Accounting treatment for Sec 85 rollover

Hi everyone, I have a question regarding the accounting treatment of transfer of assets in Sec 85 rollover.

Scenario: A sole proprietor decides to form a corporation and transfer its assets under Sec 85. He understands that he can transfer the assets at ACB to defer tax on capital gains. However, my question is regarding accounting treatment. Should asset be recorded at FMV or Cost in the accounting books (balance sheet).

For e.g.

FMV = $50,000
ACB = $30,000
Elected amount for transfer is $30,000

Should this asset be recorded at FMV i.e. $50,000 or ACB i.e. $30,000 in accounting books at the time of transfer?

Is this example, POD is less than the FMV. Since the transaction is between the related parties, I am assuming that it will be recorded at ACB. Please share your thoughts.


Usually you need to record the asset at FMV. The journal entry is something like:

DR Asset cost
CR Shareholder loan (or promissory note or cash)
CR Shares (usually pref shares with stated value)

Non-share consideration (i.e. promissory note) cannot be more than the agreed amount, which is typically established as the seller’s ACB. But, you have to account for the FMV of the shares, so the asset cost needs to be FMV. Here’s a good explanation:

Just remember that for tax purposes, the PUC of the shares is (usually) zero, and the tax cost = seller’s ACB. So, if the corp later sells the asset, the TCG will be larger than (50% of) any gain on the financial statements (accounting gains are removed on S1 and replaced by recapture from S8 and possibly TCG from S3).