Move Rental Property Into a Corporation: Section 85, Transfer Tax

Can I move my rental property into a corporation without paying tax on the gain?

Often, for income tax. If a taxable Canadian corporation gives you shares for the property, you and the corporation can file a joint election under section 85 and choose an amount for each property. That amount becomes your selling price and the corporation's cost (Income Tax Act, s. 85). If you elect the lowest amount the Act allows for each property, no gain is reported at the transfer. The gain is deferred, not erased: it stays in the corporation's low cost and in your shares.

Without the election, a transfer to a corporation you control is taxed as a sale at fair market value. You and the corporation are related, so you do not deal at arm's length, and a transfer for less than market value is treated as made at market value (s. 251; s. 69).

Section 85 is an income tax election. Land transfer tax, GST/HST, your lender's consent and the corporation's tax on the rent each need their own answer.

A case is not simple when:

• more than one property moves, or the properties are in different provinces;
• title has already moved and you are not sure a Form T2057 was filed or transfer tax was handled. The election has a deadline and a late one carries a penalty, so read the Form T2057 deadline section below first;
• a building has had capital cost allowance (CCA, the tax depreciation you claimed) and is worth more than its undepreciated capital cost (UCC, the CCA base left on it), because electing above the UCC adds that CCA back to your income as recapture;
• the mortgages the corporation takes over total more than the lowest elected amounts, your land cost plus the buildings' UCC;
• land is worth less than it cost, or a building less than its UCC. The Act generally denies the loss while a corporation you control holds the property, and for a building it can take the transfer out of section 85 (s. 13(21.2); s. 40(2)(g) and the definition of superficial loss in s. 54);
• the property is commercial, mixed-use or short-term, or you built or substantially renovated it, so GST/HST may apply;
• you or a shareholder is not a Canadian citizen or permanent resident. A federal ban can stop the corporation from taking title to a building of up to three units if non-Canadians own 10% or more of the corporation, and a foreign-buyer tax may apply on top of land transfer tax;
• your spouse or common-law partner, or a child under 18, will own 10% or more of any class of shares. If one main purpose is to move income to them, interest at the prescribed rate can be deemed yours each year. The small business corporation exception does not usually fit a corporation that holds only rentals (s. 74.4);
• the property was ever your home, or someone else co-owns it;
• the property is held for resale, or you have owned a housing unit, such as a rental house or condo, for less than 365 consecutive days. Section 85 does not cover real property held as inventory, and a quick-sale gain can make the property inventory (s. 85(1.1)(f); s. 12(12));
• you owe the CRA tax, or the shares you take back are worth less than the property. The corporation can be liable, with no time limit on assessment, for your income tax and GST/HST debts up to the amount by which the property's value exceeds what it gave (Income Tax Act, s. 160; Excise Tax Act, s. 325).

Gather first, for each property: the purchase closing statement, your CCA schedule showing UCC, a written valuation that splits land and building, the mortgage statement and terms, the leases, and your province's transfer tax rules. The last section lists what to check.

What does the corporation have to give me, and what is the elected amount?

The corporation must give you at least one share, or part of one, as part of the price. It can add cash, a note or a mortgage it takes over. The elected amount, also called the agreed amount, is the price you and the corporation choose for each property, within limits set by the Act (CRA: IC76-19R3).

• Shares are required. If the price includes no share, section 85 does not apply and the transfer is taxed as a sale. A note or a credit to a shareholder loan account is not a share.
• Non-share consideration counts against the election. Cash, a note or a mortgage the corporation takes over cannot exceed the elected amount for that property. If it does, the Act raises the amount to match and tax follows (s. 85(1)(b)). The CRA treats the full mortgage a corporation assumes as non-share consideration, and accepts debt allocated across properties moved together if the amount allocated to each is no more than its elected amount (IT-291R3, archived, para. 17). If rentals carry mortgages, compare their total with the total of the lowest elected amounts, your land cost plus the buildings' UCC, and then property by property, before you agree to any amount. If the mortgages are larger, the choices are to elect higher and report the difference now, or to move different properties.
• Your shares get a low cost. Their tax cost is the total elected amount less any non-share consideration, and their paid-up capital is cut back the same way (s. 85(1)(g), (h) and (2.1)). Both are usually below market value. See shareholder loans for taking money out later.
• A benefit to someone else is taxed. If you take back less than the property is worth and the shortfall benefits a related person, such as a child who holds shares, the elected amount is raised by that benefit (s. 85(1)(e.2)).

How section 85 works for an operating business is in moving a business into a corporation.

How do I split the elected amount between land and building, and when is there recapture?

Each property needs two elected amounts, one for the land and one for the building, because land has no CCA and a building does (CRA: Rental income). The lowest amounts the Act allows are your land cost and the building's UCC. They give no gain and no recapture. Electing the building above its UCC adds recapture to your income. If you never claimed CCA on a building, its UCC is generally its cost, so the lowest amount shows no recapture.

These limits come from section 85(1)(b), (c), (c.1) and (e). Neither amount can exceed market value. Recapture is CCA you claimed earlier that comes back into income when the amount received is more than the UCC (s. 13(1); CRA: Rental income). Electing above the lowest amount means the extra is reported in the year of the transfer.

• UCC is measured by class. A rental building acquired after 1971 that cost $50,000 or more generally has its own class, so its UCC is its own. Buildings that share a class are elected in an order you designate before the filing deadline, or the CRA sets the order (s. 85(1)(e.1); CRA: Form T2057).
• The land and building split of market value needs support. The form asks whether there is a written agreement and a valuation report, and the CRA expects you to keep how each property's value was worked out. A valuation that values land and building separately supports the split.
• The corporation steps into your shoes. Its cost of the land is the elected amount. Its capital cost of the building is generally your capital cost, plus one-half of any amount you elected above it. If you elected less than your capital cost, the gap counts as CCA already claimed, so the same recapture can arise when the corporation sells (s. 85(5); s. 13(7)(e)).

Whether to claim CCA at all is covered in should you claim CCA on a rental.

When is Form T2057 due, and what if I file late?

The election on Form T2057 is due by the earliest income tax return filing deadline of either party for the transfer year (s. 85(6)). It is filed separately from any return, and the CRA's form gives the same rule (CRA: Form T2057).

The earlier date controls. A corporation with an early year-end can make its date earlier than yours, so settle the corporation's year-end before you set a deadline.

• One form per transfer date. Properties transferred on different dates need separate forms. Each form lists every property with its own agreed amount.
• Complete it. An incomplete form may be treated as invalid, and a valid CRA account number is needed to file (CRA: Form T2057).
• Co-owners elect separately. The CRA asks one designated co-owner to send every co-owner's form together, with a list of the co-owners. See co-owned rental property.

The penalty for a late or amended election is the lesser of 1/4 of 1% of the amount by which market value exceeds the agreed amount, for each month or part of a month, and $100 for each month or part of a month, up to $8,000 (s. 85(7) to (8); CRA: IC76-19R3). If title already moved and no election was filed, the due date may not have passed. If it has, a late election is possible. A property left off the election is treated as sold at market value unless a late election covers it.

Do I pay land transfer tax when I move title into my own corporation?

In Ontario and British Columbia, the tax is generally charged on the property's market value, not the cash paid, when you move title to your own corporation. Section 85 is an income tax election, and neither province's page lists it as an exemption from transfer tax. Other provinces have their own rules, which this page does not check.

Ontario. When shares are any part of the price, the taxable consideration is deemed to be the fair market value of the property at registration (Ontario: transfers involving corporations). The exemption for transfers to a family business corporation excludes the leasing of real property, so rentals do not qualify (Ontario: family business corporation exemption). The tax is payable when the transfer is registered (Ontario: calculating land transfer tax).

British Columbia. Property transfer tax is charged on fair market value at registration when you transfer property from yourself to your corporation, including when no money changes hands (BC: property transfer tax FAQs). The exemptions page lists specific cases, such as a family farm moving to a family farm corporation, but no general exemption for moving a rental into your own corporation. Check whether a listed exemption fits your property (BC: exemptions).

Use the province's own calculator for the exact amount, because other taxes can apply. A property in the City of Toronto may also carry the City's own tax (City of Toronto: municipal land transfer tax). This page does not check other municipal taxes. For any other province, get that province's rule from its own revenue or land registry site, or from the lawyer who registers the transfer, before you sign.

Foreign-buyer taxes can sit on top of these rates. Ontario's non-resident speculation tax is 25% on land with one to six single family residences when a buyer is a foreign entity: a person who is not a Canadian citizen or permanent resident, a corporation not incorporated in Canada, or a Canadian corporation controlled by foreign entities (Ontario: NRST). British Columbia's additional property transfer tax is 20% of the residential value in five listed regional districts when the buyer is a foreign national, foreign corporation or taxable trustee (BC: additional tax). If you or a shareholder is not a citizen or permanent resident, check both before you sign.

A federal ban is separate from those taxes. It is scheduled to end in January 2027. Until then, a corporation that non-Canadians (people who are neither citizens nor permanent residents, and foreign corporations) control (10% or more of its equity value or votes, or control in fact) cannot buy residential property in a census metropolitan area or census agglomeration. That covers a building of up to three dwelling units and a semi-detached, row or condo unit. A transfer of title into the corporation counts as a purchase. The penalty is a fine of up to $10,000 and a possible court-ordered sale, not a tax (the Act; Regulations; Housing, Infrastructure and Communities Canada).

Do I charge or pay GST/HST when I move the property?

Often not, for a long-term residential rental. A sale of a residential complex by someone who is not its builder is exempt from GST/HST, unless the seller claimed an input tax credit (ITC) on the last acquisition or on an improvement (Excise Tax Act, Schedule V, Part I, s. 2; CRA: Memorandum 19.1). Short-term, commercial, mixed-use and built or substantially renovated properties can change that.

On a taxable sale of real property to a corporation that is registered for GST/HST, you do not collect the tax; the corporation accounts for it on its own return (s. 221(2)(b); s. 228(4)). The definitions of "builder" and "residential complex" are in section 123(1). Rent for a residential unit let for at least one month at a time is also exempt, so the corporation does not charge GST/HST on ordinary long-term residential rent (Schedule V, Part I, s. 6).

If you are registered and move a rental business that the corporation will carry on, a joint election under section 167 can remove the tax on some of the transfer, but a registered seller cannot make it with an unregistered buyer. Whether moving only some of your properties qualifies is a question of fact. See GST/HST on residential property for the home-and-rental rules.

What tax does the corporation pay on the rent after the move?

Rent is generally income from property, so the small business rate generally does not apply to it. The Act defines a "specified investment business" as one whose principal purpose is income from property, including rents, and excludes it from active business income (s. 125(7)). The small business deduction applies only to active business income.

The exception is a rental business with more than 5 full-time employees throughout the year, or one that would need that many employees if an associated corporation did not provide it with services. Whether a given setup meets it is a question of fact, so confirm it against payroll records.

The rates, the part of the tax that comes back when you pay dividends, and the effect on your other companies are in rental property in a corporation and holding and investment corporations.

What do I report on my own return and the corporation's first return?

Rent earned up to the transfer date is yours. Rent after it is the corporation's, so the date of transfer fixes the split between the two returns.

On your own return for the year of the transfer:

• The rental statement, with rent and expenses up to the transfer date. Show each building's disposal at its elected amount in the CCA schedule, where a negative balance is recapture (CRA: Rental income).
• Each disposition of land on Schedule 3, whether or not there is a gain (CRA: Capital gains).
• Any gain or recapture created by electing above the lowest amounts, or by non-share consideration above your cost.

On the corporation's first return: a T2 return is required for every tax year, even if no tax is payable (CRA: who has to file), due six months after the year ends. It reports the rent, its expenses and CCA on the building at the capital cost and UCC described above. Track each property's tax cost, the elected amount, from the first day. See books for a rental holding corporation.

What should I gather and check before I sign anything?

Settle these before title moves.

1. Title. A current title search for each property showing the registered owners and any charges.
2. Cost and UCC. The closing statement from each purchase, with the land and building split, and your CCA schedule showing the UCC of each building.
3. Valuation. A written valuation of each property with land and building valued separately, dated close to the transfer.
4. Mortgages. The statement and terms for each mortgage. Check whether the lender must consent to a transfer or can call the loan, and whether it lends to a corporation or asks for your guarantee. These are the lender's terms, not tax rules.
5. Leases. The landlord named in each lease, deposits held, and how tenants will be told who now collects the rent.
6. GST/HST facts. Whether you are registered, whether each building is long-term residential, short-term or commercial, whether you built or renovated it, and any ITCs claimed.
7. Transfer tax. The province's amount for each property, and who will fund it at registration.
8. The corporation. Its business number, tax year-end, shareholders and share classes, so the shares you receive are the ones you intend.
9. One date. The same transfer date for every property, so one T2057 covers them.
10. The numbers. For each property, the elected amounts for land and building, and a comparison of your mortgages, allocated across the properties, to your land cost plus the buildings' UCC.

Example

These examples are illustrative. All amounts are Canadian dollars.

Three duplexes in Ontario, elected at cost

An Ontario landlord owns three duplexes worth C$2,400,000 in total that cost her C$1,500,000. On each property the land and the building are worth more than they cost, she has never claimed CCA and no mortgage moves. Her new corporation issues her shares worth C$2,400,000 and nothing else. On one T2057 for the transfer date they elect, for the land and the building of each, the lowest amounts the Act allows, C$1,500,000 in total. She reports no gain, the corporation's cost is C$1,500,000, and her shares cost her C$1,500,000. The accrued C$900,000 is still there, held in those low costs. Ontario land transfer tax is still worked out on the fair market value of each property, C$2,400,000 in total, because shares are part of the price.

A fourplex, land and building

A fourplex has land that cost C$150,000 and is now worth C$300,000. The building cost C$700,000, is worth C$700,000 and has a UCC of C$400,000 after earlier CCA.

Two rentals in British Columbia with a mortgage

A British Columbia owner moves two rentals worth C$1,500,000 into a corporation she controls. Her land cost and the buildings' UCC total C$900,000. The rentals carry a C$1,000,000 mortgage, which the corporation takes over, and it issues her shares worth C$500,000. No cash changes hands.

On the CRA's view, the mortgage is non-share consideration larger than that C$900,000, so the elected amounts rise by at least C$100,000 in total. That increase is reported as capital gain or recapture, depending on how it falls between land and buildings. Property transfer tax applies to the full C$1,500,000 market value, even though she received only shares and the corporation took over a mortgage.

Different for you?

• You are about to move title on two or more rentals, or you already did without a T2057 or a transfer tax check: the elected amounts for land and building, the filings and the transfer tax in your province should be settled before anyone signs, or a late election filed. Get corporate tax help.
• You have not decided whether a corporation is worth it: compare the rent tax and the cost of taking money out in rental property in a corporation.
• Your property is in Quebec or in a province other than Ontario and British Columbia: the transfer tax and any provincial election are outside this page. Get corporate tax help before you sign.
• You or a shareholder is not a citizen or permanent resident: a federal purchase ban and a foreign-buyer tax may apply to the corporation on top of land transfer tax. Get corporate tax help before you sign.
• A spouse or a child under 18 will hold shares: the attribution rule can tax you on deemed interest each year. Get corporate tax help before you set the share structure.
• You bought the property in the last year, or you owe the CRA tax: a quick-sale gain can make the property inventory, which section 85 does not cover, and the corporation can become liable for your tax debts. Get corporate tax help before you sign.
• A property is worth less than it cost, or a building less than its UCC: the loss rules in the first section can deny the loss and take a building out of section 85. Get corporate tax help.
• The property is commercial, mixed-use or short-term, or you built or substantially renovated it: read GST/HST on commercial property and GST/HST on short-term rentals. Whether the seller counts as a builder depends on the facts, so get corporate tax help before you sign.
• The property was your home: see turning a home into a rental for the election that applies when use changes.
• You would rather sell to an outside buyer: see selling a rental property.
• You are not a resident of Canada: real property owned by a non-resident is eligible for section 85 only if it is used in a business carried on in Canada by the owner, with added conditions (s. 85(1.1)(a), (h) and (1.2)). Get cross-border tax help.
• The corporation will hold only rentals and needs books from day one: see books for a rental holding corporation and bookkeeping help.
• You are moving a business as well as rentals: see moving a business into a corporation.