*Updated October 2024*
Businesses that start as a sole proprietorship and later decide to incorporate should consider filing a Section 85 tax election.
Accounting
Check out our video below for how to account for an asset transferred under a Section 85 Rollover into QuickBooks using the Carrying Value method.
Tax
Depending on the asset transferred, there may be tax implications on the disposition of assets by the sole proprietorship to the corporation.
Depreciable & non-depreciable assets such as land/building or goodwill could give rise to a significant tax liability if the correct elections are not filed.
For example, without filing an election, land purchased for $200,000 that has a fair market value of $500,000 will result in a capital gain of $300,000, taxable to the sole proprietor in their T1 return.
Such risk can be mitigated by filing a special election on transfer.
In some cases, however, it may be desirable to create a gain on the disposition of property to a corporation and use up existing losses that a individual may have, such as capital losses on investments.
Having an experienced tax advisor involved can significantly reduce your taxes on the transfer.
Tax election (section 85 rollover – form 2057)
Working with your lawyer, an experienced tax accountant can help determine an elected amount that optimizes the tax outcome for the business owner.
A section 85 rollover election (T2057 form) must be filed by the earliest date that either the sole proprietor or corporation has to file. If you are a sole proprietor with a December 31st year-end, and your corporation also has a December 31st year-end, the filing due date would be June 15th of the subsequent year.
Legal
General conveyance – A lawyer can help you draft an asset purchase agreement and a general conveyance which legally transfers the assets from the sole proprietorship to the corporation. It is important to involve a lawyer to ensure the transaction is properly documented.
Transferring assets under section 85 can be complicated, if you need assistance in planning your transition to a corporation, please feel free to contact us for more information.
Our firm specializes in helping businesses transition from Sole Proprietorship to a Private Corporation Structure. Through our network of local legal professionals, we ensure our clients affairs are set up in a tax efficient structure with proper legal documentation.
Want to know more about the basics of Private Corporation Tax? Read our article: A Brief Overview of Private Company (CCPC) Taxes in Ontario.