Ch. 30 - Incorporation of a Proprietorship - Section 85 Rollover Flashcards

1
Q

Incorporation - Advantages

A
  1. limited liability
  2. tax deferral on earnings
  3. Potential to split income
  4. compensation flexibility
  5. year-end flexibility
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2
Q

Incorporation - Disadvantages

A
  1. cost of incorporation and annual return fees

2. Inability to claim losses against personal income

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3
Q

Incorporation - Timing

A
  • starting as proprietorship means start-up losses can be claimed against other income
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4
Q

Section 85 Requirements

A
  1. Assets must be transferred to a taxable CDN corporation
  2. Assets must be eligible assets
  3. Transferor must take back a share(s)
  4. Transferor can also take back non-share consideration (NSC) (often debt)
  5. Consideration from transferee must equal the FMV of property transferred
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5
Q

Section 85 Requirements - Eligible Property

A
  1. Inventories
  2. non-depreciable capital property (MS, land)
  3. depreciable capital property (equipment, buildings, intangibles)
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6
Q

Section 85 Requirements - Eligible Property (AR)

A

when a section 22 election is made, any losses realized by the seller are business losses. If section 22 is not made, the losses are capital

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7
Q

Section 85 - Elected Amount

- determines three key values

A
  1. proceeds on disposition to the transferor
  2. cost of consideration taken by the transferor
  3. Cost of property for the transferee
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8
Q

Section 85 - Limits for inventory or non-depreciable capital property

A
Maximum - the FMV of assets being transferred
Minimum - The greater of
1. The FMV of any NSC
2. Lesser of
a) FMV of asset
b) ACB of asset or tax cost of inventory
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9
Q

Section 85 - Limits for depreciable capital property

A
Max - FMV of asset
Min - Greater of
1. FMV of NSC
2. Lesser of
a) FMV of asset
b) UCC of class
c) Capital cost
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10
Q

Section 85 - Goodwill

A

Goodwill is typically recorded on the books as $1

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11
Q

Section 85 - Ideal NSC

A

NSC should equal the tax basis of the assets transferred

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12
Q

Section 85 - Terminal Loss

A

The terminal loss is denied on the transfer, but is added to a separate pool with the same rate and is depreciated

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13
Q

Section 85 - PUC of shares received

A

The PUC of shares received will equal the tax basis of the assets transferred

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