SECTION 85 ROLLOVER TAX BENEFITS
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The significance of a section 85 rollover as an important corporate tax planning strategy, arises from the taxpayer (an individual, trust, or corporation) being able to transfer eligible property to a taxable Canadian corporation on a tax-deferred basis. This means that the tax on any accrued capital gains is not triggered at the time of the transfer but is instead deferred until a later date. This provides substantive tax-driven benefits and advantages from the correct implementation of a section 85 rollover, including:
A. Tax Deferral
The primary and most significant advantage is the ability to defer capital gains tax. When you transfer an asset with an appreciated value, you can elect an "agreed amount" for the transaction. This amount can be set at the tax cost or adjusted cost base (ACB) of the property, which means no immediate capital gain is realized on the transfer. The potential tax liability is effectively "rolled over" to the corporation and is not paid until the corporation eventually disposes of the asset or the transferor sells the shares of the corporation.
B. Facilitating Corporate Restructuring
A Section 85 rollover is a valuable tool for corporate reorganizations and is commonly used in several scenarios:
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Incorporating a Sole Proprietorship: A sole proprietor who has built up a valuable business, including assets like goodwill, can use a Section 85 rollover to transfer these assets to a newly formed corporation without triggering a large personal tax bill.
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Introducing a Holding Company: Business owners can use a rollover to transfer shares of an operating company to a newly created holding company. This structure can offer benefits like asset protection and tax-efficient transfer of funds through inter-corporate dividends.
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Transferring Assets Between Businesses: It allows for the tax-deferred transfer of assets from one corporation to another, streamlining business operations or preparing for a sale.
C. Estate and Succession Planning
This provision is crucial for intergenerational wealth transfer and family business succession. It allows a business owner to transfer assets or shares to a corporation owned by their children or other family members. This can be done without incurring immediate tax liabilities, making the transition of the business smoother and more efficient.
D. Crystallizing the Capital Gains Exemption
In some cases, a taxpayer might use a Section 85 rollover to intentionally trigger a capital gain. This is done to use up a portion of their lifetime capital gains exemption (LCGE) on the value of their shares. By electing an amount above the tax cost of the property, the individual realizes a capital gain that can be offset by their available LCGE, thereby sheltering the gain from tax. This is often done to "lock in" the exemption before the value of the shares increases further.
E. Transferring Goodwill and Other Intangibles
Many businesses, particularly sole proprietorships, have valuable intangible assets like goodwill. A Section 85 rollover provides a mechanism to transfer this goodwill to a corporation on a tax-deferred basis, which is essential for business continuity and future tax planning.
Given the complexity and potential for severe tax penalties, it is critical that your section 85 rollover is correctly structured, with the appropriate legal and supporting paperwork, such that it might effectively respond to any scrutiny. With over two decades of legal experience, which includes designing and implementing a multitude of section 85 rollovers and other corporate tax planning strategies, we can put that knowledge and experience to use for the advancement of your business.
Our law firm strives to provide strategic tax-driven legal advice and direction to Calgary businesses looking to optimize their business structures and corporate transactions. Contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 to schedule a confidential initial consultation for your business' tax structuring and tax planning initiatives.
