The Section 85 rollover comes to the rescue in such situations, allowing for tax-deferred asset transfers.
Section 85 rollover is a provision in the Canadian income tax act that permits transfer of certain assets from one corporation to another on a tax-deferred basis.
Instead of triggering an immediate tax liability, tax on any gains or losses is deferred until a future taxable event occurs, e.g when recipient corporation disposes of transferred assets.
To be eligible for a Section 85 rollover, certain conditions must be met:
1. Canadian Corporations: Transfer must occur between two Canadian corporations.
2. Similar Business: Recipient corporation must carry on a business that is similar in nature to transferor corporation’s business. This ensures that rollover is limited to genuine business related asset transfers.
3. Shareholder Continuity: There should be continuity of shareholding between transferor and recipient corporations. In other words, shareholders of transferor corporation must receive shares of recipient corporation as consideration for transfer.
4. Common Control: Both corporations involved in the transfer must be under common control, either directly or indirectly. Common control typically means that the same group of shareholders owns a significant portion of each corporation.
By deferring tax obligations until a future date, business owners can retain more capital within the corporation, providing additional financial flexibility.
Section 85 rollovers facilitate business restructuring, such as mergers, acquisitions, or estate planning. It allows for the seamless transfer of assets between related corporations, simplifying complex business transactions.
Since transfer is made in exchange for shares of recipient corporation, shareholders’ interests in business are preserved. This encourages business continuity and facilitates family business succession planning.
Before the transfer occurs, both corporations must agree on the fair market value of the assets being transferred. This valuation will determine the amount of consideration received by the transferor corporation.
Shareholders of both corporations must approve the transaction. The terms of transfer including number and class of shares to be issued must be documented and filed with CRA.
Within the specified time frame, both corporations must file the necessary tax forms with the CRA, disclosing the details of the Section 85 rollover transaction.
– It is important to seek professional advice from income tax expert to ensure compliance with all regulatory requirements and to make the most of this beneficial provision.