Bringing Assets into a Business
Brining Assets into a Business
Transferring personal assets into a business is quite a common occurrence, however many people don’t realize there are tax implications that follow these types of transfers, such as input tax credits that GST/HST registrant may recover. Each business structure, such as a sole proprietorship, partnership, or corporation, each has different rules applied to the transfer of assets. This article intends to inform you of the differences; however we do strongly suggest that you contact your accountant for any transfers of assets.
The transfer of assets into a Sole Proprietorship is the least complicated of the types of transfer into a business. When assets are transferred into the business, it is done so at its fair market value. Basically, fair market value is what one party would pay on the open market for the property of a second party, both at arm’s length. For example, if someone was to transfer several computers that are three years old, they would not be able to transfer the original purchase price of the asset, instead they can only transfer what the open market would currently pay for the assets. The fair market value of the assets transferred becomes the opening undepreciated capital cost.
In a partnership business structure, transferring assets into that partnership is a little more complex. The assets value transferred into the partnership may be different from the fair market value under certain conditions. The elected value of the assets becomes the proceeds of transferred property, as well as the costs of the property to the partnership. If the elected value is greater than the original purchase price, the difference must be reported as a capital gain on the income tax & benefit return. An example of this is a property that is transferred to a partnership, where the overall value of the property has increased; the amount transferred into the partnership is the appraised price, while the purchase price (when the purchase was made several years ago) is lower than the current value; In this case a capital gain will be realized.
Transferring assets into a Corporation is far more complex than under a partnership or a sole proprietorship. Remember, this may also apply when you decide to incorporate an existing sole proprietorship or partnership. Similar rules apply to these transfers, such as the amount applied to the asset being different than the fair market value under certain conditions, as well as the elected amount being greater than the original purchase price and reporting capital gains. What differs is what’s called the Transfer of Property to a Corporation under section 85 as found on the CRA website. Due to the complicated nature of asset transfer to corporations, we are unable to simply summarize this type of transfer, therefore it is suggested that you contact one of our accounting experts to help you understand your tax responsibilities and plan for any taxes that you will incur on transfer.
Remember, for every action of asset transfer into or out of your business, there are many tax issues to take into consideration. An accounting professional will allow you to plan for these tax issues, and minimize any tax responsibilities that you may face.