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s.85 Rollover

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
  • 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.

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 

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.
  • The transferee corporation must issue shares, it can issue cash up to the amount of UCC/ACB
    • Everything above that has to be shares
    • See s.24(3) OBCA for stated capital, also see PUC restrictions in s.84(1) and s.85(2.1) ITA, this means the value that is attributed to the transferor’s shares is usually what the transferor gets added to his PUC/stated capital
  • At last, what kind of shares should be issued?
    • Could be either common shares or preferred shares.