Many business that operates as a sole proprietor/self employed sometimes find that they are making more money than anticipated. It may be in their best interest to consider going from sole proprietor to an incorporation. Having said this, many sole proprietors accumulate assets through time and it’s good to know which assets are transferrable to the corporation and which are not.
The CRA treats these transfers as a disposition at fair market value. This being said, there may be capital gains on these assets which will mean taxes need to be paid. Section 85 Rollover can allow eligible assets to be transferred to a taxable corporation on a tax deferred basis. Below is a list of eligible and ineligible assets.
Eligible:
- Capital property which includes depreciable assets and accounts receivable
- Goodwill
- Inventory including any work in progress (but not real property inventory)
- Canadian and foreign resource property
Ineligible:
- Real property
- Real property that represents inventory
- Prepaid expenses
To qualify, the sole proprietor will need to receive one share from the corporation. The fair market value must be considered. The sole proprietor must also file a joint election with the CRA before the filing deadline or penalties will begin to incur.
By doing the Section 85 Rollover, the sole proprietor will not be liable to pay tax on the assets being transferred.
Please keep in mind that this is only for income tax. PST, GST and land transfer tax may be payable on the assets.
This is general comment, and you should contact Tax Partners for any questions by sending an email to info@taxpartners.ca or (905) 836-8755.
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