What is a Section 85 Rollover?
A Section 85 Rollover is a provision in the Canadian Income Tax Act that allows a taxpayer (individual, trust, or partnership) to transfer eligible property to a taxable Canadian corporation on a tax-deferred basis.
Without this election, transferring assets (like IP, inventory, or shares) to a corporation is treated as a sale at Fair Market Value (FMV), triggering immediate capital gains tax. Section 85 allows you to elect a transfer price at your cost base, effectively deferring the tax until you sell the shares or the corporation sells the asset.
How It Works: The Mechanics
Transfer & Consideration
You transfer "eligible property" to the corporation. In exchange, the corporation must issue you at least one share. You can also receive non-share consideration (boot) like cash or a promissory note.
The Election (T2057)
You and the corporation jointly file Form T2057. This form declares the "Elected Amount"—typically your original cost base (ACB)—as the transfer price.
Valuation Requirement
The CRA requires that the transaction happen at Fair Market Value. Even if you elect a lower tax amount, you must know the actual FMV to determine the number of shares issued.
Price Adjustment Clause
Smart legal agreements include a clause that allows you to retroactively adjust the number of shares issued if the CRA challenges your valuation later.
The "Bona Fide" Trap
Why a "free guess" by your accountant could cost you double taxation.
The Law
Under Income Tax Act (Canada) Section 85(1), the transfer of shares must happen at Fair Market Value (FMV). If the CRA disagrees with the valuation, they will reassess the transfer. This triggers immediate capital gains tax for the founder and penalties for the corporation.
The Protection
Competent tax lawyers always insert a Price Adjustment Clause (PAC). This clause allows the price to be adjusted retroactively if the CRA challenges it, effectively "undoing" the tax hit.
But here is the catch...
The CRA only accepts a Price Adjustment Clause if the original valuation was made with a "bona fide attempt" at Fair Market Value.
— Source: CRA Income Tax Folio S4-F3-C1
A "free guess" or simple spreadsheet by an accountant is not considered a bona fide attempt. If the CRA sees no formal valuation report, they can void the PAC and apply gross negligence penalties.
This is why Big 4 firms charge $15,000–$40,000. They aren't just selling math; they are selling the "Bona Fide" status that protects your Price Adjustment Clause. QuantPillar provides this same defensibility at a fraction of the cost.
The Cross-Border Trap: Section 85 vs. 409A
For Canadian founders with US investors or employees, this is critical.
The Conflict: When doing a Section 85 rollover, you are incentivized to keep the valuation reasonable (low) to avoid scrutiny on "boot" or capital gains. However, when issuing stock options to US employees (409A), you need a defensible FMV that might be higher to show growth to investors, or lower to help employees.
The Risk
If you declare Value A to the CRA for a rollover and Value B to the IRS for a 409A valuation at the same time, you create a discrepancy. Auditors share data. Inconsistent valuations can lead to penalties on both sides of the border.
The Solution: A unified valuation approach. QuantVal™ ensures your methodologies for CRA (Section 85) and IRS (409A) are consistent, defensible, and synchronized.
We Partner with Accountants & Tax Lawyers
We handle the valuation; your professionals handle the filing.
For Accountants (CPAs)
You prepare the T2057 election form and the tax returns. We provide the Defensible Valuation Report that backs up the "Proceeds of Disposition" you enter on the form. We speak your language (ACB, PUC, FMV) and deliver reports ready for your audit files.
For Tax Lawyers
You draft the Asset Transfer Agreement and the Price Adjustment Clause. We provide the independent valuation that activates those clauses and protects your client from CRA penalties.
*Note: QuantPillar provides the valuation report only. We do not provide legal or tax advice, nor do we file the T2057 form.
The "Delaware Flip" & Section 85
Raising from US VCs? You will likely need to move your Canadian entity under a US parent company (a "Delaware Flip").
The "Phantom Tax" Risk
Exchanging Canadian shares for US shares is a "deemed disposition" (a sale) in the eyes of the CRA. Without a Section 85 election, you could owe capital gains tax immediately on paper gains you haven't realized.
The QuantPillar Solution: We act as the backend valuation engine for your legal counsel. We provide the specific Section 85 Valuation Report required to execute the rollover tax-free, often delivering it directly to your law firm (Osler, Torys, Fasken, etc.) in under 72 hours.
Transferring to a US Corporation?
If you are simply moving assets (IP, contracts) to a US C-Corp without a full share exchange, Section 85 does not apply directly. Instead, you face:
- US Section 351: The US equivalent of a tax-deferred rollover.
- Canadian Departure Tax: If you move assets out of Canada, you trigger a deemed disposition at FMV.
QuantVal™ Advantage: We produce a dual-purpose valuation report that satisfies both CRA (Departure Tax FMV) and IRS (Section 351/409A) requirements simultaneously.
Tips for Form T2057
The T2057 Election Form is the critical document. Here is what you need to know:
- Deadline: It is due by the tax filing deadline of the transferor (or the corporation) for the year of transfer. Late filing penalties are steep ($100/month up to $8,000).
- Joint Filing: Both you (Transferor) and the Company (Transferee) must sign.
- FMV Field: The form asks for the "Fair Market Value" of the property. This is where you reference our Valuation Report.
Need a template? We don't file taxes, but we can recommend partner accounting firms who specialize in T2057 filings for tech startups.
Fair Market Value vs. DCF
Founders often confuse the definition of value with the method of calculating it.
Fair Market Value (The Goal)
Definition: The highest price, expressed in terms of money, that a property would bring in an open and unrestricted market between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.
Discounted Cash Flow (The Tool)
Methodology: A specific valuation method (Income Approach) that projects future cash flows and discounts them back to present value. It is one of the primary ways to determine Fair Market Value, especially for pre-revenue or high-growth tech companies where historical data is irrelevant.