What Section 85 is and why it’s the Canadian closest cousin to US 1031

US investors are familiar with Section 1031 of the IRC — the like-kind exchange that defers capital gains tax when you swap one real property for another. Canada has no direct equivalent. The closest mechanism is Section 85 of the Income Tax Act: a rollover that lets you transfer property INTO a Canadian-controlled private corporation (CCPC) in exchange for shares, deferring the capital gain to a later disposition of those shares. Two critical differences from 1031. (1) You’re transferring to a corp you control, not exchanging for like-kind property. The transferor and the receiving corp must jointly file Form T2057 electing the rollover. The “elected amount” is the price you choose for the transfer — it can be anywhere between the property’s ACB and FMV. (2) The tax is deferred, not eliminated. When the corp eventually sells the property (or you eventually sell the shares), the original gain crystallizes plus any further appreciation. Section 85 is useful for separating active operations from passive holdings (Opco-Holdco structures), isolating appreciated property in a vehicle that can be sold as shares (often tax-advantaged vs asset sale), and structuring estate succession. It is not useful for “I want to defer capital gains by buying another property” — Canada simply doesn’t offer that, and rumours otherwise mislead investors.

When the rollover saves real money (and when it’s a CPA’s wet dream that doesn’t help you)

Section 85 works in three specific situations and is overkill or counterproductive in others. Works well: (a) you own appreciated real estate personally and want to separate it from operating risk before selling the operating business, (b) you’re planning a multi-generation succession and want the appreciation to grow in a corporate vehicle that can be transferred via share rollovers under different ITA provisions, (c) you’re consolidating multiple properties into a single holdco for management and lender simplicity. Doesn’t help: (a) you plan to sell the property within 1-3 years anyway — the rollover defers the tax briefly but the corporate sale will crystallize it, and you’ve added complexity and ongoing compliance costs (annual corporate returns, T1135 if foreign property, professional fees) without meaningful tax savings; (b) the property is your principal residence — the PRE already exempts you, rolling it into a corp KILLS the PRE going forward (the corp can’t claim PRE); (c) you’re rolling into an Opco that already has operational risk — putting your appreciated real estate inside an operating company exposes it to business creditors, which Holdco structures specifically exist to avoid. The right path varies — talk to a CPA + tax lawyer specific to your situation. The calculator above runs the simple before-and-after math; the strategic question requires expert review.

Election price: the strategic number that controls when the tax actually triggers

The elected amount is the lever. Rules: it must be between ACB and FMV, with two specific exceptions for some accounting bases. Election at ACB: zero crystallized gain, full deferral. Best for long-term Holdco structures where you genuinely want the asset to grow inside the corporation without current tax cost. Election at FMV: full gain crystallized now, full tax paid now, asset transfers at fresh ACB equal to FMV. Counterintuitive but useful if you want to use a non-capital loss carry-forward, a capital loss carry-forward, or the Lifetime Capital Gains Exemption to absorb the gain at current values rather than future values. Election in between: partial crystallization. Useful for tax-rate smoothing — crystallize just enough gain to use up this year’s lower marginal bracket or carry-forward losses, defer the rest. The mechanics: you and the corp file T2057 jointly, the elected amount becomes the corp’s ACB in the asset, you receive shares with ACB equal to the elected amount minus any non-share consideration (“boot”). CRA scrutinizes the elected amount when it diverges meaningfully from FMV — defending requires an independent appraisal contemporaneous with the rollover. Book a 30-min walkthrough for a property-specific scenario.

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