Incorporating Your Medical Practice? Here’s How a Section 85 Rollover Protects You From an Unexpected Tax Bill

If you’re a Canadian physician or dentist moving from a sole proprietorship into a Professional Corporation (PC), the mechanics of how you transfer your practice’s assets matter just as much as the decision to incorporate itself. Done incorrectly, that transfer can trigger an immediate, avoidable tax bill. Done correctly — using a Section 85 rollover — it can happen on a tax-deferred basis.

This is one of the most overlooked steps in a physician’s incorporation strategy, and it’s worth understanding before you sign anything with your accountant.

What Actually Happens When You Incorporate

When you incorporate, you’re not just filing paperwork — you are legally transferring assets (equipment, goodwill, accounts receivable, sometimes real estate) from yourself personally into a new corporate entity. The Canada Revenue Agency treats this transfer as a disposition at fair market value, by default. If your practice’s goodwill or equipment has appreciated in value since you acquired it, that default treatment can trigger immediate capital gains tax — even though you haven’t actually sold anything to a third party or received any cash.

For an established practice with real goodwill value, this can mean a five- or six-figure tax bill purely as a byproduct of restructuring.

The Section 85 Election: Deferring the Tax, Not Avoiding It

Subsection 85(1) of the Income Tax Act allows you and your new corporation to jointly elect a transfer price somewhere between the asset’s original cost base and its fair market value — often at the original cost base itself. This means:

• No immediate capital gain is triggered on the transfer.
• The corporation inherits your original cost base in the assets, meaning tax is deferred, not eliminated, until the corporation eventually disposes of them.
• You can still receive consideration for the assets — typically a mix of share consideration and, in some cases, a promissory note — without immediate tax consequences.

The election isn’t automatic. It requires filing Form T2057 with the CRA, generally by the earliest tax filing deadline of either party involved in the transfer, and it must be prepared jointly with your accountant and often reviewed by legal counsel given the share structuring implications.

Why the Share Structure You Choose at This Stage Matters Later

Here’s where many physicians miss an opportunity. The shares you receive back from your corporation in exchange for your rolled-over assets don’t need to be simple common shares. Structuring this exchange with special voting or preferred shares at the outset sets the stage for a future estate freeze — a separate but related strategy where you “freeze” the value of your shares today and allow future growth in the practice’s value to accrue to shares held by a family trust or adult children, for eventual income splitting and tax-efficient succession.

In other words, the rollover you do at incorporation and the freeze you may do 10–15 years later are not separate, unrelated events. Getting the share structure right on day one can materially simplify — and reduce the cost of — an estate freeze down the road.

Provincial Regulatory Considerations

Every provincial medical or dental regulatory college has its own rules governing who may hold voting shares in a professional corporation. In most provinces:

• Only licensed practitioners may hold voting shares.
• Non-voting shares can often be held by a family trust, spouse, or adult children — this is the mechanism that makes income splitting and estate freezing possible in the first place.
• Some colleges cap the percentage of non-voting equity that can be held outside the practitioner.

Before finalizing any Section 85 election, confirm your specific provincial college’s current rules on share ownership. These vary meaningfully between, for example, Ontario, British Columbia, and Alberta, and getting this wrong can force a costly restructuring later.

Practical Next Steps

If you are considering incorporation, or have already incorporated without using a formal rollover election, ask your advisory team:

1. Was a Section 85 election filed (Form T2057), and at what elected transfer price?
2. What share classes did I receive, and are they structured to support a future estate freeze?
3. Have we confirmed the current voting-share rules with my provincial college?
4. Is goodwill being valued appropriately, given how CRA has scrutinized physician goodwill valuations in recent years?

A properly executed rollover is a foundational piece of long-term corporate tax planning — not a one-time compliance task. Getting the structure right now can save significant tax, and significant complexity, at every later stage of your career.

Ready to review your incorporation structure or plan your next step in corporate tax strategy? Book a private consultation with our team at financialadvice.ca or call at 587 718 8001 — we work exclusively with Canadian medical and dental professionals to build tax-efficient, regulation-compliant corporate structures.