Example
You own real estate capital property with a tax cost of $200,000 and a fair market value (FMV) of $500,000. You transfer the property to your corporation in consideration for 100 common shares in the corporation and $50,000 cash. The amount you and the corporation elect under section 85 is $200,000
The deemed proceeds of disposition on the transfer of the real estate will be $200,000, resulting in no capital gain or loss and no tax payable for you. The corporation’s cost of the property will be $200,000. Your cost of the 100 common shares will equal $150,000 ($200,000 elected amount minus the $50,000 non-share consideration).
Although you would often choose an elected amount to completely defer any gain, you can choose an elected amount that will generate a gain, such as if you have losses that can offset the gain. In the above example, suppose you have a $30,000 net capital loss (half of actual capital losses) from last year that you are carrying forward. If you elect $260,000 on the transfer of the real estate, there will be a $60,000 capital gain, $30,000 of which will be a taxable capital gain included in your income. However, you will have no tax payable on the transaction if you used the $30,000 net capital loss to offset that taxable capital gain. At the same time, your corporation’s cost of the property will be bumped up to $260,000, and your cost of the 100 common shares will be increased to $210,000 ($260,000 elected amount minus the $50,000 non-share consideration).
Limits on the elected amount
The elected amount on the property transferred to the corporation is subject to the following general limits:
- It cannot exceed the FMV of the property;
- It cannot be less than the lesser of the FMV of the property and its tax cost; and
- It cannot be less than the FMV of the non-share consideration (sometimes called “boot”) that you receive on the transfer.
Filing deadline for section 85 election
The joint election is due by the earlier of your tax-filing due date and the corporation’s tax-filing due date for the taxation year in which the transfer of property takes place. An election may be filed late within 3 years of this date, although with a monetary penalty. The CRA has the discretion to allow a later election if it is “just and equitable” in the circumstances.
