $400,000
• Your original cost = $400,000
• Capital gain = $0
• CCA recapture = $400,000 - $320,000 = $80,000 (this is taxable income)

Wait — there’s still recapture? Yes. You can avoid the capital gain, but if your UCC is lower than your cost base, you’ll still face CCA recapture on the difference. This is income, not a capital gain, so it’s fully taxable.

If you elect at the UCC of $320,000:

• Your proceeds = $320,000
• Capital gain = $0 (proceeds below cost)
• CCA recapture = $0 (proceeds equal UCC)

But now you need to make sure the boot (non-share consideration) doesn’t exceed $320,000. Otherwise the elected amount gets bumped up.

This is why the elected amount mechanics matter so much. Get it wrong by even a dollar and the whole thing can blow up.

Book Your Strategy Call

Understanding Boot (Non-Share Consideration)

Boot is any consideration you receive from the corporation that isn’t shares. Common examples:

• A promissory note from the corporation
• Cash
• Assumption of the mortgage

Here’s the critical rule: the elected amount cannot be less than the fair market value of the boot.

This is where most people mess up.

The Mortgage Trap

Book Your Strategy Call

If the corporation assumes your $280,000 mortgage, that mortgage counts as boot. Your elected amount must be at least $280,000.

In our example, that’s fine — $280,000 is still below the $400,000 cost base. But imagine a different scenario where your cost base is $250,000 and the mortgage is $280,000. Now you’re forced to elect at $280,000, which triggers a $30,000 capital gain.

The lesson: high mortgage balances relative to cost base can kill your Section 85 planning. Pay down the mortgage before the transfer, or have the corporation get its own financing after the transfer instead of assuming yours.

Structuring the Consideration

Typically, you’d structure it like this:

The promissory note is boot ($320,000). The elected amount must be at least $320,000. Since that equals the UCC, no recapture and no gain. Perfect.

The preferred shares make up the remaining $380,000 of fair market value. The tax cost of those shares to you is $0 (elected amount minus boot = $320,000 - $320,000 = $0). When you eventually redeem those shares, you’ll face a deemed dividend — and that’s when the deferred tax comes due.

Land and Building: Two Separate Properties

Here’s something that trips up even experienced accountants: for tax purposes, a building and its land are separate properties. You need to do the Section 85 election on each one separately.

This matters because:

• The building has a UCC (from CCA claims) that’s different from its cost base
• The land has no CCA, so cost base and UCC aren’t an issue
• The elected amounts need to be calculated independently

If you just throw one number at the whole property, CRA will reject the election or reassess you. Always separate land and building values and file separate elections for each.

Professional Fees: What to Expect

A Section 85 rollover isn’t a DIY project. Here’s what you’ll typically pay:

• Accounting fees for the election: $2,000–$5,000 per property
• Legal fees for incorporation: $1,000–$2,500 (if you need a new corporation)
• Legal fees for share structuring: $1,500–$3,000
• Land transfer tax: Varies by province — Ontario charges it even on transfers to your own corporation (though there are limited exemptions for certain qualifying transfers)
• Property transfer registration fees: A few hundred dollars

All in, expect $5,000–$15,000 per property depending on complexity and province. For a property with $200,000+ of deferred gains, that’s money well spent.

When Does It Make Sense?

A Section 85 rollover makes sense when:

• You have significant unrealized gains in personally-held properties
• Your personal marginal tax rate is much higher than the corporate rate
• You want liability protection
• You’re retaining most of the rental income (not spending it all personally)
• You’re planning to scale and want a corporate structure going forward

It does NOT make sense when:

• Your properties haven’t appreciated much (just transfer them normally)
• You need all the rental income personally (you’ll pay tax pulling it out of the corporation anyway)
• Your mortgage balances are close to or above your cost base
• The property is your principal residence (use the PRE instead)
• Professional fees would exceed the tax savings

Common Mistakes That Cost Real Money

Mistake #1: Filing late. Form T2057 must be filed by the earlier of the transferor’s or corporation’s tax filing deadline for the year of the transfer. Miss the deadline and you can request a late-filed election — but CRA charges a penalty of $100 per month late, up to $8,000. Not fun.

Mistake #2: Ignoring land transfer tax. In Ontario, a transfer to your own corporation triggers land transfer tax based on fair market value. For a $700,000 property, that’s roughly $11,000. This is a real cash cost on top of the professional fees.

Mistake #3: Forgetting about TOSI. The tax on split income rules (formerly “kiddie tax”) can ruin income-splitting plans. If family members hold shares but don’t actively work in the business, dividends to them may be taxed at the highest marginal rate. Plan the share structure carefully.

Mistake #4: Not considering the exit. The tax is deferred, not eliminated. When you eventually sell the property (inside the corporation) or extract the value (through dividends or share redemption), the tax will come due. Sometimes the total tax paid through a corporation is actually higher than paying it personally. Run the numbers both ways.

Mistake #5: Doing it yourself. I’ve seen investors try to file T2057 without professional help. They get the elected amounts wrong, miss the land/building split, or mess up the share consideration. CRA reassesses them, and the “savings” on professional fees cost them $50,000+ in unexpected taxes.

The Step-by-Step Process

1. Decide if incorporation makes sense. Run a full personal-vs-corporate tax comparison with your accountant. Factor in current income, projected rental income, personal spending needs, and long-term goals.

2. Incorporate. Set up a new corporation (or use an existing one). Structure the share classes properly — typically common shares, preferred shares, and possibly different classes for different family members.

3. Get property appraised. You need fair market value for the election. Use a qualified appraiser. This isn’t optional.

4. Calculate elected amounts. Work with your accountant to determine the optimal elected amount for each property (land and building separately).

5. Structure the consideration. Decide on the mix of shares, promissory notes, and other consideration.

6. Execute the transfer. Sign the transfer documents. Register the property in the corporation’s name.

7. File Form T2057. Both you and the corporation sign and file the election with CRA.

8. Update your records. Transfer insurance, property management agreements, leases, and utility accounts to the corporation.

9. Notify your mortgage lender. This is important — transferring title without lender consent can trigger a due-on-sale clause. Get the lender’s approval first, or arrange new corporate financing.

A Real-World Scenario

Ready to explore your financing options? Book a free strategy call with LendCity and let our team help you find the right path forward.

Sarah owns four rental properties worth a combined $2.8 million. Her adjusted cost base across all four is $1.6 million, so she has $1.2 million in unrealized gains. At a 50% marginal rate, the inclusion rate means she’d owe roughly $300,000+ in tax if she transferred these normally.

Using Section 85, she transfers all four properties to a new corporation at their cost base. Total professional fees: about $35,000 (four properties, appraisals, legal work, land transfer taxes).

She saves $300,000 in immediate tax, her rental income is now taxed at corporate rates, and she has liability protection. The deferred tax will eventually come due — but she has years or decades of compounding before that happens.

That $300,000 reinvested in more real estate at a 10% annual return grows to over $770,000 in ten years. The time value of the deferral alone makes the entire exercise worthwhile.

Final Thoughts

Section 85 is not for beginners. It’s not for someone with one rental condo. It’s for investors who have built meaningful portfolios, have significant unrealized gains, and are ready to operate like a business.

But if that’s you — and you’re paying personal tax rates north of 45% on rental income you don’t even spend — this could be one of the best financial moves you ever make.

Get a good accountant. Get a good lawyer. Get it done right the first time. The numbers speak for themselves.

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LendCity

Published

May 13, 2026

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Capital Gains Deferral Corporate Transfer Incorporation Real Estate Corporation Section 85 Rollover Tax Free Transfer Tax Planning

Key Terms

Adjusted Cost Base

Adjusted Cost Base

The original purchase price of a property plus qualifying capital improvements and acquisition costs, minus any CCA claimed. The adjusted cost base is subtracted from the sale price to determine the taxable capital gain.

Appraisal

Appraisal

A professional assessment of a property's market value, required by lenders to ensure the property is worth the loan amount.

Capital Cost Allowance

Capital Cost Allowance

The Canadian tax deduction that allows property owners to write off the depreciation of a building over time, reducing taxable rental income. CCA cannot be used to create a rental loss and must be recaptured upon sale of the property.

Capital Gains Tax

Capital Gains Tax

Tax owed on the profit from selling an investment property, calculated as the difference between the sale price and the adjusted cost base. In Canada, 50% of capital gains are currently included in taxable income. A 2024 federal budget proposal to raise the inclusion rate to 66.67% on gains above $250,000 was deferred and has not been enacted; the 50% rate remains in effect. Tax outcomes depend on your specific situation — consult a Chartered Professional Accountant.

Cash Flow Optimization

Cash Flow Optimization

Cash flow optimization is the strategic process of maximizing the net income generated from a rental property by increasing rental revenue and minimizing operating expenses, mortgage costs, and vacancies. For Canadian real estate investors, this often involves tactics such as selecting the right financing structure, leveraging rental income from multiple units, and managing expenses like property taxes and maintenance to ensure the property generates consistent positive monthly returns.

Cash Flow

Cash Flow

The money left over after collecting rent and paying all expenses including mortgage, taxes, insurance, maintenance, and property management. Positive cash flow is the primary goal of buy-and-hold investors. See also [NOI](/glossary/noi), [Cash-on-Cash Return](/glossary/cash-on-cash-return), and [Vacancy Rate](/glossary/vacancy-rate).

Due On Sale Clause

Due-on-Sale Clause

A mortgage provision requiring the borrower to repay the loan in full if the property is sold or transferred. Transferring a property into a corporation may trigger this clause, requiring lender approval or refinancing.

Duplex

Duplex

A residential property containing two separate dwelling units, either side-by-side or stacked. Duplexes are popular among beginner investors because they can house-hack by living in one unit while renting the other to offset mortgage costs.

Equity

Equity

The difference between a property's current market value and the remaining mortgage balance. If your home is worth $500,000 and you owe $300,000, you have $200,000 in equity. Equity builds through mortgage payments, [appreciation](/glossary/appreciation), and [forced appreciation](/glossary/forced-appreciation). See also [LTV](/glossary/ltv) and [Refinancing](/glossary/refinancing).

Estate Freeze

Estate Freeze

A tax planning strategy that locks in the current value of assets for the original owner while transferring future growth to the next generation, minimizing capital gains tax triggered at death.

Hover over terms to see definitions. View the full glossary for all terms.