A Section 85 Tax Rollover is a unique tax method that permits a taxpayer to postpone all or part of income that would otherwise be taxed at the time of transfer. To put it another way, it enables a taxpayer to delay paying taxes on assets that have been transferred. The transfer is known as a “rollover” because it might occur at the expense of the property, avoiding incurring tax right away. In the following case, a section 85 rollover is most effective:

• Incorporation of a Firm — This option is used when a sole proprietorship has grown lucrative and the owner no longer needs all of the after-tax cash flow generated by the business. The taxpayer might incorporate and transfer the business assets into a corporation to take advantage of the reduced small business tax rates. The taxpayer can resort under section 85 to transfer the business assets to the company for cost, resulting in no revenue on the transfer.

The Income Tax Act specifies the rules and standards (Canada). Tax rollovers are frequently used when a person starts a business as a single proprietor and later incorporates a company to run it. If the firm has appreciated, transferring it to the corporation may result in a capital gain and be subject to capital gains tax. The business owner may carry transfer assets to the corporation in exchange for shares to avoid the payment of capital gains tax.

There are two factors to keep in mind when transferring qualifying property through a Section 85 Tax Rollover: Although the transferee corporation may accept various types of payment (“consideration”), a portion of the consideration must be in the form of transferee corporation shares. This could be in the form of common stock, preferred stock, or a combination of both. The transferee’s consideration must equal the transferee’s fair market value of the transferred qualified property.

Despite the fact that the transferor obtains fair market value for the property being transferred, tax deferrals may be possible since the transferor and the transferee jointly set the “chosen value” at which to transfer qualifying property. This chosen value must fall inside specific parameters.

The following are eligible to be transferred under S.85:

1. Capital Properties (including A/R)

2. Eligible Capital Properties

3. Inventory

4. Resource Properties

The following are not eligible to be transferred under S.85:

1. Cash

2. Prepaids

3. Real property (i.e. land and buildings) held as inventory

The Section 85 rollover is a popular and vital strategy in the Canadian business scene, allowing expanding businesses to move fast and adjust without incurring immediate tax repercussions.