Fair market value

You may find yourself in a situation where you would like to take assets that belong to you personally and transfer them 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 these assets at a price equal to their FMV at that time. If the FMV at the time of the transfer to the business is greater than your original purchase price, you must report the difference as a capital gain on your income tax and benefit return.

You may also be able to claim a GST/HST input tax credit (ITC) based on the basic tax content of the assets you transfer to your business. For more information, see Goods and Services Tax/Harmonized Sales Tax (GST/HST).

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 schedule for income tax purposes.

For income tax purposes, when you transfer the property to a Canadian partnership or a Canadian corporation, you may transfer the property to the partnership or the corporation 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 in nature. They allow you to change your business type from a sole proprietorship to a corporation or partnership; or from a partnership to a corporation, on a tax free basis. For more information, see Information circular IC76-19R3, Transfer of property to a corporation under section 85; Interpretation bulletin IT-291R3, Transfer of property to a corporation under subsection 85(1); and interpretation bulletin IT-413R, Election by members of a partnership under subsection 97(2).

The rules regarding these transfers of property are technical in nature.

Forms and publications

• Information Circular IC76-19R3, Transfer of property to a corporation
  under section 85
• Interpretation Bulletin IT-291R3, Transfer of property to a corporation
  under subsection 85(1)
• Interpretation Bulletin IT-413R, Election by members of a partnership
  under subsection 97(2)

Related topics

• Goods and Services Tax/Harmonized Sales Tax (GST/HST)
• GST/HST, Input tax credits
• Basic information about GST/HST