As per Section 69 of the Income Tax Act, when a taxpayer transfers a property to a person with whom they are not dealing with at arms length, the taxpayer is deemed to have disposed of the property at fair market value.
A corporation is a person under the Income Tax Act. Related individuals are deemed to be operating at non-arm’s length. An individual and a corporation are related if the individual controls the corporation.
Therefore, if a person transfers property to their corporation, it is deemed to have been disposed of at fair market value. Similarly, if a taxpayer owns multiple corporations and transfers assets between them, it also considered a non-arm’s length transaction.
A Section 85 rollover allows a person to transfer property to a corporation at any price between cost and fair market value, provided they also take back share consideration.
In most cases, a Section 85 rollover must be completed to avoid a disposition at fair market value.
It is important to note that if a taxpayer previously operated a sole proprietorship and then incorporated without transferring any physical assets, they may still have to do a Section 85 rollover. In such situations, the taxpayer likely generated Goodwill from their business, which is deemed to have been transferred upon incorporation. Failure to complete the rollover could result in the deemed transfer of Goodwill at fair market value creating an unintentional capital gain.
Disclaimer
The information provided on this page is intended to provide general information.
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