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In the realm of Canadian tax law, Section 85 rollovers are a nuanced and essential tool for property transfers to a corporation. At Shajani CPA, our unique blend of CPA and LLM expertise makes us exceptionally qualified to navigate these complexities. Here’s a detailed analysis to help you understand why engaging with our team is your best choice for managing these transactions.
Ten Critical Aspects of Section 85 Rollover:
- Essential Conditions: The transferee must be a taxable Canadian corporation, and the property should be “eligible property” as defined in s. 85(1.1), typically capital property. Both the transferor and transferee must jointly file form T2057, with the consideration including at least one share of the transferee’s capital stock.
- Eligible Property Definitions: Eligible property includes capital property, Canadian and foreign resource properties, and specific inventory types. Cash and accounts receivable are notably excluded.
- Agreed Amount and Consideration: The property is transferred for an “agreed amount” that may differ from its fair market value, forming the basis for the proceeds and cost for the transferor and transferee, respectively. Consideration often involves shares and may include “boot” (additional assets or cash).
- Fair Market Value and Tax Implications: To avoid adverse tax consequences, the total fair market value of the consideration (shares plus boot) should ideally not surpass the fair market value of the assets transferred.
- Election Process and Late Filing Penalties: A joint election on form T2057 is mandatory, with deadlines and penalties for delays up to $100 per month, capped at $8,000.
- Elected Amount Range: This amount should be within a specified range – the upper limit being the assets’ fair market value and the lower limit the greater of the boot or the property’s adjusted cost base.
- Adjusting Cost Base and Paid-Up Capital: The elected amount allocation between boot, preferred shares, and common shares impacts the adjusted cost base (ACB) and paid-up capital (PUC). Section 85 includes a PUC reduction calculation to align the total PUC with the total ACB of the shares.
- Tax Deferral Opportunity: The elected amount choice allows for the deferral of capital gains, presenting a strategic tax planning opportunity.
- Impact on Future Transactions: The choices made during a Section 85 rollover can have long-term implications on subsequent corporate transactions, such as mergers, acquisitions, or further asset transfers. Understanding these implications is crucial for strategic planning.
- Compliance and Reporting: Post-rollover, there are ongoing compliance and reporting requirements to ensure that the rollover remains valid. This includes proper documentation and adherence to the rollover’s terms over time.
Why Engage with Shajani CPA?
Shajani CPA’s deep understanding of both accounting principles and tax law ensures that your Section 85 rollovers are not just legally compliant but also strategically sound. Our guidance helps in maximizing the benefits of tax deferral while minimizing risks and maintaining transparency in your corporate records.
Navigating a Section 85 rollover requires a blend of legal acumen and accounting expertise. With Shajani CPA, you access a team equipped with both, ensuring that your asset transfers are efficient, compliant, and strategically beneficial. Partner with us to make the most of your corporate asset transfers.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2023 Shajani CPA.
Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.