Section 85 Rollover: How It Benefits Canadian Businesses

DISCLAIMER

This information is intended for business owners in Canada and serves as general guidance only. Always consult with a qualified advisor before making any legal decision. 

In this article, we’ll cover the following topics:

• What is a section 85 rollover?

What is the section 85 rollover?

A Section 85 rollover is a mechanism under the Income Tax Act of Canada that allows taxpayers to transfer eligible property to another entity, usually a corporation, without the transfer resulting in an immediate personal tax liability. Used most often by small business owners who are operating as sole proprietors of their businesses and whose sole proprietorship has significant value, Section 85 rollovers allow sole proprietors to transfer properties on a tax-deferred basis, without realizing any sort of taxable gain on the transfer of property. 

Let’s say that a sole proprietorship has started to gain traction, and they have the quantifiable assets to show for it – customer lists, inventory, accounts receivable, assets such as office equipment etc. 

Now let’s say that the sole proprietor wishes to incorporate and then transfer all of those assets to a corporation. Normally, when someone transfers property to another entity – even if it’s an entity that they control – that transaction is taxable. Whoever transfers the property would need to report that sale as personal income. 

Before you try any sort of clever workaround (such as transferring the property and receiving the full payment but reporting the sale as $1), know that the CRA will come looking, and they will hand you a tax bill – potentially a big one. They could reassess the value of the transaction and you may well end up with a double taxation scenario.

Fortunately, the CRA understands that this whole process can be a headache for entrepreneurs who are in the middle of transitioning from sole proprietorship to corporation, and that’s why the section 85 rollover exists. By carrying out a section 85 rollover, business owners can transfer property into a corporation without it resulting in an immediate tax liability at the time of transfer. Instead, by carrying out a section 85 rollover, tax liabilities related to capital gains are effectively transferred to the corporation and  deferred until some later point in time (e.g. when the property is later sold by the corporation).

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