A Section 86 rollover lets you change your company’s share structure without paying tax right away. You exchange your existing shares for new shares in the same company, and the tax on any built up gain waits until you sell those new shares later. The rule comes from Section 86 of the federal Income Tax Act. In Ontario it usually runs alongside a change to your corporation’s articles under the Business Corporations Act.
Most owners use it for one reason. They want to pass future growth to the next generation or to new investors while keeping today’s value locked in their own hands.
Insight Law Professional Corporation is a business law firm in Toronto. If you want help with a Section 86 reorganization, talk to a corporate lawyer at our firm and we will walk you through it.
What is a Section 86 rollover?
A Section 86 rollover is a tax deferred share exchange inside one corporation. You give up all of the shares you hold of a particular class. In return, the corporation gives you new shares of a different class, and sometimes a bit of cash or a promissory note on top.
Normally, swapping shares counts as a sale. If the shares grew in value, you would owe capital gains tax on the spot. Section 86 steps in and says the exchange does not trigger that tax, as long as you follow the rules. The tax cost of your old shares carries over to the new shares, so the gain is parked, not erased. You pay it down the road when you actually sell or redeem the new shares.
Think of it as relabeling your ownership rather than cashing out.
“Clients often expect a tax bill the moment they restructure. A Section 86 rollover, done properly, means that bill simply waits until they actually take money out of the company.” Demet Altunbulakli, founding lawyer at Insight Law
How the Section 86 rollover works
The mechanics are simpler than they sound. A clean rollover follows four steps.
- Your corporation amends its articles to create a new class of shares. This is the reorganization of capital that the rule requires.
- You hand back all of your shares of the old class.
- The corporation issues you new shares in exchange. You may also receive a small amount of cash or a note.
- The tax cost of your old shares, known as the adjusted cost base, along with the paid up capital, moves over to your new shares.
Two points matter most for the average owner.
All of the class. You must give up every share you own of that class, not just some of them. You cannot keep a few old shares and roll the rest.
Watch the boot. Lawyers call cash or notes you receive on top of the new shares “boot.” Boot can trigger tax now. If the boot is worth more than the tax cost of your old shares, you report a capital gain on that part right away. Keep the boot low, or skip it, if your goal is full deferral.
The Ontario law connection
Section 86 is a federal tax rule, but you cannot use it in a vacuum. The Canada Revenue Agency takes the position that a reorganization of capital normally needs a change to your corporation’s articles.
For an Ontario corporation, you make that change by filing Articles of Amendment under the Ontario Business Corporations Act. The Act lets you create a new class of shares and set the rights attached to them, such as voting, dividends, and redemption. A change like this counts as a fundamental change, so your shareholders must approve it by special resolution. That means at least two thirds of the votes cast.
So a clean Section 86 rollover has two moving parts. The corporate side updates your share structure under Ontario law. The tax side defers the gain under federal law. Both need to line up.
When business owners use Section 86
The classic use is the estate freeze, and the timing matters more than ever.
The Canadian Federation of Independent Business reports that about 76 percent of small business owners plan to exit within the next decade, moving more than $2 trillion in business assets, yet only around 9 percent have a formal succession plan (CFIB). For many of those owners, a Section 86 freeze is the first real step.
In an estate freeze, you exchange your common shares for new fixed value preferred shares. That locks in today’s value for you. Your company then issues fresh common shares to your children or a family trust, so future growth builds up in their hands instead of yours. When you pass away, the tax on your frozen shares stays capped at today’s value rather than ballooning with decades of growth.
Owners also reach for Section 86 to bring in a new investor, to split voting control among family members, or to reset their share classes before a sale. If a future sale is on your mind, a freeze pairs well with planning around the Lifetime Capital Gains Exemption, which now sits at $1.25 million on qualifying small business shares.
One more trend works in your favour. The capital gains inclusion rate held at 50 percent in 2026 after a proposed increase was cancelled, so the deferral a rollover gives you is as valuable as ever. For the bigger picture, see our guide to business succession planning.
Section 85 vs Section 86 rollover
People mix these two up. They sound alike and both defer tax, but they do different jobs.
| Feature | Section 85 rollover | Section 86 rollover |
| What it moves | Property such as assets, real estate, goodwill, or shares into a corporation | Shares swapped for new shares inside the same corporation |
| Who is involved | You and a separate corporation | You and your own corporation |
| CRA election form | Required (Form T2057) | Not required, applies automatically |
| Common use | Incorporating a business or moving assets to a holding company | Estate freeze, changing share classes, adding investors |
| When you pay the tax | When the corporation later sells the property | When you later sell or redeem the new shares |
For the asset side, read our guide on the Section 85 rollover. If you are buying or selling instead of restructuring, our share versus asset sale article covers that choice.
Do you file anything with the CRA?
Here is the part people get wrong. Unlike a Section 85 rollover, Section 86 does not need a special election form. There is no Form T2057 to file and no box to tick. The rollover applies on its own once you meet the conditions.
That does not mean the paperwork disappears. You still need the corporate documents, board and shareholder resolutions, a proper valuation, and updated share records. And Section 86 will not apply if a Section 85 election already covers the same transaction, since the two cannot run on the same step.
Mistakes to avoid
A few errors come up again and again.
- Getting the valuation wrong. The freeze value sets your future tax. A weak valuation can hand the CRA an opening and push value to the wrong people.
- Taking too much boot. Cash or notes above the tax cost of your old shares create a gain now, which defeats the point.
- Skipping the articles. Without a real reorganization of capital, the rollover can fail.
- Forgetting the family side. If you freeze in favour of children or a trust, a shareholder agreement keeps everyone clear on control and exit.
Summary
A Section 86 rollover lets you reshape your company’s shares without an immediate tax bill. You exchange all of one class of shares for a new class, your tax cost carries over, and the gain waits until you sell. It powers most estate freezes and many ownership changes. The rule applies automatically when you qualify, but the corporate steps under Ontario law and the valuation behind them need care. Get both right and you keep more of what you built.
Frequently Asked Questions
Does a Section 86 rollover get rid of my tax?
No. It defers the tax. The gain on your old shares carries to your new shares and comes due when you sell or redeem them.
Do I have to file an election with the CRA?
No. Section 86 has no election form. It applies automatically once the conditions are met, which is a key difference from a Section 85 rollover.
Can I keep some of my old shares?
No. You must dispose of every share you hold of that class. Keeping some breaks the rollover for that class.
What is boot and why does it matter?
Boot is cash or other non share consideration you receive on top of the new shares. If it is worth more than the tax cost of your old shares, you trigger a capital gain right away.
Is a Section 86 rollover the same as an estate freeze?
Not exactly. An estate freeze is the goal. Section 86 is one of the tools that makes it work, by letting you swap common shares for fixed value preferred shares.
Do I need both a lawyer and an accountant?
In most cases, yes. The corporate steps are legal work, and the valuation and tax reporting are accounting work. The two need to match for the rollover to hold.
The information provided above is of a general nature and should not be considered legal advice. Every transaction or circumstance is unique, and obtaining specific legal advice is necessary to address your particular requirements. Therefore, if you have any legal questions, it is recommended that you consult with a lawyer.
