Whether it’s a company restructuring for tax planning objectives or a successful sole-proprietor aiming to incorporate– the Section 85 rollover is a valuable tax deferral tool, used extensively in the Canadian business landscape. If you have decided to transform your existing business into another Canadian entity without having to pay taxes then this blog contains a lot, you need to know!
The main purpose of section 85 rollover is to transfer eligible property (with a built-in gain) on a tax-deferred basis from one company (corporation or sole proprietorship for example) to another corporation.
Electing to apply the section 85 rollover mechanism allows for assets to be transferred to a Canadian Corporation without triggering the tax. If this mechanism did not exist and assets needed to be transferred from one company to another, a sale at fair market value would have been considered, resulting in possible tax implications.
Who can use Section 85 Rollover?
Section 85 Rollover should be considered whenever there is a disposition of property, which has appreciated in value, to a corporation. When you transfer assets to a corporation, you have two options:
After incorporating a sole proprietorship Section 85 Rollover is a special election filed with the Canada Revenue Agency (CRA) through T2057 Form or T2058 in the case of partnerships by the prescribed deadline [ITA 85(6)]
Time for election. The election must be filed at the earlier of the next sole proprietor’s tax return deadline or the first corporate tax return deadline. Late filing within three years of that date is allowed, subject to penalty. After the three years, you may be able to file late if the CRA believes that it would be “just and equitable” to allow the late filing. Again, a penalty will apply.
To qualify for the election, the transferor will need to receive at least one share in the capital stock of the ‘purchasing’ corporation, as consideration for the transfer of assets. You may also receive a non-share consideration called “boot”.
When filing a joint election, the transferor and transferee must choose an elected amount, which represents the proceeds of disposition for the transferor and the cost to the transferee corporation. The Income Tax Act (ITA) defines the maximum and minimum limits on the elected amount:
The election can only be made concerning eligible property [ITA 85(1.1)] which includes but not limited to:
Assets that are ineligible for a tax deferred transfer include:
Section 85 Rollover scenarios mostly experienced are:
As with any tax planning scenario, there is no one size fits all answer. This is especially true for the complex Section 85 Rollover. It is a technical tax document and our experienced professionals at Filing Taxes can assist you with structuring and documenting the section 85 Rollover agreement considering your unique business situation. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.