Section 85 - Basics

Section 85 Rollover

What is Section 85 Rollover/Purpose

Section 85 rollover (also known as a rollover provision) is an election in the Canadian ITA that outlines the conditions of a tax-deferred transfer of eligible property by a taxpayer, known as the transferor, to a taxable Canadian corporation known as a transferee. A Section 85 rollover allows taxpayers to defer all or part of the tax consequences that may otherwise immediately arise from the disposition of property at FMV.

Section 85 is utilized by sole proprietors who would like to incorporate due to the various advantages of incorporation. It allows them to transfer assets of the sole proprietorship into the newly incorporated business on a tax-deferred basis.

Please note that it does not eliminate tax indefinitely. It is deferred until the assets or shares are sold to a third party.

The Benefits/Advantages

Section 85 rollover has proved advantageous to sole proprietors who want to incorporate their wealth or businesses into other corporations. The main advantage is that the transferor avoids the immediate taxation of the assets during the transfer process. Section 85 rollover ensures the actual economic disposal of goods by deferring the tax payments. In addition, the rollovers facilitate corporate reorganization since no extra financial burden is incurred.

Conditions and Key Date

Certain conditions must be met before a transferor, and a transferee can apply section 85 rollovers. The transferor can either be a sole proprietor, corporation, or trust. The transferee must be a taxable Canadian company or a company that has resided in Canada since 18 June 1971. The assets to be rolled over must be eligible property, and the transferee’s consideration must include at least one share of capital stock. Another essential condition is that the parties must file a joint election (Form T2057) before the deadline. The form is filled separately from other returns and directed to the transferor’s tax center.

Essential Terms and Costs of Consideration

The essential terminologies used include eligible property, elected amount, non-share consideration, and consideration to the transferor. Eligible property entails assets that can be transferred under section 85 rollovers and include; inventories, foreign resource property, Canadian resource property, non-depreciable capital properties, depreciable capital properties, and non-resident real estate business properties operating in Canada. The amount upon which the transferor and the transferee agree to transfer the property is the elected amount. The consideration to the transferor is a set of conditions provided by the transferee to the transferor in return for the transferred assets and must include shares in the corporation. Finally, the non-share consideration or boot is the amount paid to the transferor as a portion of the consideration.

Section 85 rollovers represent a connection between accounting and law. On most occasions, accountants and lawyers work together to help clients achieve both results and tax efficiency for their assets.

Contact us for a consultation.

The content of this blog is intended to provide a general guide to the subject matter. Professional advice should be sought about your specific circumstances.

By: Kamal Gawri, CPA, CA