Why would I use a Section 85 Rollover? What are the benefits?

Neufeld Legal PC: Chris@NeufeldLegal.com - 403-400-4092 / 905-616-8864

A Section 85 Rollover is a provision in the Canadian Income Tax Act that allows individuals, partnerships, trusts, or corporations to transfer "eligible property" to a taxable Canadian corporation on a tax-deferred basis. This means that you can transfer assets that have appreciated in value without immediately triggering a capital gain and the associated tax liability.

Potential reasons for undertaking a Section 85 Rollover include:

Incorporating a Sole Proprietorship: This is one of the most common uses. If you've been operating a successful sole proprietorship and want to transition to a corporate structure, a Section 85 rollover allows you to transfer your business assets (like equipment, inventory, and especially goodwill) to the new corporation without incurring immediate taxes on any accrued gains.

Corporate Reorganizations: When restructuring an existing corporate group, such as adding a holding company (Opco-Holdco structure) or consolidating assets, a Section 85 rollover can facilitate these changes without immediate tax consequences.

Estate Planning and Succession: It's a valuable tool for transferring assets to the next generation or to key employees within a family business. This allows for an orderly transition of ownership while deferring tax liabilities.

Asset Segregation and Protection: You might want to move certain assets into a separate corporation for liability protection or other business reasons. A Section 85 rollover allows this without triggering a taxable event.

Crystallizing Capital Gains Exemption: In some specific scenarios, you might intentionally trigger a capital gain using a Section 85 rollover to utilize your lifetime capital gains exemption (LCGE) if you have one available.

Realizable benefits that are possible from undertaking a Section 85 Rollover include:

Tax Deferral: The primary benefit is the deferral of capital gains and recapture taxes. Instead of paying tax on the appreciation of the assets at the time of transfer, the tax liability is deferred until the corporation eventually sells those assets or the shares of the corporation are sold by the original transferor. This preserves cash flow for the business.

Flexibility in Elected Amount: You and the corporation can jointly elect an "agreed amount" for the transfer of the assets. This amount can be set anywhere between the asset's tax cost (Adjusted Cost Base or Undepreciated Capital Cost) and its fair market value, allowing for strategic tax planning. Often, it's set at the tax cost to fully defer the gain.

Preservation of Capital: By deferring taxes, more capital remains within the business for reinvestment, expansion, or operational needs.

Facilitates Corporate Structuring: It enables various corporate reorganizations, such as mergers, spin-offs, and the creation of holding companies, without immediate tax impediments.

Smooth Intergenerational Transfers: For family businesses, it provides a tax-efficient way to transfer ownership and future growth to heirs, aiding in succession planning.

Avoids Double Taxation (in certain contexts): Without a Section 85 rollover, transferring assets to a corporation at fair market value would typically trigger a personal tax liability for the transferor, and then the corporation would hold the asset with a stepped-up cost base. While a Section 85 defers the initial personal tax, the overall tax liability is still recognized, just at a later time or potentially within the corporation which may be subject to different tax rates.

As with any tax planning / structuring strategy, there are numerous considerations of great significance that will need to be address, and be impacted by the specific facts and circumstances, including but not limited to:

Eligible Property: Not all assets qualify for a Section 85 rollover. Generally, it applies to capital property (depreciable and non-depreciable), eligible capital property (like goodwill), and certain types of inventory. Cash and prepaid expenses generally do not qualify.

Taxable Canadian Corporation: The transferee must be a taxable Canadian corporation.

Consideration: The transferor must receive at least one share of the transferee corporation as part of the consideration. If non-share consideration (like a promissory note or cash, often referred to as "boot") is received, it can trigger immediate tax consequences if it exceeds certain limits.

Joint Election: The transferor and the corporation must jointly elect for the Section 85 rollover by filing a prescribed form (Form T2057 for individuals/trusts/corporations, or T2058 for partnerships) with the Canada Revenue Agency (CRA). This election must be filed by a specific deadline.

Significance of Professional Advice: Section 85 rollovers are complex and involve strict rules. It is highly recommended to seek advice from a tax accountant and a lawyer to ensure compliance and to properly structure the transaction for your specific circumstances..

For knowledgeable and experienced tax law representation for corporate tax rollovers and other tax planning strategies, contact tax lawyer Christopher R. Neufeld at Chris@NeufeldLegal.com or call 403-400-4092 (Calgary, Alberta) / 905-616-8864 (Toronto, Ontario).

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Why would I use a Section 85 Rollover? What are the benefits? A Section 85 Rollover is a provision in the Canadian Income Tax Act that allows individuals, partnerships, trusts, or corporations to transfer "eligible property" to a taxable Canadian corporation on a tax-deferred basis. This means that you can transfer assets that have appreciated in value without immediately triggering a capital gain and the associated tax liability. . . . Continue reading.

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