As Grande Prairie grows, we see entrepreneurs launching new endeavours and expanding operations. If you’ve been operating as a sole proprietorship and have recently made the leap to incorporation, you’ve likely transferred personal assets into your business. After transferring personal property from the proprietorship to the corporation, you’ll want to consider a Section 85 Rollover to reduce personal taxes on those assets. 

If you have questions about the benefits or process of transferring a business from a proprietorship to a corporation, reach out to your accountant or give us a call at McNabb Lucuk LLP. 

Section 85 Rollover 

The most common instance for using a Section 85 Rollover is to transfer property from a sole proprietorship into a new corporation while deferring all or part of the personal tax consequences. Tax liability is then realized when the property, shares or other assets are sold. However, there are a few additional instances where the rollover can be used. These include 

  • Estate planning
  • Transferring assets from one business to another
  • Crystalizing capital gains 

A Section 85 rollover or Section 85 election is often used interchangeably under the Canadian Income Tax Act. The difference is the “election” is the act of filing the rollover. 

Filing a Section 85 Rollover 

Who Files

Your lawyer and accountant will likely work together on the election as part of the sale agreement and forms submitted to the Canada Revenue Agency. 

Why File 

A Section 85 rollover is beneficial when a sole proprietorship is incorporated and goodwill exists or when the rights of something are transferred into a corporation. 

Goodwill in your business can be considered value built rather than bought, such as brand reputation, copyrights, intellectual property, and customer lists. Once transferred into the corporation these have a significant value and can be essential towards continuing operations. 

A Section 85 rollover allows these intangible items to be transferred from a taxpayer to a taxable Canadian corporation at a nominal value, such as $1.00. This can greatly reduce the capital gains declared by the proprietor while maintaining the market value through shares in the corporation. 

If the election is not filed, the corporation would need to purchase the goodwill at fair market value which is then taxed as a capital gain on the seller’s personal tax return.  

When to File

Depending on when the transfer is made, the election must be filed either on the sole proprietor’s tax return deadline or on the first corporate tax return deadline, whichever is earlier. 

What to File

The election form is called a T2057 Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation, or for simplicity a T2057. 

How to Complete a T2057 Form

Step 1: Valuation

Determine if there is goodwill to transfer into your corporation and seek the professional help of an accountant or business valuation expert to calculate its value. 

Step 2: Incorporation

Head to your nearest registries office or contact an accountant to prepare and file for incorporation then register for a tax account with the CRA. Depending on the specifics of your business, it may also be beneficial to consult with a lawyer on share structuring to support the Section 85 rollover. 

Step 3: Transfer

Once incorporated, perform a Schedule 85 election to transfer assets and goodwill from the sole proprietor to the corporation at your chosen rate. Remember, don’t transfer at market value. 

Step 4: File 

Complete the T2057 form and file it with the proprietor’s personal tax return along with a Purchase and Sale Agreement showing the rates chosen for the transfer. Transfer rates must also be reported as capital gains in the tax year the transfer is made.

When filing a Schedule 85 election, we strongly recommend seeking professional advice and assistance. Calculating the value of goodwill, rights, and other business assets when incorporating your business can be challenging. If you’re operating here in Grande Prairie or the Peace Region, McNabb Lucuk LLP is conveniently located on 100 St in Grande Prairie. and would be happy to share our expert tax advice for your proprietorship or incorporation.