Advantages of incorporating a business under Section 85.

Are you self-employed? If yes, you may want to think about eventually turning your business into a corporation. There are financial benefits that can be gained by choosing to incorporate.

Benefits of Incorporating

1. You pay less tax (the tax rate for corporations is much lower compared to sole proprietors)
2. You will have limited liability, which means only your corporate assets are at risk, and not your personal assets (such as your car or house)

When it’s time to turn your business into a corporation, make sure you use the Section 85 rollover for transferring your business assets to your new corporation. If you don’t, you will end up paying a lot in taxes that could have been avoided.

You can’t simply transfer your business’ assets to a corporation for a $1 or for nothing. If you do, the Canadian Revenue Agency will reassess the transaction and adjust the sales price to market value, or what the assets are worth. If the assets have gone up in value since you bought them, there will be profit made when they are transferred or ‘sold’ to your corporation. This profit, called a capital gain, is taxed. This is where Section 85 comes in – to help you avoid this tax. More specifically, Section 85 allows you to sell your business assets at the initial price you had purchased them for, instead of at their current market value. For example, if you bought a business asset for $8,000, you can sell it to your corporation for $8,000 with Section 85 instead of for the $10,000 it is worth today.

Rules of Using Section 85 of the Income Tax Act

1. Section 85 only covers certain assets such as equipment, real estate, inventory, intellectual property, and goodwill
2. Account receivables and cash are excluded
3. You must receive at least some shares of your corporation in exchange for transferring business assets to your corporation

So Here’s the Tip:

If you have your own business and want to incorporate it, use the section 85 rollover. This will allow you to transfer your business assets to your corporation for their initial purchase price, thereby avoiding a potential profit from the transfer and the related tax on that profit.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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