Bert - you’re not wrong. As a general rule though, the commercial lawyers I’ve dealt with are generally happy to paper a transaction the was “contemplated at the effective date”, so they are not “backdating” a transaction, but rather giving paper effect to it as of the date the original transaction was contemplated but not papered.
The determining facor: was it actually contemplated at the effective date? (Only the single party responsible in this case would know, LOL.)
Yah…clear as mud. I know. But apparently very common.
Is it? I can never remember if the due date is the earlier or later of the two parties’ filing dates. Even if it was April 30 (per the T1 filer), the asset transfer could have “happened” in Jan 2023, and since the new corp hasn’t yet filed a T2 the corporate year-end date hasn’t been established. They could set the year-end to Oct 31, which means the first T2 would be due April 30, 2024 (same as the 2023 T1). That is, nothing would be late yet.
I hear what you are saying, and also you Nezzer. My point, which you appear to understand is that in order to do this S85, he better start talking to a tax lawyer. However, depending on the amounts involved, is it worth the legal fees…
I think this discussion is getting a bit muddled. It is being said that a FMV transfer is something completely different than a section 85 rollover, when in fact a rollover occurs at FMV as well.
I would describe the two different transfer methods as “section 85 rollover” or “bill of sale”, both are at FMV the difference being the consideration and tax implications.
On a bill of sale transfer the transferor will have to declare straight income (for example sale of small tools that were previously expensed on the proprietorship) and or recaptured cca (for the amount the FMV exceeds the UCC of the transferred assets)
On a section 85 transfer the assets are transferred at FMV with the consideration being cash for the value (or slightly higher) of the UCC of the assets transferred (no tax for the transferor) and shares for the balance of the FMV (tax deferred for the transferor). Hence the reason for section 85.
Correct. Assets are out of concern here really as they are usually dealt with with a purchase and sale agreement and you figure out which route to take depending on the $ value etc.
How about we have some greater minds here chime on how to value goodwill.
Let’s say I am working out of my home garage, making 500k revenue, 200 left after expenses as my salary. I am a mechanic and all clients are “my” clients. If I close, there is no business. They are coming just to me. This is my home, I am not selling my home, but even if it is a rented garage. They might or might not stay with new owner and go to another location. Essentially the only real asset here is a list of clients. New owner might not have the exact skill set needed to keep these clients or keep this profit level.
Is there value here? If we talk about FMV, this means we are valuing what another person would pay for this in market conditions. I doubt anyone would pay anything for this, apart for the value of tool/equipment, as it would make more sense to start fresh. Does this mean the goodwill here is $0?
Who makes this decision? Is the only way is to pay a valuator?
Aside from 40% profit on a mechanic shop based from home is absolutely unrealistic on East Coast, your question is whom should value the Goodwill.
Goodwill in an arms length transaction is a meeting of the minds ( contract) between buyer and seller. We do not question that amount. It is what it is.
A business valuation is usually obtained by one of the parties to aid in determining if they are getting a good or bad deal.
A seller may engage an evaluator to help ascertain a fair price to offer the business ( goodwill) for sale on the open market.
A buyer may engage an evaluator to help ascertain if what they are contemplating buying is not over priced.
At end of day, it is a meeting of their minds.
Regarding this case, as other posters have pointed out, the director of the New Corp and SoleProp ( buyer/seller) are the same and it is a non arms length transaction.
What difference does it make to valuation if it is the same buyer/seller and its a non arms length transaction? FMV assumes FMV - it doesn’t matter buyer and seller are the same person.
Complete your thoughts.
What would be a sufficient process to establish FMV of goodwill? There is no law that would require business owner to pay for a valuator. And considering there are no such listings on marketplace, what could be the process.
Why would goodwill be not $0 in this case. Or how would CRA make a case that it is not $0. (Again apart from heavily used assets).
Fair Market Value is (among other things) defined as a price agreed to between people who are arms’-length from each other.
THAT is why the ITA specifies that Non-Arms’ Legnth parties’ transactions are at FMV.
There is a long line of thought on the self-dealiing issue that Courts have reviewed and adjudicated over the years. Whether you agree or not is not relevant.
However, it remains a question of fact whether a sole prop who incorporates and retains the same effective structure has any Goodwill whatsoever. If the sole prop (now sole shareholder) is hit by the proverbial bus, does the biz have any value beyond bare assets? Probably not. If so…no Goodwill.
It is the taxpayer’s decision. Perhaps that is you, yourself?
In any case, for tax purposes, it would be wise for the taxpayer to hire someone who has some some tax education and experience to advise him (not just hope for some free advice here on a public forum). An experienced tax practitioner will tell him the same thing as has been stated here re: valuation of goodwill - it will be hard to prove to CRA that it has any value other than zero. But, CRA relies on the taxpayer to know the law, and prove their position. So, if the taxpayer is able to get someone (unrelated to him) to provide a reputable document stating the value of that goodwill, CRA may accept that (maybe…if you’re lucky).
Unless someone on this forum is a CBV, you’re not likely to get anyone to suggest HOW TO VALUE ASSETS, including goodwill.
When I took the In-Depth course many years ago we were advised to always include goodwill as an asset being transferred to the company. Elect to transfer it at $1 and put whatever your reasonable estimate of value is. Your special shares taken back in the transfer should include a price adjustment clause.
