What is a S. 85 Rollover?

Stop, drop and do a Section 85 Rollover: listen up when incorporating a sole proprietorship!

When you start a business, there are many ways to structure it. Many entrepreneurs begin as a sole proprietorship or partnership because it’s less expensive and less complicated than incorporating. But as the business grows and starts making money, you might think about turning it into a corporation. This is where the Section 85 Rollover comes in handy.

The Section 85 Rollover is a part of Canada’s Income Tax Act that allows business owners to move their business into a corporation without having to pay taxes immediately on any gains they might have made. Normally, if you were to sell your business assets—like equipment, inventory, or even the name of your business—you could be taxed on the profit you make from that sale. However, the rollover lets you delay paying this tax.

Here’s a simple way to look at it: Imagine your business is a lemonade stand that you’ve started by yourself. You’ve got a table, some pitchers, and a sign that says “Lemonade for Sale.” As you sell more and more lemonade, you decide it’s time to make your lemonade stand a real business by turning it into a corporation. In the tax world, this is like selling your table, pitchers, and sign to your new corporation. If you just did this without a Section 85 Rollover, you’d have to pay taxes as if you sold these items for a profit.

But you’re smart, and you’ve heard about the Section 85 Rollover. So, you get a lawyer to help you make an agreement that says you’re not selling your lemonade stand items for cash. Instead, you’re trading them for shares in your new corporation. It’s like saying, “I won’t take money for my lemonade stand; give me a piece of the new company instead.” This way, you don’t have to pay taxes right away on any money you might have made from the stand because you haven’t actually “sold” anything.

Now, this might sound simple, but there are a lot of details to get right. For example, you have to make sure that you’re transferring the right kinds of assets and that you’re doing it for the right amount of shares. And the value of your business—how much your lemonade stand is worth—needs to be calculated. This can get pretty tricky, especially if you’ve been running your stand for a while and it’s worth a lot more than when you started.

The agreement you make is a legal document and it outlines everything about the transfer. It’s like a contract that says exactly what’s being moved to the corporation and what you’re getting in return. This contract needs to be very clear and follow all the rules, or else you could end up with a big tax bill you weren’t expecting.

Another thing to consider is that if you’re transferring almost all of your business over, you might be able to avoid paying certain taxes like the HST. But again, there are specific rules about this, and you have to qualify under another part of the tax law.

Because all of this is so complicated and important, you really need to talk to a lawyer who understands business taxes. They’ll help you figure out if a Section 85 Rollover is the right choice for you and help you make sure you do everything the way it needs to be done. You’ll also want to chat with a tax expert who knows about the value of businesses and can advise you on your tax return. They’ll consider everything unique about your situation.

In conclusion, if you’re an entrepreneur with a growing business and you’re thinking about incorporating, you should know that the Section 85 Rollover can be a powerful tool. It can help you move your business into a corporation smoothly and without a big immediate tax hit. But it’s not a DIY project—you’ll need professional advice to pull it off successfully. This process is all about planning and getting the details right, so you can focus on what you do best: running your business. With the right help and guidance, the Section 85 Rollover can be a smart business move that sets you up for future success.

From the very beginning of our professional relationship, Garnet demonstrated a level of expertise and commitment that immediately put me at ease. His guidance throughout the intricate process of incorporating my business was nothing short of impeccable. What truly sets Garnet apart is his unwavering dedication to his clients. His responses to my inquiries were consistently timely, and his availability ensured that I always felt supported and prioritized.

Garnet has been a real asset to my company. He is a pleasure to work with and more importantly he gets the job done, on time and on budget, so I can focus on growing my business.

I highly recommend Garnet Brooks for company incorporation services. His seamless and efficient process made the incorporation experience effortless. Garnet demonstrates exceptional willingness to assist and promptly answers any questions, making the entire process straightforward and stress-free.

Garnet, and his team made incorporating my small business incredibly simple. I couldn't recommend his service and expertise enough.

When you work with Garnet, you get much more than a lawyer, you get a trusted team member who truly cares about your success day in and day out, and you can count on that year after year.

Garnet has been a key trusted resource for my business. He is a reliable and detail-oriented professional, and his passion to help entrepreneurs shines through in his work.