What is a Tax Rollover?

The tax rollover is a significant opportunity found within the tax laws of Quebec. The rollover is a provision of Section 85 of the Taxation Act that allows property or shares to be transferred between different parties while deferring tax payments. In other words, a tax rollover allows an individual or corporation to make a transfer without immediately paying taxes, as the compensation takes the form of unrealized gains.

In this article, our corporate tax experts take a closer look at tax rollovers and, more specifically, Section 85. Learn all about the benefits of tax rollovers!

Tax rollover: Section 85 of the Taxation Act

Section 85 of the Taxation Act plays a crucial role in Quebec’s taxation system. This legal provision allows taxpayers to transfer property or shares between individuals and/or corporations without having to immediately pay taxes on the gains realized on these transfers.

This provision was created with the goal of facilitating commercial transactions and corporate restructuring. By understanding how it works and what it involves, you can use this law to benefit your company.

A rollover between two companies

Let's take the example of two fictitious companies, A Inc. and B Inc. A Inc. wishes to acquire assets belonging to B Inc. to strengthen its business. However, if the transaction were to proceed normally, B Inc. would be taxed on the capital gain realized on the sale of its assets.

To avoid paying taxes immediately, both companies opt for a tax rollover under Section 85 of the Income Tax Act. In practice, this means that B Inc. transfers its assets to A Inc. in exchange for shares of equivalent value.

Through this tax rollover transaction, B Inc. can defer taxation on its capital gains until it decides to sell the shares received from A Inc. to a third party. This allows B Inc. to reinvest the funds in its business or pursue other projects without incurring an immediate tax obligation.

For its part, A Inc. also benefits, as it can increase its cost base for the assets acquired. This will have a positive impact on future tax deductions and capital gains on the subsequent sale of these assets.

A rollover between a private individual and their company

Yves bought a commercial building a few years ago for $100,000. Over time, the value of the building has increased to $200,000. If Yves decides to sell this building to his corporation, he will have to declare a capital gain of $100,000. However, thanks to the tax rollover, he can transfer the building to his corporation without immediately paying taxes.

In this case, both parties can agree to transfer the building at an adjusted cost base (ACB) of $100,000, in exchange for shares equivalent to the value of the building. Although the transaction takes place at fair market value, from a tax standpoint, there will be no immediate taxation thanks to Section 85.

As a result, Yves can continue to develop his business, enjoy the benefits of this transaction and defer taxation on the capital gain until he decides to sell his company's shares to a third party.

Criteria to be met for a tax rollover between two companies

To benefit from the tax rollover between two companies, certain conditions must be met, among them:

• Companies must be eligible: A tax rollover between two companies generally applies to taxable Canadian corporations. Specific rules may apply depending on the type of transfer or the structure of the transaction.
• The transfer must be in the form of shares or eligible property: The tax rollover applies to transfers of shares or eligible property, such as capital assets, inventory, mining property, etc. Certain assets, such as real estate owned by a non-resident or corporation, may not qualify.
• Compliance with specific rules: to benefit from a tax rollover, you must comply with the rules established by the Canada Revenue Agency (CRA) and Revenu Québec. This includes filing appropriate business tax returns, documenting transfers and respecting required deadlines.
• Tax expertise: given the complexity of tax rules, we recommend consulting a tax accountant who specializes in corporate transactions to ensure that you meet all relevant conditions and criteria.

What are the advantages of a tax rollover?

Having covered the basics of tax rolling and how it works in the context of corporate taxation, let's take a closer look at the potential benefits of using this method.

Reduced tax impact on asset or share transfers

One of the main advantages of tax rollovers is being able to avoid any impact on your tax obligations at the time of transferring assets or shares. Rather than having to pay taxes immediately on realized gains, taxpayers can defer this tax obligation to a later date, usually when the transferred assets or shares are sold.

This can be a real advantage in the context of restructuring a business, transferring family assets or planning an estate.

Opportunity to take advantage of tax breaks

Tax rollovers also maximize tax savings by opening the door to advantageous tax planning opportunities. By deferring tax on gains realized on transfers, it is possible to structure transactions to minimize their tax burden.

By optimizing the structure of asset or share transfers, you can take advantage of tax rollover rules to reduce your tax liabilities, maximize tax savings and optimize your financial situation.

T2inc is your Quebec business tax expert

Businesses looking for expertise in corporate taxation and accounting can count on T2inc. As qualified specialists in the field of business tax accounting, we understand tax rollovers and can help you navigate through the complexities of the transfer process while maximizing your tax benefits.

At T2inc, we can help you understand the rules and criteria surrounding tax rollovers, develop effective tax planning strategies and optimize your bottom line. Contact us for more information!