Do you have property that you need to transfer to a corporation? If you have a sole proprietorship and you want to transfer the equipment and other property that you are using to a newly formed corporation tax free, you need to complete what is called a section 85 rollover.
If you have a building that you need to transfer over, you will need to ‘sell’ the building to corporation and pay the property transfer tax which is a provincial tax. If you have vehicles that you need to transfer, then you need to pay the PST on the transfer. You can apply for an exemption for GST on the transfer.
So transferring assets into a corporation from a sole proprietorship takes some planning to avoid or reduce both the provincial and the federal taxes that might be payable.
The required tax form is a T2057 and requires specific and adequate description of the properties transferred. A section 85 transfer allows the taxpayer to transfer property at an agreed amount which may be fair market value or cost or an amount in between. You must receive at least one share or a fraction of a share in order for the transfer to be valid. When you choose an amount that is different than fair market value, you are required to have supporting documentation to support your choice because the CRA can review the transfer and revalue the amounts. Also, depending on the value of the transfer you may also trigger a capital gain or loss in the sole proprietorship, so you may want to discuss what the best transfer amount might be with your accountant or a lawyer.
The T2057 must be filed separately from any other tax return. The deadline to file the return is the earliest of when either of the parties has to file a return. For example if the property was transferred in February 2015, and the corporation’s year end was July, then the T2057 would need to be filed by July 2015 to avoid any penalties. Or if the transfer occurred in November of 2014 and the corporate year end was July 2015, the T2057 must be filed before June 15 which is when the sole proprietor’s return is due to be filed. If you do miss the deadline, you can make this election up to three years after the filing deadline, but you will be charged late filing interest and you must provide reasons as to why it is late.
Finally, elections can be amended to correct inaccurate valuations that gave rise to unintended tax consequences, due to an error such as using the incorrect cost, or use of net book value instead of undepreciated capital cost value.
More information can be found on the Canada Revenue Agency’s information circular IC76-19R3.
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