Fair market value
You might transfer your personal assets to your business.
If you are operating a sole proprietorship, this is a reasonably simple process. The Income Tax Act requires that you transfer these assets to the business at their fair market value (FMV). This means that we consider you to have sold the assets at a price equal to their FMV at that time. If this amount is greater than your original purchase price, you must report the difference as a capital gain on your income tax and benefit return.
Your business will show a purchase of these assets, with a cost equal to the FMV at the time of the transfer. This is the value that you will add to the capital cost allowance (CCA) schedule for income tax purposes.
For income tax purposes, when you transfer the property to a Canadian partnership or a Canadian corporation, you can transfer the property for an elected amount. This amount may be different from the FMV, as long as you meet certain conditions. The elected amount then becomes your proceeds for the property transferred, as well as the cost of the property to the corporation or partnership.
The rules regarding these transfers of property are technical. They allow you to change your business type from a sole proprietorship to a corporation or a partnership, or from a partnership to a corporation, on a tax-free basis.
For more information, see interpretation bulletin IT-291R3, Transfer of Property to a Corporation Under Subsection 85(1), information circular IC76-19R3, Transfer of Property to a Corporation Under Section 85, and interpretation bulletin IT-413R, Election by Members of a Partnership Under Subsection 97(2).
For GST/HST purposes, you may be able to claim an input tax credit (ITC) for the GST/HST paid or payable on property such as capital property and inventory that you have on hand on the day you register. For more information, see guide RC4022, General Information for GST/HST Registrants.
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