16%20Rollovers%20Under%20Section%2085

16%20Rollovers%20Under%20Section%2085 - Chapter 16...

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Chapter 16 Rollovers Under Section 85
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Rollover of Assets • Assuming that there are advantages to incorporating a business to reduce, defer or redistribute taxes, Section 85 of the ITA provides an attractive means for doing so • Without s. 85, a transfer of assets from an individual to a corporation would be a disposition resulting in recapture and capital gains to the individual, possibly resulting in a significant tax liability
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Rollover of Assets • Section 85 provides relief by permitting assets to be transferred by an individual to a wholly owned corporation on either a tax ee basis, or at a level of taxation that can free basis, or at a level of taxation that can be determined by the individual • This transaction is called a rollover
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Concept of a rollover Before • Individual – Runs a business as a proprietorship. Owns usiness assets, and has After • Individual – Runs business through a corporation. Owns shares the corporation with business assets, and has business liabilities. The difference between the value of the assets and liabilities = value of business. • Corporation – Does not exist in the corporation with value equal to the net assets that were originally held in the proprietorship. • Corporation – Is run by individual. Owns business assets and has liabilities.
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General Rules Transferor • s. 85(1) – refers to taxpayers, which could be individual, ust or corporation Transferee • Must be a taxable Canadian corporation • Defined in s. 89(1) – trust or corporation • s. 85(2) – provides for transfer from partnership to corporation currently resident in Canada, and either incorporated in Canada or has been resident continuously since June 18, 1971.
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General Rules • Property eligible for s. 85 transfer: – Depreciable and non-depreciable capital property, not including real property owned by non-residents. – Eligible capital property – Canadian or foreign resource properties ventories, other than inventories of real property – Inventories, other than inventories of real property (NOTE: This can be quite problematic if you aren’t certain of the status of the real property) – Real property owned by a non-resident and used in the year in a business carried on by that person in Canada. • Not eligible – Cash, prepaid expenses – Accounts receivable are transferred under (s.22)
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General Rules • The transaction: – Transferor • Gives assets to the corporation orporation – Corporation • Provides consideration to the transferor, which must consist of some shares of the corporation (common, preferred or a combination), but could include cash and debt, which is non-share consideration, called the “boot” (I have no idea why!)
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• The election: – Transferor and transferee elect on Form T2057 (on WebCT) or T2058 (for a partnership) to have s. 85 provisions apply – Must be filed on or before the earliest of the dates on which the normal tax returns are due for the two taxpayers. – Can file late (3 years, + more with CRA permission),
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16%20Rollovers%20Under%20Section%2085 - Chapter 16...

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