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What is a Section 85 Rollover?

February 8, 2013

Tax Question:

What is a section 85 rollover?


Many corporate owners start off their business as an unincorporated entity. This is because it is the cheapest and fastest way of setting up a business. As the business grows, the tax planning opportunities are limited. Therefore, the business owner often thinks about transferring the business intoÊ a corporate structure. A popular mechanism to achieve this is a section 85 rollover.


The normal rules for transferring assets between related parties require the transfer price to be set at fair market value (FMV). This is to stop taxpayers from entering into non-arms-length transactions where they have disposed of an asset either above or below the FMV to gain a tax advantage. If a business has been in operation for a while it is likely to have considerable value in terms of both tangible assets such as buildings and intangible assets such as goodwill.

Consequently, the sale of the business from an unincorporated venture to a corporation could trigger significant tax bills. This is because an unincorporated entity is just an extension of the individual and any gain on selling the assets would be added to the owner’s income on the tax return. A section 85 rollover allows the business owner to transfer the business at a predetermined value, often at cost, which defers any taxes. The reasoning behind the rollover is that the business owner has not really disposed of his business, he has just placed it in a more tax-efficient vehicle. Therefore, why should he pay any taxes on something he still owns? Basically, the business owner is selling the assets of the business to the corporation in return for shares in that corporation and possibly, but not necessarily, other considerations such as cash or a promissory note. The purchase consideration paid by the corporation must include at least one share but can include other forms of payments as well.

The transfer value can be chosen anywhere between the cost of the assets being transferred and their FMV. This means that the business owner can elect what his tax liability is or not pay any taxes until he sells the company. Section 85’s are not limited to unincorporated businesses. They can also be used in similar circumstances by incorporated or non-resident businesses.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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