Transferring Business Assets to a Corporation: An Overview of Section 85 Rollovers Posted onJanuary 16, 2024January 16, 2024 Stephen Sforza Suppose you’ve been diligently building your business as a sole proprietor or in a partnership, accumulating valuable assets like equipment, cash, and goodwill. As your business expands, the idea of incorporating crosses your mind – not only for tax advantages but also to shield yourself from personal liability. However, did you know that transferring such assets to a new corporation can trigger capital gains tax? Section 85 of the Income Tax Act (ITA) offers a solution in the form of a tax-deferred transfer, commonly known as a Section 85 rollover. Section 85 of the ITA enables a joint election between you and your new corporation, facilitating a tax-deferred transfer. By entering into an agreement with your corporation to exchange business assets for common shares in the corporation or a combination of shares and non-share consideration (such as a promissory note or the assumption of existing debt) (the “Consideration”), you can defer the tax liability until a future date – typically when the asset is sold to a third party or disposed of. To execute a Section 85 rollover effectively, you, in consultation with your accountant, must determine the fair market value of the assets being exchanged, as well as the elected amount for transferring such assets. Your accountant will also need to advise as to the particulars of the Consideration to be given by the corporation to you in exchange for the assets. The key is to ensure that the value of what you receive matches the fair market value of the assets transferred. Completing a Section 85 rollover involves the preparation of various legal documents and the filing of necessary CRA forms after the exchange. Once such rollover is completed, in addition to the tax deferral benefits, you’ve helped safeguard your assets and ensured the smooth continuity of your business. This tool is versatile, extending beyond sole proprietors or partnerships transitioning to corporations. It can also be instrumental in estate freezes, estate planning and corporate reorganizations. It is crucial to always consult your corporate lawyer and accountant before undertaking a Section 85 rollover. These professionals can guide you through the technical requirements, evaluate the benefits for your business, and prepare the necessary documentation for a seamless transfer. For expert advice, contact corporate lawyer, Stephen Sforza at stephen@durhamlawyer.ca or call 289-220-3239. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” Authors Stephen Sforza 289-220-3239 (905) 668-9737 stephen@durhamlawyer.ca