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Section 85 Rollover Explained

Section 85 of the Income Tax Act allows for the tax-deferred transfer of property from individuals to Canadian corporations, avoiding immediate capital gains or recapture. Eligible properties include capital property, inventory, and goodwill, while cash and certain liabilities are excluded. The transferor must receive at least one share and file a joint election to set the transfer price, enabling tax deferral and facilitating business restructuring.

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61 views2 pages

Section 85 Rollover Explained

Section 85 of the Income Tax Act allows for the tax-deferred transfer of property from individuals to Canadian corporations, avoiding immediate capital gains or recapture. Eligible properties include capital property, inventory, and goodwill, while cash and certain liabilities are excluded. The transferor must receive at least one share and file a joint election to set the transfer price, enabling tax deferral and facilitating business restructuring.

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mazenshaath00
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Section 85 Rollover - Transfer of Property to a Corporation

The transfer of property from an individual to a corporation can be done on a tax-deferred basis
using section 85 of the Income Tax Act (ITA).
This is commonly referred to as a section 85 rollover and allows taxpayers to transfer assets to a
corporation without triggering immediate capital gains or recapture of capital cost allowance.

How It Works:
1. Eligible Transferor & Transferee
- The transferor must be a taxpayer (individual, partnership, or another corporation).
- The transferee must be a Canadian corporation.

2. Eligible Property
- Certain types of property qualify, including:
- Capital property (e.g., real estate, shares, equipment).
- Inventory.
- Eligible capital property (e.g., goodwill).
- Excluded: Cash and certain types of liabilities.

3. Consideration Received
- The individual must receive at least one share of the corporation as part of the exchange.
- Other considerations, such as cash or a promissory note (called "boot"), can also be received,
but may trigger immediate tax consequences.

4. Elected Transfer Price (Agreed Amount)


- The transferor and transferee must file a joint election (Form T2057) to set the transfer price,
known as the elected amount.
- This elected amount:
- Cannot be lower than the fair market value (FMV) of any non-share consideration received (to
prevent tax-free withdrawals).
- Cannot exceed the FMV of the property transferred.
- Must be at least equal to the lesser of the FMV and the adjusted cost base (ACB) or
undepreciated capital cost (UCC) of the property (to avoid triggering gains).

5. Tax Deferral Mechanism


- If the elected amount equals the ACB (for capital property) or UCC (for depreciable property), no
capital gain or recapture is triggered.
- The corporation takes over the transferor's tax cost basis in the property (i.e., a "rollover" of tax
attributes).

Example:
Suppose an individual owns a rental property with:
- FMV: $500,000
- ACB: $300,000
- UCC (if depreciable): $250,000

If transferred under section 85:


- The individual and corporation can elect an amount between $250,000 (UCC) and $500,000
(FMV).
- If they elect $300,000, no capital gain is realized.
- The corporation's ACB for the property will be $300,000.

If the individual takes cash of $50,000 as part of the transaction:


- The elected amount cannot be less than $50,000.
- If the election is for $300,000, there is no capital gain, but the $50,000 boot is taxable.

Key Benefits of Section 85 Rollover:


- Defers taxes until the corporation disposes of the property.
- Allows for flexible planning (e.g., receiving shares instead of triggering immediate taxation).
- Enables business restructuring without immediate tax costs.

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