A section 85 rollover allows Canadian taxpayers to defer all or part of the tax consequences when changing assets over from a sole proprietorship to a corporation.
One strategy that many business owners may not be aware of is the Section 85 Rollover. In this article, we will provide an overview of the Section 85 Rollover, what it is, how it works, and how it can help you minimize your taxes and increase your profits.
What is a Section 85 Rollover?
A Section 85 Rollover is a tax-deferred transaction that allows a business owner to transfer property to their corporation in exchange for shares, without triggering a tax event. This transaction is made possible by section 85 of the Canadian Income Tax Act.
How Does it Work?
In a Section 85 Rollover, a business owner transfers property to their corporation in exchange for shares. The transfer of property is considered a disposition for tax purposes, but the tax liability is deferred until a future event occurs. The future event that triggers the tax liability can be one of the following:
- The corporation sells the property
- The corporation dissolves or winds up
- The business owner disposes of their shares in the corporation
When the tax liability is triggered, it is based on the fair market value of the property at the time of the transfer. However, since the transfer is tax-deferred, the business owner can enjoy the benefits of the transfer without incurring an immediate tax liability.
Benefits of a Section 85 Rollover
A Section 85 Rollover offers several benefits to business owners, including:
- Tax deferral: As previously mentioned, it allows a business owner to transfer property to their corporation without incurring an immediate tax liability. This tax deferral can help business owners minimize their taxes and maximize their profits.
- Increased asset protection: By transferring property to their corporation, business owners can increase their asset protection. If a business owner faces legal action, their personal assets will be protected because the property is owned by the corporation.
- Increased access to capital: By transferring property to their corporation in exchange for shares, business owners can increase their access to capital. This increased access to capital can help business owners grow their business and increase their profits.
In conclusion, a Section 85 Rollover is a tax-deferred transaction that can help business owners minimize their taxes, increase their asset protection, and increase their access to capital. By understanding how a Section 85 Rollover works and the benefits it offers, business owners can make informed decisions about their tax planning and financial strategies. If you are interested in learning more about Section 85 Rollovers, contact us.