There are various provisions under the Income Tax Act that allow us to transfer property to a corporation or to the next generation on a deferred basis.
What if these provisions did not exist
If these provisions mentioned did not exist, the transferor would sell their assets at a current market value, instead of the initial purchase price. In certain cases, a sole proprietor is only trying to transfer their own assets. However, these transfers are deemed to be sold to the transferee at the fair value on the date of transfer.
How do you determine Fair Value
The fair value is determined by various methods such as appraisal, analyzing the present and future cash flows from that property.
How does this apply if a parent transfers their business to their children
CRA will require that a sale should be reported when transferring the shares of a corporation to their children. This can result in significant capital gains taxes if the Income Tax provisions are not applied correctly. By using the correct application, one can 'freeze' the current value of the business and transfer any future growth to the next generation.
How is this Beneficial to me?
This can be extremely beneficial in the following scenarios:
1. While incorporating a business, assets (subject to certain restrictions) can be transferred at a cost basis to the newly founded corporation, thereby avoiding any potential capital gain tax.
2. The current generation can transfer a privately held business to the next generation and defer taxes payable upon the eventual disposition of the shares of that business
3. Income splitting, protection of assets from creditors and other areas can be enabled when using the rollover provisions.
Speak to one of our tax experts today to inquire how this can be achieved.