Section 85: Rollover and Tax planning

The Section 85 Tax Rollover, also known as a "rollover," is a specialized tax strategy that enables taxpayers to delay paying taxes on income that would have been taxed upon transfer. This approach is particularly useful for sole proprietors seeking to incorporate or for transfers between affiliated companies.

Under Section 85 of the Income Tax Act, certain types of eligible property, such as capital property, Canadian and foreign resource properties, some types of inventory, and some types of real estate, can be transferred to a transferee corporation.

When transferring eligible property via a Section 85 Tax Rollover, it is crucial to remember two things:

  • Although the transferee corporation can use various forms of payment ("consideration"), it must issue a portion of the consideration as shares in the transferee corporation. This can include common shares, preference shares, or a combination of the two.
  • The fair market value of the transferred eligible property must be equal to the fair market value of the consideration paid by the transferee.

Even though the transferor receives fair market value consideration for the property being transferred, tax deferrals can occur because the transferor and transferee jointly choose the "elected value" at which to transfer eligible property. This elected value must fall within specified ranges.

Asset Rollovers can be complicated, but Positive Accounting is here to help. Contact us today for more information on what you need to do to get started.

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