Businesses that start as a sole proprietorship and later decide to incorporate should consider filing a Section 85 tax election.
Depending on the asset transferred, there may be tax implications on the disposition of assets by the sole proprietorship to the corporation.
Depreciable & non-depreciable assets such as land/building or goodwill could give rise to a significant tax liability if the correct elections are not filed.
For example, without filing an election, land purchased for $200,000 that has a fair market value of $500,000 will result in a capital gain of $300,000, taxable to the sole proprietor.
In some cases, however, it may be desirable to create a gain on the disposition of property to a corporation and use up existing losses.
Having an experienced tax advisor involved can significantly reduce your taxes on the transfer.
Tax election (section 85 rollover – form 2057)
Working with your lawyer, an experienced tax accountant can help determine an elected amount that optimizes the tax outcome for the business owner.
A section 85 rollover election (T2057 form) must be filed by the earliest date that either the sole proprietor or corporation has to file. If you are a sole proprietor with a December 31st year-end, and your corporation also has a December 31st year-end, the filing due date would be June 15th of the subsequent year.
General conveyance – A lawyer can help you draft an asset purchase agreement and a general conveyance which legally transfers the assets from the sole proprietorship to the corporation. It is important to involve a lawyer to ensure the transaction is properly documented.
Transferring assets under section 85 can be complicated, if you need assistance in planning your transition to a corporation, please feel free to contact us for more information.