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Does a corporate reorganization mean a tax bill? Not necessarily. Under section 85 of the Income Tax Act you can move property into a Canadian corporation at a price you choose, and a $200,000 gain can wait until a later day. The catch is that the election has to be filed correctly and on time.
Which sections of the Income Tax Act defer tax?
Several of them do, each for a different kind of restructuring. The table lists the most common, based on Canada Revenue Agency descriptions.
| Provision | Typical use | Effect |
|---|---|---|
| Section 85 | Transfer property to a taxable Canadian corporation | Owner picks an elected amount and defers gain |
| Section 86 | Reorganization of a corporation’s capital | Old shares are swapped for new shares without an immediate gain |
| Section 87 | Amalgamation of corporations | New corporation continues the old ones for most purposes |
| Section 88(1) | Winding up a subsidiary | Applies when the parent owned at least 90% of each class of shares |
Every one of these comes with conditions. Miss one and the restructuring can become a taxable event, so have a tax adviser look over the plan before anyone signs.
How does a section 85 transfer work?
You hand over property, say shares or business assets, and get at least one share of the corporation’s capital stock back. If no share is part of the payment, the election isn’t valid. You and the corporation then agree on an amount and report it on Form T2057, which the CRA describes this way:
For use by a taxpayer and a Canadian corporation to jointly elect under subsection 85(1).
CRA, Form T2057, canada.ca
That amount has limits. It can’t go above the fair market value of the property, and for depreciable property it can’t fall below the undepreciated capital cost. The cost of the shares you receive is the agreed amount less any non-share payment, such as cash, that you take out. Push the agreed amount up and you get a gain now and a higher cost base later.
What does the choice of amount cost you?
Here’s a case. You bought investment property for $100,000 and it’s now worth $300,000. You use section 85 to move it into a new corporation for shares, and you have $80,000 of other taxable income in Ontario.
- Agreed amount $100,000: no gain today. The shares cost you $100,000, so the $200,000 of growth is still ahead of you.
- Agreed amount $150,000: a $50,000 gain. The capital gains tax calculator shows $7,533 of extra tax, since half the gain joins your income.
- Agreed amount $300,000: a $200,000 gain and $39,346 of extra tax, or 19.7% of the gain.
Treat those as a ballpark, since your own income and province change the answer. The first choice defers everything. It also leaves a gain baked into the shares, and that gets taxed when you sell them. Picking an amount that uses up your lifetime exemption or old capital losses can make sense too, but that one needs modelling by a professional.
Is a rollover the same as avoiding the tax?
No. Deferring is not forgiving. The $200,000 of growth in the first choice above is still sitting in the shares, and it comes out when you sell them or when the company is sold. What you gain is time, plus the chance to choose the year, and your other income, in which the gain lands. Like a loan you don’t have to repay yet, though, it’s worth planning for the day it comes due, especially if you expect to be in a higher bracket then.
What about tax after the reorganization?
The new company pays its own tax. The corporate tax calculator shows the combined federal and provincial bill on business income: on $300,000 of active business income in Ontario, that’s $35,088, or 11.7%. Getting money out to you is another layer, and the dividend tax calculator shows what a payout costs personally. Your own salary and other income? The income tax calculator covers the rest.
What goes wrong most often?
- Missing the T2057 deadline. It falls on the earliest date any party to the election must file a tax return for the year of the transfer, and a late request can bring a penalty for each month it’s late.
- Taking cash instead of shares and not counting it. A non-share payment lowers the cost of your shares and can push the agreed amount up.
- Assuming every merger qualifies. Each provision has its own conditions, like the 90% ownership test for a wind up.
- Ignoring paid-up capital. Section 85 has a rule that cuts paid-up capital in some cases, to prevent a deemed dividend.
- Forgetting provincial or transfer taxes on land. Those fall outside this page.
Who should prepare the paperwork?
A reorganization usually involves share structures, valuations and elections that depend on each other, so a lawyer and an accountant often work on it together. Bring them the property list, what you paid, what it’s worth today and what you want the corporation to do. A clean file at the start keeps their time, and your bill, down.
Sources, and how we checked them
The rules come from Canada Revenue Agency pages on section 85 transfers and amalgamations, plus the wording of the Income Tax Act on Justice Canada’s site, all read in September 2026. The examples use 2026 rates from this site’s calculators. Nothing here is advice for your file, and this site has no link with any government.
Frequently asked questions
Is a corporate reorganization taxable in Canada?
Not always. Sections 85, 86, 87 and 88 of the Income Tax Act can defer the tax if their conditions are met.
What is a section 85 election?
It's a joint election with a corporation, made on Form T2057, that sets the price of property you transfer to it for shares.
What is the limit on the elected amount?
It can't exceed fair market value, and for depreciable property it can't be below the undepreciated capital cost.
When is Form T2057 due?
By the earliest date any party to the election has to file a tax return for the year of the transfer.
What is the tax cost of the shares I receive?
The agreed amount less any non-share payment, such as cash, that you take.
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