Corporate Reorganizations: Navigating Section 85 Rollovers in Canada

In Canada, corporate reorganizations offer businesses the opportunity to restructure their operations efficiently while deferring taxes.

‍A Section 85 rollover is one of the most powerful tools available, allowing shareholders to transfer assets to a corporation on a tax-deferred basis. This article provides a detailed analysis of Section 85 rollovers and how they can be applied to optimize tax outcomes for Canadian corporations.

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Key Considerations for a Section 85 Rollover

• Eligible Property: Not all property qualifies for a Section 85 rollover. Eligible property includes shares, real estate, and certain types of securities. However, inventory and goodwill often raise complex valuation issues, requiring a professional assessment to avoid future tax complications.
• Elected Transfer Value: When using Section 85, the transferor and transferee must agree on an “elected value,” which determines the tax impact. This value can be as low as the adjusted cost base (ACB) of the asset but no higher than its fair market value (FMV). Selecting the appropriate value is crucial to deferring taxes without triggering an immediate capital gain.
• Boot Considerations: In addition to shares, the transferee may provide "boot," or consideration in the form of cash or debt. The presence of boot can complicate the deferral, and the transferor may be required to recognize a gain for the portion of boot received. Structuring the deal to minimize boot while maximizing deferred tax can create significant tax savings.

Practical Strategies for Corporate Reorganizations

• Preserving Tax Attributes: Corporate reorganizations can preserve valuable tax attributes such as loss carryforwards and capital dividend accounts (CDA). By carefully planning the rollover, businesses can ensure that these attributes are not lost during the reorganization.
• Post-Rollover Steps: A Section 85 rollover is often the first step in a broader reorganization. Consider integrating this with estate freezes or share exchanges under Section 86 to further optimize tax outcomes for shareholders.
• Pitfalls to Avoid: Proper documentation is critical, and the Canada Revenue Agency (CRA) may scrutinize transactions where the FMV of transferred assets is in dispute. Professional valuations and detailed records help avoid triggering adverse tax consequences.

Conclusion
A Section 85 rollover is a sophisticated tool for corporate reorganizations that can deliver substantial tax deferrals. However, it requires careful planning, precise valuation, and professional guidance to execute successfully.

"Selecting the right elected value is crucial to deferring taxes without triggering an immediate capital gain."