What is Tax Free Section 85 rollover?

  • You started your business as proprietor and over the year your business has grown. You want to incorporate a company to optimize your tax savings. Section 85 of The Income Tax Act allows you to transfer property (in proprietorship business) to your corporation without any immediate tax impact. This transfer is called “rollover” which allows you to avoid immediate capital gain taxes.   For Example, You transfer a capital property to your corporation. The fair market value (FMV) at the time of transfer is $100,000 which you purchased  at $25,000. You incorporated a company and received 100 common shares in the corporation and elected to transfer the property at $25,000 (cost) to the corporation. By this section 85 rollover, you will not pay capital gain tax on $75,000 gain (i.e. FMV - $100,000 minus cost $25,000). The corporation’s cost of the property will be $25,000 and the cost of 100 common shares will be $50,000.  Please note that 85 rollover is a defferal of capital gain tax rather than complete exemption from tax. For more info, please contact us.

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