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What is a “Roll-Over” for my Business?

As you may already know, or as you may have read in other blogs on our website, a corporation has the status of a legal person in law. This means that the Corporation itself is separate and distinct from its shareholders and directors. As such, property owned by the corporation does not directly belong to the shareholder. Likewise, property owned by the individual does not directly belong to the corporation.

Transferring Property into a Corporation

This distinction is important for many reasons, one of which is how an individual might go about transferring property that they own personally into a corporation that they control. This is common in situations where a business starts as a proprietorship, being an individual who does business personally without incorporating a corporation, but later decides to create a corporation as the preferred business vehicle – generally for liability protection and/or tax saving purposes.

Tax Implications of Property Transfer

In these situations, the individual, as a proprietor, has generally accumulated assets, equipment, inventory, and other such property in their personal name that now needs to be transferred into the corporation such that the corporation can use it to generate income. Sometimes this property can be transferred without triggering the payment of tax, but in cases where an asset (say an investment property) was acquired several years prior for $100,000 and has appreciated in value to $250,000 in fair market value, the transfer of the asset to the corporation may be considered a taxable disposition and the individual may find themself liable to pay tax on the gain in value (called a capital gains tax). This may seem unfair, but recall that the corporation is, for the purposes of the law, a separate legal entity, so this would be the same tax that would be payable if you sold the asset for cash to an arms-length buyer on the open market.

Introduction to Rollovers

However, there are some exceptions to this general rule, and one of these exceptions is called a Rollover. Generally speaking, a Rollover is a way to transfer these kinds of assets into the corporation in exchange for shares of a said corporation rather than cash (although it is sometimes possible for some cash consideration to be paid to the individual from the corporation as part of the transaction) – essentially “trading” the asset for shares in your own corporation.

Specific Criteria for Rollovers

Rollovers are specific exceptions to the general rules in the Income Tax Act (Canada) and have many unique and specific criterium that need to be met before a transfer will qualify. However, with most private, closely held corporations they are a common way to defer tax that would otherwise be payable and operate as a valuable tax deferment tool.

Note that a Rollover can also be used to transfer property between related corporations, and in a variety of other circumstances, but the commentary in this article is intended to be an introduction to the concept rather than a comprehensive article on all of the different types of Rollovers permitted by the Income Tax Act (Canada). A Rollover can also be used as part of a restructuring transaction, as part of an estate freeze, or in a variety of other situations.

Collaborative Approach

Your accountant should always be consulted in situations like these and will be able to provide an opinion on the best way to transfer the assets into your corporation on a tax-efficient basis. Sometimes this is not possible as the government has prescribed very specific rules to govern the Rollover exceptions, and there are certain conditions that have to be met before the transfer may qualify. There are also sometimes legal reasons why a Rollover (or transfer of the asset in general) may be undesirable for an individual. This is why it is important that your accountant works closely with your Business Law Lawyer (and vice-versa) when contemplating a Rollover as each of the Business Law Lawyer (Corporate Lawyer) and accountant are experts in different fields.

Expert advice from both your accountant and your Corporate Lawyer is important as the tax planning efficiency of a Rollover transaction sometimes has to be considered in light of legal and practical concerns related to the transfer of assets into a corporation. This collaboration between your Business Law Lawyer and your accountant will help minimize tax liabilities, avoid unexpected tax consequences, and at the same time help the corporation and the individual shareholder appropriately manage risk.

The Role of Business Law Lawyer

Provided that a Rollover is available to your specific transaction, your accountant will work in conjunction with your Business Law Lawyer at Main Street Law LLP to formulate a suitable plan to transfer these assets into the corporation on a tax-deferred (this is the “Rollover”). This plan may also require an expert to evaluate the present Fair Market Value of the asset being transferred, and generally, the Corporate Lawyer will insert a “price-adjustment clause” into the Rollover agreement as a “safety” in case CRA disagrees with the chosen value of the asset.

Considerations and Costs of a Rollover

A Rollover is a moderately complex transaction that requires careful consideration and expert guidance from your accountant and Business Law (Corporate) Lawyer. It can be costly in terms of legal and accounting fees, but the accountant will consider the relevant cost to benefit consideration to the individual before recommending a Rollover as an option. Yes, they can be expensive in terms of professional fees, but if your accountant is recommending a Rollover it is likely because this will create substantial tax savings for the individual shareholder in the mid-to-long run.

Decision and Implementation of Rollover

If you decide to proceed with the Rollover then your Spruce Grove or Drayton Valley Based Business Law Lawyer will prepare the necessary corporate and transfer documents in accordance with the rules and the tax plan, the client will sign the same, and the accountant will then file the required documentation and elections with the Canada Revenue Agency. The asset will then belong to the corporation (instead of the individual), the individual will acquire shares (or additional shares) in the corporation, and no (or little) tax will be paid immediately as a result of the transaction.

Making an Informed Decision

Ultimately, the individual client is the party that gets to weigh the pros and cons of such a transaction, the cost of the same, and make the decision – but this decision is easier to make if the individual has a good accountant and a good Business Law (Corporate) Lawyer who can provide the necessary information to the client for their consideration. If you believe that a Rollover might be useful in your particular circumstances, the Business Law and Corporate Lawyers at Main Street Law LLP would be pleased to discuss the matter with yourself and your accountant such that we can explore this option for you.

Please be advised that this article was prepared by Justin Danzo, Business Law Lawyer and Corporate Lawyer with Main Street Law LLP in Spruce Grove in May of 2023. This article is intended as a general overview and general information on a legal subject as the law exists at the time of writing, and is not intended to be legal advice. Often the specific facts of your legal matter may change or impact the applicability of this information. For legal advice related specifically to the facts of your concern, please consult with any of the Business Law Lawyers or Corporate Lawyers at Main Street Law LLP in either Spruce Grove or Drayton Valley

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