Section 85 Rollover
What is a Section 85 Rollover?
The Income Tax Act (“ITA”) contains several provisions that allow a taxpayer to transfer ownership of property without any immediate tax consequences, with section 85 being one such provision.
The general rule is that transfers of property take place at fair market value (“FMV”) and consequently, any money made on a sale over what was paid for the property is known as a capital gain and taxes must be paid on that amount. However, section 85 may allow a taxpayer to elect to have the transfer of property take place without having to pay capital gains taxes. This provision can be extremely useful as it allows taxpayers to move assets and property without taxes being paid to the Canada Revenue Agency (“CRA”).
How does it Work?
A section 85 rollover means that property is transferred by a taxpayer to a related corporation at the same cost it was original purchased for. Since it is being transferred at cost, there are no taxes owing. Only once the corporation sells the property would there be taxes payable.
The individual transferring the property to the corporation must take back at least one share of the corporation. In addition, both the taxpayer and the corporation must complete a joint election and file it with the CRA.
Benefits of a S.85 Rollover
Rollovers can be a great tool for individuals who own businesses to restructure their holdings and assets to gain considerable tax advantages.
One such circumstance is when an individual taxpayer is earning more than he or she needs on an annual basis. When this occurs, the taxpayer may choose to incorporate a new company and roll his or her assets or property into the corporation. Since it would then be a corporation earning the income from the asset or property, any money remaining in the corporation, which was not paid out to the owner, is taxed at a much lower rate than it would have been if held by the taxpayer personally. This is because the corporate tax rate is significantly lower then personal tax rates.
By reorganizing ownership of an asset or property, taxpayers may be able to save themselves tens of thousands, perhaps hundreds of thousands of dollars in taxes.
There are many types of rollovers, and section 85 is only one of the many hidden provisions in the ITA that may help reduce your tax liabilities. Here at Rosen & Kirshen, we have the expertise necessary to guide you through these difficult provisions. Call us today to see if restructuring your assets and/or property may help reduce your tax bill!
T2057 – Election of Disposition of Property by a Taxpayer to a taxable Canadian Corporation
IC75-19R3 – Transfer of Property to a Corporation under Section 85
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.