There Is No Canadian 1031: The Section 85 Rollover That Defers the Gain When You Move Commercial Property Into Your Corporation
US investors reach for a like-kind exchange to defer the gain — Canada has no direct equivalent. The tool that actually works here is a section 85 rollover, and it defers by a completely different logic. Here is how it works, and the three places it goes wrong.
Canada has no 1031 like-kind exchange — so how do I defer the capital gain when I move a commercial property into my corporation?
You use a section 85 rollover — and it defers the gain, it does not erase it. The Income Tax Act has no provision directly equivalent to the US 1031 like-kind exchange. Instead, section 85(1) lets you dispose of eligible property to a taxable Canadian corporation, where the consideration must include shares of that corporation, and both sides jointly elect an amount on CRA Form T2057. Elect at roughly the property’s cost and the gain is deferred — it moves onto the shares you take back, coming due only when you later dispose of those shares or the corporation disposes of the property. It is a restructuring tool, not a way to pay less overall — and it defers income tax only; land transfer tax and GST/HST are two separate tracks.
Source: Income Tax Act (Canada), R.S.C. 1985, s.85(1), s.85(1.1), s.85(6) (joint election and eligible-property definition); CRA Form T2057 and IC76-19; Ontario Land Transfer Tax Act, R.S.O. 1990, c. L.6, s.1 and s.3(9). This is general tax education, not advice for your situation; section numbers and rates are current as of the official source on 2026-08-13.
I’m Arthur Zhao. When an investor who has spent time in US real estate asks me how to defer the gain on a commercial property, the first question is almost always the same: “Can I do a 1031 exchange here?” The short answer is no — Canada’s Income Tax Act has nothing that directly mirrors the US like-kind exchange, where you roll proceeds into a replacement property and pay nothing now.
But there is a Canadian tool that defers the gain — it just works by a different logic. A section 85 rollover lets you move the property into your own corporation in exchange for shares, and defers the tax by shifting the gain onto those shares rather than onto a replacement building. It is powerful, and it is also easy to get wrong in three specific places: property held as inventory does not qualify, land transfer tax is not deferred, and GST/HST is its own separate track. This piece walks all of it — what it is, how it works, and where it goes sideways. It is tax education, not a decision made for you.
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The 1031 reflex, and why it does not cross the border
If you have invested south of the border, the instinct is to look for a like-kind exchange: sell one commercial building, roll the proceeds into another, and defer the gain by staying invested in real estate. That mechanism does not exist in Canadian income tax law. There is no provision in the Income Tax Act that lets you defer a gain simply by reinvesting the proceeds into a replacement property.
What Canada offers instead defers the gain through a different move entirely: not by swapping one building for another, but by swapping the building for shares of a corporation you control. The gain does not vanish; it rides along on those shares until you eventually cash out. Same goal — no tax today — reached by a completely different route, with its own rules and its own traps.
What a section 85(1) rollover actually requires
Three things must be true at the same time for the deferral to apply — miss any one and the transfer is just an ordinary disposition at fair market value:
① The recipient must be a taxable Canadian corporation — not any company, but one that meets the statutory definition.
② The consideration must include shares of that corporation. You cannot take back only cash, or only have the company assume debt, and still defer; you must receive at least one share.
③ Both parties must jointly elect on the prescribed form — CRA Form T2057 — naming an elected amount. The election has a statutory deadline, with late-filing relief and penalties beyond it (s.85(6)/(7)).
These are joined by “and,” not “or.” Drop one and the gain is recognized in full.
The elected amount: the dial between deferral and a triggered gain
The elected amount is the heart of the mechanism: it is treated both as your proceeds of disposition and as the corporation’s cost of the property. Where you set it decides how much gain you recognize now:
• The closer it sits to the property’s adjusted cost base (ACB), the less gain you trigger — set it at cost and, in principle, you defer the whole gain.
• But the Act imposes limits: the elected amount cannot exceed the property’s fair market value (s.85(1)(c)); and for capital property it cannot be below the lesser of fair market value and cost amount (s.85(1)(c.1)).
• The one people trip over is a further floor (s.85(1)(b)): the elected amount cannot be below the fair market value of the non-share consideration you take back — which leads straight to the next trap.
What the number should actually be is a calculation your accountant runs from your ACB, the fair market value, and how much cash or debt you want out of the company — not a formula you can copy.
The trap that catches people: taking too much boot
“Boot” is any consideration you take back other than shares — cash, a note the company owes you, or a mortgage the company assumes on the property. The rule: if the fair market value of the boot is greater than your elected amount, the elected amount is pushed up to match the boot (s.85(1)(b)), and the gain is forced out — deferral lost.
In plain terms: the more cash you pull out and the more debt you shift onto the company, the more you break the deferral. To defer as much as possible you generally keep the boot at or below the elected amount (often near cost) and take shares for the rest. A mortgaged commercial property is where this bites hardest — the assumed mortgage balance is itself boot, even if not a dollar of cash changes hands between you and the company.
⚠️Boot is where deferral breaks: cash you take back and any mortgage the company assumes both count as boot, and if their fair market value exceeds your elected amount, the elected amount is pushed up and the gain is forced out (s.85(1)(b)). On a mortgaged property, the assumed balance is boot even if no cash moves between you and the company.
Sell outright versus roll it over under section 85
The limit most people miss: inventory property does not qualify
This is the one line to remember. Section 85(1) is open only to “eligible property,” and s.85(1.1)(f) expressly excludes real property held as inventory from that definition.
What that means: if you hold this commercial property on trading account — bought to develop and resell, to renovate and flip, or as stock of your real estate business — it may be inventory rather than capital property in the eyes of the Act, and it cannot use a section 85 rollover. Only property held as capital property — a long-term hold for rent or appreciation — falls within eligible property.
Whether yours is capital property or inventory is not for you to declare — the CRA weighs your purpose, holding period, frequency of transactions and more. Developers and professional flippers especially cannot assume; this characterization has to go to a tax advisor first.
🚨The key eligibility limit — do not misread it: real property held as inventory is not eligible property (s.85(1.1)(f)) and cannot use a section 85 rollover. Property held to develop, flip or trade is especially at risk — whether it is capital property is decided by the CRA on the facts, so get it characterized by a tax advisor first.
It defers income tax — provincial land transfer tax is still due
Here is the costliest thing to overlook: section 85 defers federal income tax on the gain; it does nothing for Ontario land transfer tax (LTT). They are two separate taxes.
Worse, the Land Transfer Tax Act defines “value of the consideration” to include any liability the transferee assumes as part of the arrangement. So even if no cash passes between you and the company, the moment the corporation takes on the mortgage on the property, that assumed debt counts toward the LTT base.
Is there relief? Section 3(9) offers a deferral, not an exemption, and on narrow terms: it is corporation-to-corporation, the parties must be affiliates before and after, what moves is a beneficial interest, you apply within 30 days with a written undertaking (to keep the affiliate relationship for at least 36 consecutive months), you post security, and no conveyance is registered. A typical individual-to-own-corporation rollover generally does not fall within it.
The one-line takeaway: you may defer the income tax on the gain, yet still owe land transfer tax simply for moving the property into the company. A Toronto property adds municipal LTT on top — for commercial / non-single-family property the top rate is currently 2.0% on the portion over $400,000 (City of Toronto, verified 2026-08-13; the 4.4%–8.6% graduated brackets that took effect 2026-04-01 apply only to one- or two-unit single-family homes, not commercial property).
⚠️Deferring income tax is not the same as saving land transfer tax: a mortgage the company assumes counts toward Ontario LTT’s value of consideration, and the s.3(9) deferral covers only corporation-to-corporation transfers of an unregistered beneficial interest — usually not individual-to-own-corporation. A Toronto property also adds municipal MLTT.
A separate track altogether: GST/HST
GST/HST on commercial real estate is a third, entirely separate set of rules from the income tax and land transfer tax above. Flagging it here — not going into the mechanics:
Unlike a used residential home, which is usually exempt, a transfer of commercial real property is generally a taxable supply for GST/HST. The relative good news: where the receiving corporation is itself a GST/HST registrant acquiring the property mainly for commercial use, the tax is commonly handled by the purchaser self-assessing and claiming an offsetting input tax credit (ITC), often netting the cash cost to nil — but that hinges on registration status, use, and other specifics.
The only correct move on this paragraph is: confirm the GST/HST treatment with your accountant before any transfer — whether to register, and whether an election applies. Guessing can create an avoidable tax or cash-flow hit out of nothing.
💡 My own take: a section 85 rollover is a powerful tool, but it is structural engineering, not a tax hack. It earns its keep when you already have a real reason — operations, liability separation, future financing or succession — to hold the property in a corporation, and you use it to avoid a lump-sum tax at the moment of transfer.
If the only motive is “I heard it saves tax,” stop first. Deferral is not forgiveness — the tax still settles later — and this step immediately triggers land transfer tax, may trigger GST/HST, and adds annual compliance cost. Work out why the property should be in a corporation first; only then ask whether to use section 85. Reverse that order and it usually is not worth it.
Putting it to work — and the fine print
① Nail down what the property is first. Only capital property held long-term can qualify; inventory held for development or resale cannot.
② Decide why it belongs in a corporation. Liability separation, financing, succession — have a genuine structural reason before you reach for the deferral.
③ Cost out all three taxes together. Income tax may defer, but land transfer tax (including Toronto MLTT) will most likely apply, and GST/HST is a separate confirmation.
④ Let your accountant set the elected amount and the boot. Where you elect and how much cash or debt you take back directly decide how much you defer — this has to be modelled, not copied.
A compliance note: this is general tax education, not advice for your specific situation, and it promises no savings amount. The section numbers, forms and rates cited are parameters that can change — rely on current official guidance. Before doing anything, confirm the details with a licensed CPA or tax lawyer.
ℹ️Compliance note: this is general tax education, not advice for your situation, promises no savings amount, and endorses no accounting or law firm. Section numbers, forms and rates can change — rely on current official guidance, and consult a licensed CPA or tax lawyer before acting.
- Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Supp.), s.85 — disposition of eligible property to a taxable Canadian corporation for consideration including shares, with a jointly elected amount; the s.85(1)(b) boot floor, (c) FMV ceiling and (c.1) capital-property floor; s.85(1.1)(f) excludes real property held as inventory from eligible property.
- CRA Form T2057, Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation, and Information Circular IC76-19 — the prescribed form for the s.85(1) joint election (use the current version on canada.ca).
- Ontario Land Transfer Tax Act, R.S.O. 1990, c. L.6, s.1 (value of the consideration includes assumed liabilities) and s.3(9) (a deferral, not an exemption, for corporation-to-corporation transfers of an unregistered beneficial interest between affiliates).
- City of Toronto, Municipal Land Transfer Tax (MLTT) Rates & Fees — commercial / non-single-family rates of 0.5% / 1.0% / 1.5% / 2.0% (2.0% on the portion over $400,000); the 4.4%–8.6% graduated brackets effective 2026-04-01 apply only to one- or two-unit single-family homes. Verified 2026-08-13.
- CRA GST/HST Memoranda 19-1 (Real Property and the GST/HST) and 19-4-1 (Commercial Real Property – Sales and Rentals) — a transfer of commercial real property is generally a taxable supply; a registrant purchaser acquiring for commercial use self-assesses and claims an input tax credit. (High-level flag only; confirm treatment with your accountant.)
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Frequently Asked Questions
Is a US 1031 like-kind exchange available in Canada?
No. Canada’s Income Tax Act has no provision directly equivalent to the US 1031 like-kind exchange — you cannot defer a gain simply by rolling the proceeds into a replacement property. The Canadian tool that defers a gain in a comparable situation is a section 85 rollover, which works differently: you transfer the property into your own taxable Canadian corporation in exchange for shares, and the gain moves onto those shares rather than onto a replacement building.
Do I ever actually pay this tax, or is the gain gone for good?
You pay it eventually — this is a deferral, not forgiveness. The gain does not disappear; it shifts from the property onto the shares you take back, and it settles when you later dispose of those shares or the corporation disposes of the property. Section 85 solves a timing problem (no lump-sum tax at the moment of transfer), not a total-cost one. Treating it as a way to pay less overall usually overlooks the land transfer tax, possible GST/HST, and ongoing compliance cost it brings.
I bought this commercial property to develop and resell — can I use section 85?
Most likely not. Section 85 is open only to eligible property, and s.85(1.1)(f) expressly excludes real property held as inventory. If you hold it on trading account — to develop and resell, renovate and flip, or as stock of your business — it may be inventory rather than capital property, and it cannot use the rollover. Whether it is capital property or inventory is decided by the CRA on the facts (purpose, holding period, frequency), so have a tax advisor characterize it before you plan around it.
No cash changes hands when I transfer it to my own company — why is there land transfer tax?
Because Ontario’s Land Transfer Tax Act defines the value of the consideration to include any liability the transferee assumes. When your corporation takes on the mortgage on the property, that assumed debt is taxable consideration — even with no cash between you and the company. Section 3(9) offers only a deferral for corporation-to-corporation transfers of an unregistered beneficial interest, which usually does not cover individual-to-own-corporation. So section 85 defers the income tax while land transfer tax (plus Toronto’s municipal MLTT) is generally still due.
Arthur Zhao
Real Estate Broker · FRI · ABR · SRS · PSA · MCNE · E-PRO · CLHMS & GUILD Elite · REAIS
VP & Branch Manager, Bay Street Group Inc.
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