Tax Lesson 24 YOURLOGO Start Lecture Note: This screen has no script. Static page. YOURLOGO Start Lecture

Section 85 Rollover This election allows a taxpayer to transfer eligible property to a Canadian corporation without triggering any income or capital gains (i.e., a rollover). Eligible property includes: capital property (which includes depreciable property), inventory (excluding real property inventory) and eligible capital property The seller must take back share consideration (non-share consideration, called boot, can also be taken) and both the seller and purchaser must elect (i.e., both sign the election form). The joint election specifies the elected amount The elected amount: (a) cannot be less than the tax cost of the asset being sold (ACB for non-depreciable capital property and UCC for depreciable capital property); and (b) the elected amount cannot be more than the FMV of the asset being sold. The elected amount determines four things: the P of D to the seller. This is the most important of the four, since this amount is chosen to either eliminate any capital gain/income on the transfer (or to trigger a specific amount of capital gains/income) For example, if QSBC shares are being transferred you may want to realize a capital gain of $824,176 in 2016. (To realize this exact amount of capital gains you use section 85 and choose an elected amount that is $824,176 higher than the current ACB of the shares). By using the capital gains exemption this capital gain is tax-free (this is called crystallizing the capital gains exemption). Notice how a higher elected amount means higher ACB (see #2 and #3 below) which means less tax to pay in the future

Section 85 Rollover (cont) the cost to the purchaser the cost of the consideration taken back by the seller. The elected amount is first allocated to boot (if any) and the ‘elected amount – boot’ is the ACB of the share consideration. If both common and preferred shares are taken back as consideration, the ‘elected amount – boot’ is first allocated to the preferred shares the PUC of the share consideration taken back by the seller. Generally speaking, the PUC of the share consideration will equal the ‘elected amount – boot’

Example Problem Section 85 Your client, Mr. Trump, is currently operating an unincorporated manufacturing business in Ontario. Mr. Trump wants to incorporate his business and accordingly he has set up Trump Corp. (TC). Mr. Trump wants to minimize any taxes upon the transfer of assets to TC. Also, as consideration for the transfer Mr. Trump wants to take back $150,000 of debt receivable and $450,000 of preferred shares. What are the income tax consequences if the following assets are sold to TC in 2016 using subsection 85(1) of the Act? FMV ACB/ Cost UCC/ CEC Equipment $100,000 $105,000 $70,000 Inventory (finished goods) $300,000 $150,000 n/a Goodwill (internally generated) $200,000 $0 $0