One of the most common tax planning tools use by accountants, but fairly unknown by anyone outside of the industry is the S. 85 rollover.

The S. 85 rollover allows an eligible transferor and transferee to jointly elect to move assets or property on a tax free basis.

The transfer would be done at an “agreed amount” which can be under the fair market value, but cannot be below tax cost. This would allow the deferral of any gains.

Some items to note about the S. 85 rollover are:

• Eligible Property – The election can only be made with respect to eligible property, which includes but is not limited to capital property, resource property, inventory, and eligible capital property.
• Eligible transferor – The election is available on a transfer of property by an individual, a trust or a corporation.
• Eligible transferee – The transferee must be a taxable Canadian corporation. This limitation ensures that the transferee will be taxable in Canada on a subsequent disposition of any property transferred using the election.
• Consideration – The election is only available if the consideration the transferor receives includes at least one share of the capital stock of the transferee..

Two typical scenarios where a S. 85 rollover would be helpful:

• Incorporation of a Business – Used when a sole proprietor business has become profitable and the business owner decides to incorporate. The taxpayer can incorporate and transfer the business assets into a corporation in order to take advantage of the lower small business tax rates (13.5% in Ontario). By electing under section 85, the taxpayer can transfer the business assets to the corporation and defer any tax consequences until the corporation sells the assets in the future, if ever.
• Family Business Planning – Used when shareholders of a profitable family business would like introduce their children as shareholders so as to be able to pay dividends to them and to allow them to participate in the future growth of the company.  As shares need to form part of the consideration for a section 85 to be valid, this strategy would involve setting up a holding company prior to performing the rollover.

It is strongly recommended that you work with a Chartered Accountant to determine the eligibility and to file the S. 85 rollover.