Ch. 30 - Incorporation of a Proprietorship - Section 85 Rollover Flashcards
Incorporation - Advantages
- limited liability
- tax deferral on earnings
- Potential to split income
- compensation flexibility
- year-end flexibility
Incorporation - Disadvantages
- cost of incorporation and annual return fees
2. Inability to claim losses against personal income
Incorporation - Timing
- starting as proprietorship means start-up losses can be claimed against other income
Section 85 Requirements
- Assets must be transferred to a taxable CDN corporation
- Assets must be eligible assets
- Transferor must take back a share(s)
- Transferor can also take back non-share consideration (NSC) (often debt)
- Consideration from transferee must equal the FMV of property transferred
Section 85 Requirements - Eligible Property
- Inventories
- non-depreciable capital property (MS, land)
- depreciable capital property (equipment, buildings, intangibles)
Section 85 Requirements - Eligible Property (AR)
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
Section 85 - Elected Amount
- determines three key values
- proceeds on disposition to the transferor
- cost of consideration taken by the transferor
- Cost of property for the transferee
Section 85 - Limits for inventory or non-depreciable capital property
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
Section 85 - Limits for depreciable capital property
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
Section 85 - Goodwill
Goodwill is typically recorded on the books as $1
Section 85 - Ideal NSC
NSC should equal the tax basis of the assets transferred
Section 85 - Terminal Loss
The terminal loss is denied on the transfer, but is added to a separate pool with the same rate and is depreciated
Section 85 - PUC of shares received
The PUC of shares received will equal the tax basis of the assets transferred