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

Question 1

Incorporation - Advantages

Answer 1

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

Question 2

Incorporation - Disadvantages

Answer 2

1. cost of incorporation and annual return fees

2. Inability to claim losses against personal income

Question 3

Incorporation - Timing

Answer 3

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

Question 4

Section 85 Requirements

Answer 4

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

Question 5

Section 85 Requirements - Eligible Property

Answer 5

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

Question 6

Section 85 Requirements - Eligible Property (AR)

Answer 6

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

Question 7

Section 85 - Elected Amount

- determines three key values

Answer 7

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

Question 8

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

Answer 8

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

Question 9

Section 85 - Limits for depreciable capital property

Answer 9

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

Question 10

Section 85 - Goodwill

Answer 10

Goodwill is typically recorded on the books as $1

Question 11

Section 85 - Ideal NSC

Answer 11

NSC should equal the tax basis of the assets transferred

Question 12

Section 85 - Terminal Loss

Answer 12

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

Question 13

Section 85 - PUC of shares received

Answer 13

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