Transferring Assets

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(Thursday, January 21, 2010)

If you have started a new business, or are changing from a proprietorship to a corporation, you may want to transfer assets such as land, buildings, vehicles, tools and equipment to the new business. There are income tax and GST/HST implications that you will need to keep in mind, in order to avoid paying unnecessary taxes.

Income Taxes

If an asset is transferred to a corporation by the shareholder, the Income Tax Act requires that the transaction take place at Fair Market Value (FMV). This may result in a loss or gain on the disposition. Any gain will be taxable, while losses may not be deductible.

If the asset was not used in a business prior to being transferred to the corporation, any loss will not be deductible because it will be a loss on a personal use asset. If the asset was used in a business, it may be a capital loss or a terminal loss, depending on what type of asset is was. Generally, a business asset such as a building, vehicle, equipment or tools will generally result in a terminal loss, while capital assets such as land will generate a capital loss.

Gains on assets not used in a business prior to the transfer to the corporation will generally be taxable as capital gains. If the asset was used in a business, a gain will first be accounted for as a recapture of previously claimed Capital Cost Allowance (CCA), which is taxable as business income. If the FMV of the asset exceeds the original purchase price plus improvements, the excess will be a capital gain.

To encourage small businesses and avoid immediate taxation of any unrealized gains on assets transferred to a corporation, the Income Tax Act allows for a special election to be made. Section 85 of the Income Tax Act allows many, but not all, assets to be transferred to a corporation without triggering taxation of any gain. Essentially, the corporation is deemed to have acquired the assets at the original cost and to have taken any Capital Cost Allowance taken in prior years. As a result, if the corporation later disposes of the asset, it will add the recapture of CCA to income and pay tax on any capital gain (or deduct any terminal loss or claim any capital loss).

Section 85 of the Income Tax Act is very complex and has many special provisions, so talk to your accountant before deciding if you need to file a Section 85 election with your tax return.

GST/HST

The Excise Tax Act allows for a tax free transfer of the assets of a business to another business, as long as both the businesses are registered for GST. A GST 44 election is made, and no GST has to be filed on the transfer of assets. So, if a proprietor is incorporating a corporation and transferring assets into the corporation, GST doesn’t have to be paid on the transfer. There are a number of technicalities involved with the GST 44 election, and an accountant’s advice would be helpful.

Assets that were used personally (not used for business purposes) prior to transferring them to a corporation or using them in a proprietorship will not be subject to GST on the transfer. These assets may qualify for input tax credits for GST purposes when the business starts to use them for commercial activity. The most common example of this is when a vehicle owned personally begins to be used for commercial activity.

The time to talk to your accountant about transferring assets into your new business is before you actually start the business. Leaving it until you prepare your tax return may cost you money.