Deferring Taxes With A Section 85 Rollover In Alberta
Deferring Taxes With A Section 85 Rollover In Alberta
The tax law in Canada includes provisions for the payment of taxes on the disposition of an asset. The law even deems a disposition in many situations. This means that the government deems taxes payable without an actual sale or disposition of property. Sometimes a person or business wants or needs to transfer ownership of assets or a business to a related person or business. In order to avoid the triggering of a taxable event, tax and corporate lawyers use section 85 rollovers. Read more below or call the corporate lawyers at Kahane Law Office in Calgary, Alberta. We assist individuals and corporations effect these rollovers to defer taxes.
Why Are They Called Section 85 Rollovers
The explanation of why we call this strategy a section 85 rollover is simple. The part of the Canadian Income Tax act that allows for this tax deferment is Section 85.
What Are Section 85 Rollovers?
Section 85 rollovers involve a tax strategy where a person or company trade at least one share of a Canadian corporation for eligible assets currently owned by
a related eligible transferee. The transferee is the entity trading the assets to a Canadian corporation. Please see just below to understand what a eligible transferee includes.Requirements To Effect A Section 85 Rollover
As with all tax rules, several requirements exist in order to complete a section 85 rollover. Tax rules include very specific details which vary on each individual situation. Therefore, before completing a section 85 rollover, it is extremely important that each individual and corporation consult with their corporate lawyer and/or accountant first. However, in a nutshell, the main elements that the law requires include some basic elements. For example, these elements include:
Eligible Property
Only certain property falls under the Canadian income tax rules for eligible property. For example, and this is only a partial list, eligible property includes: inventory, resource property, and capital property (both non-depreciable and depreciable). The government excludes certain property. For example, this tax strategy does not apply to cash or real or immovable inventory such as land held as inventory.
Eligible Transferee
Next, Canadian laws limit acceptable recipients of the transferred property. In order to fall under the eligible transferee rules, all transferee (or recipient of the eligible property) must be a valid and existing corporation in Canada. The rational of this rule is that it ensures that all taxes owed when there is a final disposition of the property, will be owed by a Canadian corporation.
Eligible Transferor
Fewer restrictions exist as to the body transferring the assets in section 85 rollovers. For example, no limits exist as to the status as Canadian for the transferor. This means international transferors retain the right to transfer property to a Canadian entity under these rules. However, the laws restrict the types of property eligible for non-Canadian transferors. Further, eligible transferors include:
- Corporations;
- Individuals;
- Trusts;
- Partnerships with only Canadian resident partners
Joint Election
Join election simple means that both the transferee and the transferor both agree to complete the transfer as a section 85 rollover.
Consideration
Consideration is what is traded when you “sell” something. For example, if you buy a pencil, the consideration for the pencil is the amount you pay for it. With respect to a section 85 rollover, the consideration must include, at a minimum, one capital stock share of the corporation transferring the property.
Income Tax Filing Requirements
As with everything tax, certain filing requirements exist after you effect a section 85 rollover. Ensure that your accountant, or yourself, file all relevant paperwork to avoid triggering a tax event. The taxes owed on a improperly completed rollover may be significant.
What Is An Elected Amount
The elected amount is the amount assigned that the eligible property “sells” for to the acquiring corporation. Simply put when using section 85 rollovers to move the land purchased by an operating company to a holding company, the elected amount is the value assigned to the land. A range exists for the elected amount. However, limits exist for the elected amount. The elected amount cannot be:
- less than the original cost of the asset (tax cost) or the current fair market value if the value went down
- more than the current, at the time of the rollover, fair market value of the asset; or
- less than the fair market value of any boot. A boot is some other value paid for an asset other than cash, such as trading an asset for another asset or trading cash plus an asset for another asset.
For example, if the original cost of land, when purchased by an operating company, was $500,000, the operating company may trade the land to a related Canadian holding company for shares (at least one). For this example, the current value of the land is $750,000. The two companies then elect the amount for the transaction. In this case, the elected amount may range between $500,000 and $750,000. For tax purposes, the value of the land to the holding company is the elected amount. And the cost for the shares of the holding company to the operating company is the elected amount. The elected amount then applies to the taxation of the land and the shares when finally disposed of.
Why Use A Section 85 Rollover
People often use section 85 rollovers in tax planning. They use it to defer taxes when transferring property to related or non-arms length entities. For example, parents seeking to pay dividends to their children often use this tax strategy. The child (over the age of 18 in Alberta) then incorporates their own corporation. A share of this new corporation is then traded for a share or shares in the parents corporation. This allows the deferment of the taxes on the transfer of the valuable share the parent sells to the child.
Another example of the utilization of sections 85 rollovers, includes when people start their business as a sole proprietor. They started their business under their own name and not as a corporate entity. At some point, the person decides it makes more sense to operate as a corporation. This strategy allows them to move the assets of the business, in fact, the business itself, into a corporation. The Canadian corporation then trades at least one share for the assets of the business so that now the corporation owns the assets and the individual owns at least one share of the corporation.
The same example as above works when a corporation decides that some of its assets are better held in a holding company while the rest remain in the opperating company. In this case the new Canadian holding company trades at least one of its shares for the assets.
Section 85 Rollover Lawyers In Calgary, Alberta
We work with your accountant to properly effect section 85 rollovers. Many people find the concept confusing but we help simplify the process for you. Call Kahane Law Office today. We book appointments to review your situation and start the process when you need us to. Please reach out our firm at 403-225-8810 locally in Calgary, Alberta or, in the alternative, call us toll-free at 1-877-225-8817 or, lastly, please email us directly here.