Hi everyone. Is the lawyer needed for the S85 and T2057 or can I do this with a client?
It is a mechanic shop with standard equipment may be worth 100k.
It is already late, as the client incorporated in Nov 2022. 2022 taxes are not yet filed.
What is the best way to go about this?
You can do it if you know what you are doing. It’s just a matter of filling out all the various forms and making the minutes for the corporate record book. The lawyers typically make the minute pages and make sure you aren’t missing anything if you are not sure what to do. A good idea if you are unclear on what needs to be done exactly as there are some landmines that can get you in trouble if you don’t know where they are because you haven’t done one of these before. If you don’t do it right you can be on the hook for a lot of tax if the CRA decides it is an invalid election for some reason or changes your valuations.
There is good amount of detail that is involved in this process besides filling out the T2057 form, hence I will always recommend using a lawyer to ensure there is nothing omitted
The documents typically created by the lawyer include the required minute book resolutions, issuance of share certificates (common, preferred or special), documentation of both share and non-share consideration, promissory notes, if applicable.
If this is rollover is an intergenerational transfer, then there are some new rules that may be applicable.
Remember that the tax filing and application of elections must follow from the effect of a business transaction - that is, subject to business law. Whenever people/businesses decide to do something significant - i.e. the sale of business assets from one entity to another - there are often terms and conditions that each party demands. It is always best to have such details in written form - i.e. a legal agreement for sale. I’m not a lawyer, so don’t want to be the one writing up such an agreement for my clients - I might miss something. So I always insist that my client get a lawyer to do up the legal agreement, and I give the lawyer most of the monetary details (number of shares, book value and tax value of assets, amount and type of non-share consideration, etc).
Just curious: what’s the rationale for an election in this case?
This is exactly what I was thinking hence I started a discussion. Neither I or client want this headache. As you can see this is all late since he had no clue that assets needs to be somehow transferred into the corporation and go onto the corp balance sheet.
It is a standard case of sole-p doing business for several years and incorporating.
Does it make more sense to just straight sell the assets and pay the capital gains on it? I don’t even think he ever claimed CCA on any of it.
But there is now goodwill from all the years and clients. Business does 600k sales, almost no profit though.
I wish this can be just added as a shareholder equity/loan and be dealt with 
I understand the point of S85 when RE is involved, larger businesses, but I always wondered if there is an easier option for these small clients with ~100k in simple assets.
If we just sell assets to the corp at FMV there is no gain to report. Assets now owned by the corp. Why do all this headache with rollover? I just don’t see benefits for these small clients. What am I missing?
No real estate is involved.
I would argue on significance or value of a goodwill in an unprofitable sole-p business. The only value in these businesses is FMV of their tools for the most part.
Not allowed. All sales must happen at FMV per the income tax act. If you want to use ACB, you must follow Section 85 rules.
But even if your client sells the assets to the corp at FMV, what proof is there that any transfer of ownership took place? What consideration was exchanged? Those are the kind of details your client may need to prove 10 or 20 years in the future when/if he sells the corporation or its assets to someone else. CRA may deem that those assets were never transferred, and still are owned by the individual. That’s the kind of headache you can avoid by getting a proper legal agreement drawn up now.
Sorry, I meant FMV.
Why does he need to proof anything to anyone if this is a new corporation. Starts from 0. Why anything needs to be exchanged?
Sole-p closed. Corporation opened.
You write a purchase agreement for those 100k of assets at FMV they would be like 40 (they are now 6 years old all used up). Record shareholder equity in the loan for 40. Done.
Lol. Who are you trying to convince? I’m not a judge. But, if you’re an accountant, you know that CRA does question such things, and there have been court cases over this kind of issue. And the ITA does specify rules for any transactions between non-arms-length parties. If you’re not an accountant, I suggest you consult one for more detailed explanation.
I am not convincing anyone, nor do I need to. Keeping a healthy discussion and expressing my point of view. Yes I know a lot and don’t need suggestions, thank you.
Question what things? I think there is very specific case here.
What is there to question on a purchase and sale of 40k of assets.
How are they going to estimate goodwill in an unprofitable sole-proprietor business.
I asked simple questions to discuss. This is what forums are for. If nothing to contribute just keep browsing
Send me a link of a court case with 40k of assets. As this is what I am discussing here. Lol…
“Goodwill” is subjective - it’s not something you can determine a FMV for, except when an arms-length buyer decides he/she is willing to pay something for it. CRA isn’t going to care if a taxpayer IGNORES goodwill when transferring assets to his own corporation. However, if the taxpayer values their goodwill at, say, $1 million, and records a credit to the shareholder loan as payment for it, THAT will raise a red flag.
If you’re talking about $40k of assets, and the difference between “actual” FMV and “your own estimate” of FMV is small, then there would be very little difference in the amount of tax that might be applicable (i.e. CCA over the next 10 years). In which case, even if you don’t play by the rules, CRA may not care. Or, if they re-assess the corporate taxes at some point, your client may not care about an additional $500 levy (i.e. less than the cost of doing a rollover).
If your client transfers his $40k of assets to the corp at FMV, no problem! That is 100% compliant with the ITA. I would just tell the client to ensure he has “some” kind of documents to support that FMV, in case CRA ever asks, “how did you come up with that value?”
As you say, it would be a different story if we were talking about $400k or $4 million, etc.
Your original question was whether you need a lawyer when doing a rollover. If you’re using FMV, you’re not doing a rollover (no S85, no T2057).
I completely agree and exactly my thoughts. awesome so now we are getting somewhere. So since no rollover with FMV, how does CRA would decide a FMV of a sole-p business? Or how can we do that? Is it even possible to estimate? What if it is not even transferable to a new owner as all relationships are dependant on the proprietor. You know what I mean?
I want to understand the threshold of when it doesn’t make sense to deal with this headache and just do FMV sale, report capital gains and keep moving as most sole-p’s are tiny under 20k in assets, under 100k of revenue and again questionable value/goodwill.
I have done S85 rollovers for clients where there were minimal assets without any questions from CRA. I prepare documents to support what I have done in case questions are asked later. I know some people would say there is too much risk but minimum rates for lawyers to do S85 rollover can’t easily be justified when we are talking about these lower amounts. And again, those are my thoughts. I have done more things that some people would call foolish.
They don’t. The “seller” and “buyer” decide that, but it’s irrelevant in this case because the seller is the same person that is the sole shareholder of the “buyer” corporation. All you have to do is record the purchase of the capital assets in the new corporation. Everything else in the corporation can start from zero. The new corporation will need a new bank account, new CRA business number, etc. Once that is all set up, the corporation can start invoicing using the new BN, and collecting sales/AR into the new bank account, and recording new expenses, and paying new supplier invoices, etc.
Meanwhile, the sole prop will continue to exist for a while (i.e. 6 months to a year), to collect outstanding AR, pay outstanding AP, etc. If your client wants to transfer outstanding AR & AP to the corp, you simply record those pre-existing customer/supplier balances in the corporate accounting system with an offset to shareholder loan (or bank account, if the client wants the corp to do that transaction in cash, which will likely require the shareholder to “loan” some “start up cash” to the corporation).
My approach is generally to “not overcomplicate” issues where that is unwarranted.
Whether “overcomplication” is warranted here is the discussion…so we need to parse the issues rather carefully.
Transfers between related parties occur at FMV by law. There is no issue there. What FMV actually is, however, is a question of fact. The OP says that it’s a “mechanic shop with standard equipment that may be worth $100K”. There is no indication as to the original cost of that equipment, nor its UCC (if any).
If there is a recapture or gain, then an S85 might make sense. Only the actual numbers can determine that, and then a judgment call on the part of the accountant and taxpayer as to the value of doing so (if any). Personally…and I’m guessing based on the OP’s description…there is unlikely to be any gain at all. Tools devalue extremely quickly. (You want FMV? Look at FB Marketplace…new tools sell for a small fraction of cost.)
Goodwill: I would be fully prepared to make the argument that where a mechanic incorporates “his/her” shop the likeliehood of the existence of Goodwill is somewhere between zero and nil. Mechanics are dime a dozen and unless there is a VERY specific proficiency or a very dedicated exisiting client list ($600K annually? Not likely.) goodwill is unlikely to be a factor.
Agreement for Purchase and Sale: while useful, there is no tax requirement for same. It’s smart…it’s valuable…but it doen’t need to exist. A list of equipment and values would be smart though. GST is also a consideration.
One person’s approach and opinion.
Oh - and…what’s the actual real dollar risk? $5K in tax? $10K max? less? more?
No, not really…are you just wondering how to determine the FMV of the capital assets? Good luck. As @SmallBizGuy says - maybe try Facebook. Or Kijiji. Or hire an actual appraiser. The question of “how to determine FMV of used assets” is outside the scope and expertise of most accountants (including me).
Cool tip: CRA will not go to Court over a Valuation unless the tax amount is significant. Fill yer boots. 
FMV is one of the most difficult…and easy…things to determine LOL. Agree…not generally our scope. T/P gives me a number and as long as it’s “reasonable” - or at least “not unreasonable”, I’ll go with it.
Kind of late to do a S85 now, as you cannot properly paper the transaction. Yes, you can late file, if you are willing to pay the penalty. However, the share structure and share transfer would still need to be in place in 2022…