The s.85 “Rollover” is a means to transfer capital property to a corporation on a tax deferred basis (i.e., without triggering capital gain).
Example
- Years ago, Danny spent $100 to buy a building
- Building’s current FMV is $300
- Danny uses s.85 to rollover the building into her DannyCo
Prerequisites
- Transferee must be a “Canadian corporation” as defined
- Meaning a corporation that is incorporated in Canada and taxable in Canada
- It does not have to be a CCPC
- Meaning a corporation that is incorporated in Canada and taxable in Canada
- Consideration must include shares of the transferee corporation
- Meaning when the corporation acquires the property, it has to give the back shares to the corporation to the transferor.
- Consideration can include so-called “non-share” consideration
- Such as
- Cash
- Promissory note
- Assumed liabilities
- For example the asset transferred is a building and it has a mortgage on it, so the corporation is going to assume a part of that mortgage.
- But there are limits on the amount of “non-share” consideration → the amount of the non-share consideration that the company gives cannot be more than the transferor’s ACB.
- This meaning DannyCo can pay Danny cash, but it cannot exceed $100
- The rest of the considerations must be shares of the DannyCo
- But if DannyCo pays Danny $150 cash and shares worth $150
- It will trigger a $50 gain on Danny’s personal tax.
- But if DannyCo pays Danny $150 cash and shares worth $150
- Such as
Type of properties that can be transferred
- Property which can be transferred is defined as “eligible property”, and s.85(1.1) provided a detailed definition and list of “eligible property”.
- The “eligible property” has to be capital property, meaning the real property that is inventory to the transferor cannot be the subject of an s.85 transfer
Elected Amount
- It is a joint election to determine transferor’s proceeds of disposition and transferee’s cost of the transferred property
- It is typically elected at the transferor’s ACB for tax purposes to defer recognition of gain on transfer
Statutory upper and lower limits to elected amount
- Upper limit
- Cannot be higher than property’s FMV
- Lower limit
- Cannot be lower than transferor’s ACB
- Upper limit
Procedures
- The transferor does not necessarily have to be an existing shareholder of the company, but s/he will become one as a result of the s.85 rollover.
- The rollover is approved by the Board of Directors.
- Land Transfer Tax (LTT) – normally, the transferee needs to pay full LTT based on the FMV
- UCC
- Because UCC = ACB minus CCA, in the above example, let’s say Danny has been deducting $10 CCA as expense from its previous years’ rental income
- Now, when Danny uses rollover to roll his building into DannyCo, he should use the UCC value, this means Danny can receive $90 cash for UCC, and the rest can be shares.
- Because UCC = ACB minus CCA, in the above example, let’s say Danny has been deducting $10 CCA as expense from its previous years’ rental income
- The transferee corporation must issue shares, it can issue cash up to the amount of UCC/ACB
- At last, what kind of shares should be issued?
- Could be either common shares or preferred shares.