Chap 16 - Section 85 rollovers

Question 1

Who is typically involved in a section 85 rollover?

Answer 1

Individual who earns business income through a sole proprietorship that now wants to incorporate & transfer assets to new corporation

Question 2

Who is usually the transferor? The transferee?

Answer 2

Transferor: individual, corporation, trust, partner

Transferee: corporation who will receive the property, MUST BE A TAXABLE CANADIAN CORPORATION

Question 3

Which of the following are elligible to be transferred under the section 85 rollover?

• Depreciable & Non-depreciable property
• Canadian & foreign resource properties
• Inventories (not including inventories of real property)
• Real property owned by a non resident and used during the year in a business carried on in Canada
• Cash/prepaid assets
• Account receivable
• Asset with unrecognized losses

Answer 3

• Depreciable & Non-depreciable property - elligible
• Canadian & foreign resource properties - eligible
• Inventories (not including inventories of real property) - eligible
• Real property owned by a non-resident and used during the year in a business carried on in Canada - eligible
• Cash/prepaid assets - not eligible
• Account receivable - it’s better to transfer under section 22 than section 85, this subsequently allows the loss and subsequent uncollectable amounts to be deductible at 100% as business loss
• Asset with unrecognized losses - the losses are denied (if the asset is not required for business operations, better to sell it to 3rd party)
  Depreciable properties: if FMV new ACB = old ACB

Question 4

What does the transferee give in exchange for the assets from the transferor?

Answer 4

Shares and non-share considerations (boot or NSC)

Question 5

How to find the transfer price of a non-depreciable property?

Answer 5

Max: FMV of property

Minimum: greater of
FMV of boot
and
lesser of: ACB of asset
                FMV of asset

Question 6

How to find the transfer price of a depreciable property?

Answer 6

Max: FMV of property

Minimum: greater of
FMV of boot
and
lesser of: capital cost of asset
                UCC of asset
                FMV of asset

Question 7

How should we choose the transfer price? Why?

Answer 7

We should aim for the minimum transfer price as the elected transfer price in order to not generate any taxable income.

Question 8

Why do people choose a transfer price higher than the minimum?

Answer 8

2 reasons:

they have unused losses

they need cash ASAP

Question 9

What happens if the boot is higher than the cost of asset?

Answer 9

The value of the boot is now the minimum transfer price, and this will generate taxable income

Question 10

How to find the ACB of common shares issued?

Answer 10

Elected Value (tranfer price) XXX
less: FMV of NSC (XXX)
—————————————————————————-
ACB of all shares issued XXX
less: ACB of preferred shares issued (FMV) (XXX)
—————————————————————————-
ACB of common shares issued XXX

Afterwards, distribute the ACB to nb of common shares

Question 11

How to find PUC of shares received?

Answer 11

1- PUC reduction
Increase in legal stated capital (FMV of shares issued) XXX

Less excess of:
total elected amount (XXX)
over NSC XXX (XXX)
——————————————————————————————————————————
Reduction in PUC XXX

2- PUC = FMV of shares - PUC reduction
*PUC reduction needs to be allocated in case more than 1 class of shares is received*

Question 12

How to determine the costs of assets received by corp? Non-depreciable property

Answer 12

New ACB = elected transfer price

Question 13

How to determine the costs of assets received by corp? Depreciable property

Answer 13

Tranfer price < old capital cost: new UCC = transfer price, new capital cost stays the same

Transfer price > old capital cost: new UCC = old capital cost + 0.5(tranfer price - old capital cost), new capital cost = transfer price

Question 14

When does a gift to related party occurs? What happens if there is a gift?

Answer 14

1- A related family member must be a shareholder of the transferee corporation (you are transferring assets to someone in your family)
AND
2- The FMV of the transferred property exceeds the greater of:
FMV of the consideration received
Elected amount (transfer price)

If there is a gift, there is a deemed elected amount equal to:
original elected amount + amount of gift

Question 15

How to calculate the ACB of shares WHEN THERE IS A GIFT?

Answer 15

Same as if we did not have a gift, based on original elected amount

Question 16

How to calculate the PUC of shares WHEN THERE IS A GIFT?

Answer 16

Calculate using the deemed elected amount

1- PUC Reduction:
Increase in legal stated capital (FMV of shares issued) XXX
Less excess of:
Total DEEMED elected amount (XXX)
Over NSC XXX (XXX)
————————————————————————————————————————————
Reduction in PUC XXX

2- PUC = FMV of shares - PUC reduction
*if more than 1 class of shares is received, allocate on a prorated basis*

Question 17

Why is there a double taxation when there is a gift?

Answer 17

Increased deemed transfer price -> tax on transfer

Taxes when shares are sold because CG

Question 18

What is an excess consideration?

Answer 18

It’s when the consideration received is higher than the FMV of the value of the assets transferred (you receive more than you give)

Question 19

What happens if there is an excess consideration?

Answer 19

• The excess consideration is 100% taxable and needs to be included in the income of taxpayer
• Value of the shareholder benefit (excess consideration) is added to ACB of NSC
• ACB/PUC of shares received stay the same