What is boot in a section 85 rollover?
In this guide, “boot” means consideration other than shares of the corporation that the taxpayer receives in a section 85 rollover. Section 85 does not use the word. Under s. 85(1)(b), subject to s. 85(1)(c), the agreed amount cannot fall below the fair market value of that consideration.
Section 85 of the Income Tax Act requires that the consideration for the transferred property include shares of the corporation. The taxpayer can also receive consideration other than shares. This page calls that extra consideration “boot”. Section 85 does not use the word. It speaks of consideration “other than any shares of the capital stock of the corporation or a right to receive any such shares”. For what the election is, see what a section 85 rollover is.
How boot affects the agreed amount
Section 85(1)(b) says that, subject to s. 85(1)(c), if the amount the parties agreed on is less than the fair market value of the consideration other than shares, the agreed amount is deemed to be that fair market value instead. So the agreed amount cannot be set below the fair market value of the boot. The agreed amount is also deemed to be the taxpayer’s proceeds of disposition of the property (s. 85(1)(a)). Ask your accountant what that means for each asset.
When shares go to a corporation you do not deal with at arm’s length
Boot has a separate and sharper consequence in one situation. Section 84.1 applies where a taxpayer resident in Canada, other than a corporation, disposes of shares of a corporation resident in Canada that are capital property to another corporation, the taxpayer does not deal with that corporation at arm’s length, and, immediately after the disposition, the corporation whose shares are sold would be connected with the purchasing corporation (within the meaning s. 84.1(1) assigns by reference to s. 186(4)). The section reduces paid-up capital and can deem a dividend to be paid to the taxpayer. The formula takes into account the fair market value of consideration other than the new shares. Section 84.1(2.31) and (2.32) set out intergenerational business transfer rules with their own conditions. Ask your accountant whether this section is in play before any non-share consideration is agreed.
What to ask before you sign
- Which assets are being transferred, and how much non-share consideration is planned for each?
- How does s. 85(1)(b) change the agreed amount on the election form?
- Is the transferee a corporation you do not deal with at arm’s length, and are shares being transferred?
- Who completes and files the election, and by what date?
Related reading
5 pages on the same subject, grouped by topic.
Sources
This answer is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of Canada — Justice LawsGovernmentIncome Tax Act, section 85 (transfer of property to a corporation by a shareholder)
- 02Government of Canada — Justice LawsGovernmentIncome Tax Act, section 84.1 (non-arm’s length sale of shares)
- 03Canada Revenue AgencyGovernmentT2057 Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation
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