Section 85(1)(e.2) benefit rule
The section 85 benefit rule, paragraph 85(1)(e.2) of the Income Tax Act, can raise the agreed amount in a rollover election. It applies where the property’s fair market value exceeds the greater of the consideration’s value and the agreed amount, and part of the excess is reasonably a benefit the transferor desired to have conferred on a related person, other than a wholly owned corporation.
Parties meet this rule when a person moves property to a corporation under a section 85 rollover for less than it is worth. A taxpayer and the corporation jointly elect under s.85(1) on CRA Form T2057, and the election sets an agreed amount. This paragraph can override that amount.
When it applies
- Fair market value just before the transfer is more than the greater of the value, immediately after it, of the consideration received and the agreed amount, determined without this paragraph.
- It is reasonable to regard part of the excess as a benefit the transferor desired to have conferred on a related person.
- The related person is not a corporation that was wholly owned by the transferor immediately after the transfer (s.85(1.3) defines this).
What changes
The agreed amount is deemed to be the original figure plus that part of the excess, regardless of what the parties agreed, except for the purposes of paragraphs 85(1)(g) and (h). Ask who benefits when a price is set below market value, and whether the accountant has tested this paragraph. See also Form T2057.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentT2057 Election on Disposition of Property by a Taxpayer to a Taxable Canadian Corporation
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