Income Tax Act (ITA) Section 85 rollover allows the transfer of a proprietorship’s eligible assets to a corporation on a tax-deferred basis. This is especially useful if the assets of the sole-proprietor appreciated over time; for example, a customer list at nil cost at the beginning may have increased in value substantially by the time of incorporating.
Without an election, the assets must be transferred at fair market value (FMV) which results in immediate taxable capital gains. Section 85 rollover allows complete or partial rollover depending on the elected amount, which cannot be more than FMV of assets transferred. If the elected amount is the adjusted cost of a property, it is a complete tax deferral. If the elected amount is more than the cost, it becomes a partial rollover. Sometimes, partial rollover may be advantageous by triggering capital gains that help to utilize the capital losses.
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