Incorporating a business in Canada is a major milestone that opens up a world of opportunities—but it also presents some unique challenges, especially when it comes to transferring personal assets into the newly formed corporation. The tax implications of this asset transfer can be significant, especially if those assets have appreciated in value. Fortunately, Canadian tax law offers a solution that allows business owners to defer taxes on certain asset transfers: the Section 85 Asset Rollover in Canada.
This provision under the Income Tax Act enables individuals to transfer personal assets—such as real estate, equipment, shares or Crypto assets—into a corporation without triggering immediate capital gains taxes. The ability to defer taxes on appreciated assets can provide a financial cushion and strategic flexibility, making the Section 85 Asset Rollover in Canada a valuable tool for those incorporating a business.
In this article, we will explore what the Section 85 Asset Rollover in Canada is, how it works, and when it makes sense to use it. Whether you’re a business owner or an advisor helping clients navigate the incorporation process, understanding the Section 85 rollover can be key to optimizing your tax strategy.
What Is a Section 85 Asset Rollover in Canada?
A Section 85 Asset Rollover in Canada is a tax-deferred mechanism that allows individuals to transfer assets into a corporation without having to pay taxes on any capital gains at the time of the transfer. The main advantage of the Section 85 rollover is that it allows assets to be transferred at their tax cost (i.e., the original purchase price or adjusted cost base), rather than their fair market value (FMV). This deferral ensures that taxes on any capital gains are postponed until the corporation later disposes of the assets or shares.
Here’s how the Section 85 rollover works in Canada:
- Tax Deferral: The transfer of assets is treated as a tax-deferred event. This means that you won’t owe taxes on any capital gains at the time of the transfer; instead, taxes are deferred until the corporation disposes of the assets or shares.
- CRA Election: In order to benefit from the Section 85 rollover, a formal election must be filed with the Canada Revenue Agency (CRA). This election ensures that the transfer of assets will be treated as a tax-deferred event.
- Asset Flexibility: A wide range of assets can be transferred under the Section 85 rollover, including tangible assets like real estate and equipment, as well as intangible assets such as goodwill and intellectual property.
- Preservation of LCGE: If you qualify for the Lifetime Capital Gains Exemption (LCGE), the Section 85 rollover allows you to preserve this exemption for future use. This can significantly reduce the taxes you pay when selling the corporation’s shares down the line.
- Strategic Tax Planning: The Section 85 Asset Rollover provides flexibility in managing the timing of your tax payments. For growing businesses, this deferral can be especially advantageous as it helps to delay tax liability until a later date.
- Cash Flow Preservation: By deferring taxes, you can preserve cash flow, which can be reinvested into the business rather than spent on taxes in the short term.
Key Features of the Section 85 Asset Rollover in Canada
- Tax Deferral: You can defer taxes on any capital gains resulting from the appreciation of your assets. Taxes are paid later when the corporation disposes of the assets or shares.
- Asset Flexibility: Transfer both tangible (e.g., real estate, machinery) and intangible (e.g., goodwill, intellectual property) assets into the corporation.
- Lifetime Capital Gains Exemption (LCGE): If eligible, you can preserve your LCGE for future use, which can help reduce your tax liability when you eventually sell the corporation’s shares.
- CRA Election Requirement: To qualify for the Section 85 rollover, you must file a Section 85 election with the Canada Revenue Agency. This must be done carefully to ensure the transfer is processed correctly.
- Strategic Tax Planning: The ability to defer taxes allows you to plan your tax strategy in a way that benefits your long-term goals.
- Cash Flow Preservation: The rollover can help maintain cash flow for reinvestment into your business, as you won’t have to pay taxes on the appreciated assets immediately.
When Should You Use a Section 85 Asset Rollover in Canada?
The Section 85 Asset Rollover in Canada can be highly beneficial in various scenarios, particularly when incorporating a business. Here are some common situations where it is advisable to use this tax-deferral strategy:
1. Incorporating a Sole Proprietorship or Partnership
When you’re converting a sole proprietorship or partnership into a corporation, the Section 85 rollover is an ideal way to transfer assets to the corporation without triggering immediate taxes. This can help you retain more capital for reinvestment in your business.
2. Transferring Appreciated Assets
If your personal assets, such as real estate or shares, have appreciated in value, the Section 85 rollover allows you to defer the taxes that would otherwise be due on those capital gains. This is particularly useful for business owners who want to delay taxes on assets that have grown in value over time.
3. Conserving Cash Flow
One of the key benefits of the Section 85 rollover is its ability to conserve cash flow by avoiding an immediate tax burden. This is especially important for small business owners or entrepreneurs who need to maintain liquidity for day-to-day operations or to fund business expansion.
4. Planning for Future Business Growth
If you’re incorporating a business with expectations of growth, using the Section 85 rollover can allow you to defer taxes on assets that will appreciate in the future. This makes it easier to structure your business for long-term success and minimizes your tax exposure in the short term.
5. Maximizing the Lifetime Capital Gains Exemption (LCGE)
The Section 85 rollover can also help maximize your LCGE, which provides a tax break on capital gains when you sell shares of your corporation. By deferring taxes on assets now, you can preserve the LCGE for future gains when the corporation sells those assets or shares.
How TMP Corp Can Help with a Section 85 Asset Rollover in Canada
Navigating the Section 85 Asset Rollover process requires careful planning and compliance with the CRA’s rules. TMP Corp offers expert guidance and services to help you maximize the benefits of this tax-deferral strategy. Here’s how we can assist:
1. Strategic Tax Advice
Our team of experts can provide personalized advice on whether the Section 85 Asset Rollover is the best option for your business. We’ll assess your unique financial situation and goals to determine how this rollover can best serve your long-term tax strategy.
2. CRA Election Filing
Filing the Section 85 election with the CRA is a crucial step in the process. We handle all the paperwork and ensure it is submitted correctly and on time to avoid any issues with the tax authorities.
3. Asset Valuation Services
For certain assets, such as real estate or equipment, it’s important to establish their fair market value to make informed decisions about the transfer. Our team can assist with asset valuation to help you navigate this complex process efficiently.
4. Ongoing Tax Planning
Beyond the initial transfer, TMP Corp offers ongoing tax planning services to ensure that your business remains compliant with evolving tax laws. We help you manage tax liabilities and take advantage of available exemptions and credits.
5. Tailored Cryptocurrency Tax Filing
If you’re involved in cryptocurrency or digital assets, TMP Corp also offers specialized tax filing services to ensure your assets are treated appropriately under Canadian tax law. Visit TMP Corp’s NFT and Cryptocurrency Tax Services to learn more.
Conclusion
The Section 85 Asset Rollover in Canada is a powerful tax-deferral tool that can provide business owners with significant financial and strategic advantages. By deferring taxes on appreciated assets and preserving cash flow, this provision allows entrepreneurs to focus on growing their businesses rather than worrying about immediate tax burdens. Whether you’re incorporating a business, transferring appreciated assets, or planning for future growth, the Section 85 rollover can be an essential part of your tax strategy.
If you’re considering incorporating your business and want to explore the Section 85 Asset Rollover in Canada, TMP Corp can help guide you through the process. Our expert team is here to ensure your business is set up in the most tax-efficient way possible.
Stay connected with TMP Corp on LinkedIn for more resources and expert advice. If you need support with your cryptocurrency tax filing, visit TMP Corp’s NFT and Cryptocurrency Tax Services to learn more.
