Section 85 Rollover

Section 85 is one such provision.

Section 85 rollover. To defer this negative tax consequence business owners carry out a section 85 rollover where the individual transfers the assets to the corporation and receives common shares in the corporation in return. Section 85 permits a tax free rollover of property to a corporation but only as long as the transferor accepts some sharesas part of the consideration received for the transfer. The purpose of subsection 85 1 is to allow a taxpayer to defer gains that are accrued on assets transferred to a canadian corp.

The business owner and the corporation then make a joint election under section 85 of the income tax act. Since it is being transferred at cost there are no taxes owing. The premise behind a section 85 rollover is to transfer assets with a built in gain on a tax deferred basis from one company corporation or sole proprietorship for example to another corporation.

In other words it allows a taxpayer to defer paying taxes on assets transferred. Equipment inventory and eligible capital property i e. Ineligible assets include cash and furniture.

When that happens there can be an embedded tax liability lying dormant in an asset that needs to be carefully considered before restructuring. A section 85 tax rollover rollover is term used to describe a special tax technique that allows a taxpayer to defer all or part of the income which would otherwise be taxed upon transfer. When is section 85 1 used.

The assets that are eligible for the section 85 rollover are inventory equipment and goodwill. In other words electing to use the section 85 rollover mechanism allows for assets to be transferred to a canadian corporation without triggering tax. Section 85 permits eligible transferors to elect jointly with a transferee corporation on the transfer of property to fix an agreed amount which both parties use to account for the transfer for income tax purposes.

This is the rollover. Under section 85 the consideration that the transferor receives for the property transferred to the corporation has to include at least one share or fraction of a share of the capital stock of that corporation for the election to be valid. One of the most commonly used tax planning tools available to canadian taxpayers is a section 85 rollover and it should be considered whenever there is a disposition of property which has appreciated in value to a corporation.