Section 85 Basics for Small Business Owners

Section 85 is an important part of the Income Tax Act and is designed to help business owners with their taxes. In fact, Section 85 allows businesses to transfer specific assets that have tax liabilities to a corporation for a tax-deferred status. Small business owners can use Section 85 for:

• Incorporating their business – When a sole proprietor is ready to take their business to the next level, incorporation is the next logical step. Under Section 85, business owners can transfer all their company’s current assets to their new corporation.

• Selling their business – If a sole proprietor wants to sell their business, Section 85 allows business owners (under certain circumtances) to sell their assets to a new corporation, in exchange for shares in the new corporation. Those new shares need to be sold shortly thereafter.

• Planning their estate – When a business owner wishes to transfer their business to their children or allow their company’s growth to be inherited by a future generation, Section 85 can be utilized for this process. In this situation, a good business accountant should help with any estate planning, attribution rules and income splitting for this part of the Tax Act.

• Protecting their assets – In the case of transferring land and building assets to a holding company with tax-deferred status, Section 85 does allow business owners to make this transaction.

Even though Section 85 is a very powerful tax planning tool, small business owners should know that there are many technical aspects to using this resource. To prevent any problems with the Canadian Revenue Agency, it is important to consult a qualified tax planner before implementing a Section 85 rollover for any business.