Apply reorganisation and election logic to preserve tax deferral while controlling filing risk.
Tax-deferred corporate reorganisations are planning tools, not magic labels. A transaction is deferred only when the property, parties, consideration, elected amount, filing, and documentation support the rule being used. If one required fact is missing, the transaction may become a taxable disposition.
In CPA Canada Taxation cases, reorganisation questions usually test whether you can identify the correct tool, explain why deferral may be available, and warn about election or valuation risk.
Reorganisation and election facts usually include asset transfers to a corporation, share exchanges, estate freezes, holding-company setups, internal transfers, or a taxpayer assuming that a rollover is automatic.
| Tool or issue | When it may appear |
|---|---|
| Section 85 election | Transfer of eligible property to a taxable Canadian corporation for shares and possibly other consideration. |
| Section 86 reorganisation | Capital reorganisation of shares in one corporation. |
| Section 51 conversion | Conversion of shares or debt into shares under qualifying terms. |
| Section 85.1 share exchange | Share-for-share exchange where conditions support deferral. |
| Elected amount | Determines the transferor’s proceeds and transferee’s cost. |
| Boot or non-share consideration | May trigger immediate tax if not controlled. |
| Late or missing filing | Can defeat intended deferral or create penalties and uncertainty. |
CRA’s T2057 form is used for a taxpayer and a Canadian corporation to jointly elect under subsection 85(1). Public CRA guidance on section 85 also emphasizes eligible property, consideration that includes at least one share, fair market value support, agreed amounts, and filing requirements.
| Section 85 element | Why it matters |
|---|---|
| Eligible property | Not every asset qualifies for the election. |
| Taxable Canadian corporation | The transferee must fit the rule. |
| Share consideration | The transferor must receive at least one share or fraction of a share. |
| Non-share consideration | Excess boot can create immediate tax. |
| Elected amount | Must fall within permitted limits and drives tax cost. |
| Fair market value | Supports consideration, elected amount, and valuation. |
| Timely filing | The election is not automatic; it must be filed properly. |
Do not recommend section 85 without identifying property, fair market value, tax cost, consideration, elected amount, and filing.
Different tools solve different problems.
| Objective | Possible tool | Key caution |
|---|---|---|
| Move business assets to a corporation | Section 85 election | Eligible property, shares received, elected amount, and filing. |
| Freeze existing share value | Share reorganisation or section 85 structure | Valuation and share terms must be supportable. |
| Exchange shares in a transaction | Section 85.1 or section 85 | Conditions and consideration determine whether deferral fits. |
| Convert debt or preferred shares | Section 51 may be relevant | Conversion terms and property type matter. |
| Reorganise share capital | Section 86 may be relevant | Must be a qualifying reorganisation of capital. |
| Create holding company | Section 85 or share exchange may be relevant | Business purpose, valuation, and dividend/account issues remain. |
The exam response should state why the selected tool fits better than a taxable sale.
The elected amount is the centre of many rollover questions. It affects the transferor’s proceeds and the corporation’s cost.
| Issue | Risk |
|---|---|
| Elected amount too low or too high | May fail statutory limits or create unintended tax. |
| Boot exceeds tax cost | Immediate gain may arise. |
| Fair market value unsupported | CRA may challenge valuation and consideration. |
| Multiple assets transferred together | Each property may need separate analysis and schedules. |
| Ineligible property included | Election may not apply to that property. |
When numbers are supplied, show the effect. When numbers are missing, identify the required tax cost, fair market value, and consideration before recommending.
Reorganisation advice should always include implementation.
| Document or step | Purpose |
|---|---|
| T2057 or other prescribed form | Supports the election where applicable. |
| Transfer agreement | Shows property, consideration, and effective date. |
| Valuation support | Supports fair market value and share consideration. |
| Tax cost schedules | Support elected amount and gain calculation. |
| Director and shareholder resolutions | Support corporate-law implementation. |
| Share terms and registers | Support rights, control, and ownership. |
| Legal review | Confirms corporate-law and creditor considerations. |
CRA guidance on section 85 states that forms are filed separately from the income tax return and that supporting schedules should be retained where needed.
Use this structure for reorganisation and election cases:
| Pitfall | Correction |
|---|---|
| Saying “rollover” without proving eligibility. | Identify the rule, property, parties, consideration, and filing. |
| Ignoring fair market value. | Obtain valuation support before setting consideration or elected amounts. |
| Forgetting non-share consideration. | Analyse boot and immediate tax exposure. |
| Treating the election as automatic. | State the required filing and documentation. |
| Ignoring corporate-law implementation. | Include resolutions, share terms, and legal review. |
For current public context, review CRA’s T2057 section 85 election form and section 85 transfer guidance.