A client is in the construction business and would like to transfer certain assets from his personal name to his corporation. This is the third year of the corporation’s operation. All of the assets have a fair market value (FMV) that is less than their original cost, and he has never claimed any CCA on these assets personally.
From my understanding, we do not need to file an S85 rollover in this situation since the FMV is less than the cost.
Can we add these assets to the corporation with a journal entry by CR the shareholder’s account and DR the asset account at FMV? Or do we need to complete any additional schedules or elections with the CRA?
His main assets are.
Ford F150 2015-$14500
Trailer-$6500
Dump truck-$15600
Material Mis Purchases-$25,000
Any help would be appreciated.
As a side note, he provided us with the cost of his guard dog for the yard, but of course, we are not adding that to the corporation!!
You never NEED to use S85 - it’s always just an option. But, if you don’t use it, the ITA requires (or expects) that all transactions take place at FMV. As long as the shareholder can PROVE the FMV when CRA questions it - no problem. VALUATION OF THE ASSETS is the main issue.
Also note that it’s not the ORIGINAL cost that matters (when deciding to use S85) - it’s the TAX COST - that is, the UCC value.
You can make an entry like that, but you should make sure legal title also changes to the corporation. CRA will likely deny CCA and related expenses if the property is not in the corporation’s name.
Note that although the transactions are deemed to occur at FMV, and loss on the transfer (since FMV is less than ACB) is denied as a superficial loss. The corporation can generally add this superficial loss to its ACB/UCC of the assets, effectively making the transfer at cost in situations where FMV is less than cost.
I’m curious why you don’t want to deduct the guard dog expenses? It’s no different than renting an alarm system. Vet bills, feed, and a guardhouse are legitimate costs of securing your assets. A guard dog is a lot more effective than an alarm going off somewhere and having the police show up 30 minutes after the thieves have left.
This applies if the corporation does not “pay” for the assets (with cash or shares or other assets), and results in a significant credit to the shareholder loan. If the assets are fully paid, there is no need to report on S11.
I appreciate your advice; however, the file will be reviewed by an LLP with 25 years of experience in public accounting. The purpose of asking this question here is for self-learning!
Schedule 11 is not only for reporting shareholder loan balances, but certain transactions with shareholders during the year as well. If a corp acquires assets from a shareholder, whether via s.85 or otherwise and regardless of how the consideration was paid, it’s reportable on s11, even if most accountants don’t complete that schedule.
I acknowledge that, hence my statement primarily for pubco’s.
Never had an auditor chase down a private enterprise for S11, but have witnessed first hand a pubco in CRA’s bullseye. Albeit, I’ve never witnessed a private enterprise at that scale who would avoid filing S11.