As a business owner in Canada, you may have heard of the term “Section 85 rollover” when it comes to transferring property or shares from your corporation to another person or entity. But what exactly does it mean, and how can it benefit you? In this blog post, we will cover everything you need to know about Section 85 rollover, including its definition, its benefits, and its tax implications.

Definition of Section 85 Rollover

Section 85 rollover is a provision in the Canadian Income Tax Act that allows taxpayers to transfer property, shares, or certain types of assets to a corporation without triggering a tax event. In other words, it allows for the transfer of property to be tax-free, provided that certain conditions are met. This can be a useful tool for business owners who want to transfer assets or shares to a corporation without incurring significant tax liability.

Benefits of Section 85 Rollover

The primary benefit of Section 85 rollover is that it allows business owners to transfer property or shares to a corporation on a tax-deferred basis. This means that the transfer does not trigger a taxable event, and the business owner can defer the tax liability until a later date, such as when they sell the shares or property in the future.

Another benefit of Section 85 rollover is that it can simplify the transfer process. Rather than selling the assets or shares and then using the proceeds to purchase shares in the corporation, Section 85 rollover allows for a direct transfer of the assets or shares to the corporation. This can save time and money, as there are no brokerage fees or other transaction costs associated with the transfer.

Tax Implications of Section 85 Rollover

While Section 85 rollover can provide significant tax benefits, it is important to be aware of its potential tax implications. When assets or shares are transferred under Section 85 rollover, the business owner will receive shares in the corporation in exchange for the transferred assets or shares. These shares will have a cost basis equal to the fair market value of the transferred assets or shares. This cost basis will be used to calculate any future capital gains or losses when the shares are sold.

It is also important to note that not all types of assets are eligible for Section 85 rollover. For example, certain types of inventory, accounts receivable, and depreciable property may not be eligible. It is important to consult with a tax professional to determine if your assets are eligible for Section 85 rollover.

Conclusion

In summary, Section 85 rollover can be a useful tool for business owners who want to transfer property or shares to a corporation on a tax-deferred basis. It can simplify the transfer process and provide significant tax benefits. However, it is important to be aware of its potential tax implications and to consult with a tax professional before using it. With the right planning and guidance, Section 85 rollover can be an effective way to transfer assets and shares to a corporation in Canada.