Benefits of Incorporating Your Business Using Section 85

If you’re a self-employed individual, you might want to consider transitioning your business into a corporation. Doing so can offer several financial advantages: 

Advantages of Incorporation: 

• Tax Savings: Corporations generally enjoy a lower tax rate compared to sole proprietors. 

• Limited Liability: By incorporating, only your corporate assets are at risk in case of any liabilities. Your personal assets, like your car or home, remain protected. 

When you decide to make the shift from a sole proprietorship to a corporation, it’s crucial to utilize the Section 85 rollover. This provision allows you to transfer your business assets to your newly formed corporation without incurring hefty taxes. 

However, it’s not as simple as transferring your assets to the corporation for a nominal fee or for free. If you attempt this, the Canadian Revenue Agency (CRA) will reevaluate the transaction and adjust the sales price to the current market value of the assets. If the assets have appreciated since their purchase, transferring or ‘selling’ them to your corporation will result in a capital gain, which is taxable. This is where Section 85 becomes invaluable. It permits you to sell your business assets at their original purchase price, rather than their current market value. For instance, if you acquired a business asset for $8,000, with Section 85, you can transfer it to your corporation for the same $8,000, even if its current value is $10,000. 

Guidelines for Using Section 85 of the Income Tax Act: 

• Section 85 is applicable to specific assets like equipment, real estate, inventory, intellectual property, and goodwill. 
• Assets like accounts receivable and cash are not covered under this section. 
• When transferring business assets to your corporation, you must receive some shares of your corporation in return.