Introduction to Section 85
A Section 85 sole exchange is a tax-deferred rollover provision under the Canadian Income Tax Act. It allows a shareholder to transfer property to a corporation in exchange for shares, without triggering immediate tax consequences.
This provision is particularly useful for business owners who want to reorganize their corporate structure or transfer assets to a new corporation, while minimizing tax liabilities.
Eligibility and Requirements
To qualify for a Section 85 sole exchange, the shareholder must transfer property to a Canadian corporation in exchange for shares. The property can include various types of assets, such as real estate, equipment, or investments.
The shareholder must also file an election with the Canada Revenue Agency (CRA) to take advantage of the tax-deferred rollover. This election must be made within the specified timeframe to avoid any penalties or interest.
Tax Implications and Benefits
A Section 85 sole exchange can provide significant tax benefits, including the deferral of capital gains tax. By transferring property to a corporation, the shareholder can avoid triggering capital gains tax, which can be substantial.
Additionally, the corporation can claim depreciation on the transferred assets, which can help reduce its taxable income. This can result in significant tax savings for the corporation and its shareholders.
The Section 85 Election Process
To complete a Section 85 sole exchange, the shareholder must file an election with the CRA. This election must include specific information, such as the description of the property being transferred and the number of shares being issued.
The shareholder must also ensure that the election is made within the specified timeframe, which is typically within 30 days of the transfer. Failure to file the election on time can result in penalties and interest.
Conclusion and Next Steps
A Section 85 sole exchange can be a complex and nuanced process, requiring careful planning and execution. It is essential to seek the advice of a qualified tax professional or lawyer to ensure that the transfer is done correctly and in compliance with the tax laws.
By following the correct procedures and seeking professional advice, business owners can take advantage of the tax benefits offered by a Section 85 sole exchange and achieve their corporate goals.
Frequently Asked Questions
What is the purpose of a Section 85 sole exchange?
The purpose is to allow a shareholder to transfer property to a corporation without triggering immediate tax consequences.
What type of property can be transferred under Section 85?
Various types of assets, including real estate, equipment, or investments, can be transferred.
How do I file a Section 85 election?
The election must be filed with the Canada Revenue Agency (CRA) within the specified timeframe, typically within 30 days of the transfer.
What are the tax benefits of a Section 85 sole exchange?
The transfer can defer capital gains tax and allow the corporation to claim depreciation on the transferred assets.
Do I need to seek professional advice for a Section 85 sole exchange?
Yes, it is essential to seek the advice of a qualified tax professional or lawyer to ensure the transfer is done correctly.
What happens if I fail to file the Section 85 election on time?
Failure to file the election on time can result in penalties and interest, so it is crucial to meet the deadline.