Under specific circumstances, taxpayers can use a section 85 rollover to transfer property to a Canadian corporation and defer the tax that would otherwise arise on the transfer.
Applicable Scenarios:
Transferring a business, investments or real estate from a shareholder to a corporation in exchange for shares.
Transfers between related corporations as part of a reorganization.
Estate freezes (see below).
Transfers between spouses — including when dividing property on separation or divorce — use a separate spousal rollover under section 73.
Detailed Explanation:
Typically, during a property transfer, the property is deemed sold, and its sale price is considered equal to its fair market value. If the market value exceeds the original cost, a capital gain occurs, which subjects the transferor to capital gains tax. Conversely, a loss results in a capital loss.
Using a section 85 rollover, the transferor and the corporation jointly elect a transfer amount (within limits), which then becomes the disposition value for tax purposes. This strategy allows the deferral of tax liabilities but does not eliminate them. While taxes must eventually be paid, deferring them can significantly enhance short-term cash flow, which is often crucial in financial decision-making.
Estate Freeze
In an estate freeze, the owner exchanges the common shares of a corporation for fixed-value preferred shares, under section 85 or 86. The current value — and the tax on it — is "frozen" in the owner's hands, while future growth goes to new common shares held by the next generation or a family trust. This limits the tax on death, and can allow more family members to use the lifetime capital gains exemption when the business is sold.
At Shengqian CPA, we have a proven track record of analyzing clients' specific situations and crafting practical and compliant strategies tailored to their needs. Using these rollovers, we help clients reduce tax burdens while offering sound financial advice.
If you have questions or require assistance with property transfers or estate freezes, please feel free to contact us for professional guidance.