Section 85 rollover
Here’s an explanation of a kind of corporate reorganization tool which is called section 85 rollover.
Overview:
-Section 85 of the Income Tax Act allows you to transfer property to a Canadian corporation without immediate tax consequences. It can take place at the cost of the property, thereby avoiding the immediate recognition of accrued gains.
Tax Implications:
-The election allows a complete rollover (no immediate gain), or partial rollover (some immediate gain), depending on the “elected amount” on the transfer. The election is to be made by both parties.
Qualifications:
-As consideration for the transfer of the property, you must receive at least one share in the corporation. You may also receive non-share consideration.
Assets used for Section 85 rollover:
-Property that qualifies for the rollover includes capital property, and inventory other than real property. Property that doesn’t qualify includes cash/cash equivalents, real estate that is inventory, and assets with unrealized terminal loss.
Sole proprietors who are now incorporating can use section 85 rollover to transfer their capital assets to their new corporation and avoid a high capital gains tax when doing so.
For more help and advice about Section 85 elections, reach out to IDM Professional Corporation CPA.
