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Overview of Sections 85 to 88:

These sections of the Canadian Income Tax Act allow taxpayers to defer the recognition of gains when transferring assets to a corporation or reorganizing their business, ensuring that taxes are not triggered immediately. However, a proper valuation is essential to comply with legal and tax requirements.

Why Business Valuation is Necessary:

Determining Fair Market Value (FMV):

• Valuation establishes the FMV of the assets or shares being transferred.
• Accurate FMV ensures that the transfer follows tax regulations and avoids challenges from the Canada Revenue Agency (CRA).

Documenting the Elected Transfer Price:

• The elected price must fall between the asset’s adjusted cost base (ACB) and its FMV to qualify for a tax-free rollover.
• A valuation provides the necessary documentation to set this price correctly.

Avoiding CRA Scrutiny:

• The CRA closely reviews tax-free rollovers to ensure FMV is accurately assessed.
• A professional valuation mitigates the risk of reassessment, penalties, or disputes.

Supporting Legal Agreements:

• Valuation is often required to draft the necessary agreements, such as Section 85 election forms (T2057 or T2058).
• These agreements must detail the value of the assets or shares being transferred.

Specific Scenarios Requiring Business Valuation:

Section 85 – Transfer of Assets to a Corporation:

• Applies when an individual or partnership transfers assets to a corporation in exchange for shares.
• Valuation is essential to determine the FMV of both the transferred assets and the shares issued in return.

Section 86 – Share Reorganizations:

• Used when reorganizing the share structure of a corporation, such as exchanging common shares for preferred shares.
• Valuation ensures the FMV of the new shares aligns with the FMV of the old shares to maintain tax deferral.

Section 87 – Corporate Amalgamations:

• When two or more corporations merge, the FMV of the shares and assets of the pre-existing corporations must be determined.
• Valuation ensures proper allocation of shares in the new amalgamated entity.

Section 88 – Corporate Wind-Ups:

• In a wind-up scenario, the FMV of the remaining assets must be established for distribution to shareholders.
• Proper valuation ensures accurate tax reporting and compliance with CRA requirements.

Benefits of Professional Valuation in Tax-Free Rollovers:

• Legal Compliance: Ensures adherence to the Income Tax Act, reducing the risk of errors.
• CRA Defense: Provides robust documentation to support the transaction in case of a CRA review.
• Strategic Planning: Helps optimize the elected price for tax deferral while maintaining flexibility for future transactions.
• Accurate Record-Keeping: Serves as an official record for both the taxpayer and CRA.

Conclusion:

Sections 85 to 88 offer significant tax advantages for business owners, but they require precise planning and documentation. A professional business valuation is not just a legal formality; it’s a strategic tool to maximize tax benefits while ensuring compliance. If you’re considering a tax-free rollover or business reorganization, contact us for a professional valuation. © 2025 [Sanjay Kulkarni, Sankul Enterprises Inc.]. All rights reserved. This article is protected under copyright laws. Unauthorized copying, reproduction, or distribution is strictly prohibited. For permissions, contact above. Disclaimer: The information provided in this article is for general informational purposes only and does not constitute professional advice. While every effort has been made to ensure the accuracy of the information, it may not apply to specific situations. Readers are encouraged to seek personalized advice from a qualified professional regarding their unique circumstances. The author and publisher accept no responsibility for any decisions made based on this content.