How to Use Rollovers as Business Start-Ups
If you are the sole owner of a business and you are currently seeking a way to reallocate assets into a corporation without suffering detrimental tax costs, the use of the subsection 85(1) rollover provisions from within the federal Income Tax Act (“ITA”) will be advantageous for you. The rollover can also be helpful if you are trying to incorporate a holding company and want to transfer assets or shares into that holding company without negative tax consequences.
This rollover enables a taxpayer to defer part or all of the income that would otherwise come upon the transfer of specific types of assets to a taxable Canadian business or corporation. Income deferral often results in no taxable event happening at the time of transfer, which means you will then owe no taxes to the tax department during the time of the transfer.
A disposition of the transferred assets will take place without the proper utilization of the rollover provisions, which results in tax owing. Deferral of the acknowledgement of income pursuant to subsection 85(1) may be necessary because related assets, including intangibles such as goodwill, may have grown in value while the unincorporated business was running. Without the rollover, the handover of appreciated assets from sole proprietor to the corporation will catalyze the acknowledgement of a capital gain that would be taxable.
If someone purchases a restaurant for an unincorporated business for $1 million, for example, they are the sole proprietor and owner of that business property. If at some point in the future that individual decides to incorporate for the various tax advantages, and wishes to move the property into the corporation, they can utilize the subsection 85(1) rollover.
The property would have accumulated at least a marginal amount of value above the original price so that if they were just to move it into the corporation without the rollover, a taxable event would then occur. This would then result in the realization of a capital gain on the deemed disposition of the property as it is transferred to that corporation.
Finally, goodwill coming from the sole proprietorship to the corporation should either be acquired at a particular value or contain an elected amount. If purchased at value, the election has to then be at the adjusted cost base of the goodwill, instead of a nominal amount. The failure to transfer and elect could result in a tax liability to the person who transferred. There are also assets that are not going to be eligible for a section 85 rollover, which may include real property inventory and real property of a non-resident.
It is crucial to deal with legal experts as the total worth attributed to the transferred assets must be correct, or the CRA may question and evaluate the transaction. If you are looking to hand over assets to a corporation or to rearrange, please contact our office to speak to a knowledgeable tsax lawyer.
Are you looking for sound legal advice for your organization, business or corporation? Contact KGPC LLP today.