Many tech workers find themselves in a tricky tax situation due to their company's success. Here's how it typically happens: you've participated in your company's share purchase plan for years, and now your company’s value has jumped through the roof. Let’s say the cost base for the shares you own is $100,000 and your stock is worth $300,000 today. Good problem, but a problem, nonetheless.
In your heart, you know that holding such a significant amount of your net worth with one company is dangerous, but you also know that you don’t like paying tax, and you are going to have to pay tax on that $200,000 profit if you sell and diversify. For most tech workers, the tax owed is probably going to be somewhere in the range of $50,000. What if you could diversify and continue to defer the taxes owed. Too good to be true? Believe it or not, this can be done.
It's called a Section 85 rollover and it’s a provision within the Income Tax Act that allows for the tax-deferred transfer of property between certain parties, typically between a taxpayer (individual or corporation) and a Canadian corporation.
I won’t bore you to death with the specifics about how it works from a tax perspective, but suffice it to say, a Section 85 rollover is a way that you can take shares that you have built up a deferred gain on and transfer them to diversified fund without triggering a capital gain. By taking advantage of Section 85 in the Canadian Tax code you can execute a rollover and exchange shares of one company for shares of a corporate class mutual fund. The advantage here is that you keep that $50,000 working for you, earning you more investment income.
This strategy is complex for a back office to pull off, and beyond the scope of what’s available to a DIY investor. Always consult with both a wealth advisor and a tax professional when considering any Section 85 rollover.
By Jerome Townsend, CA, CPA, CIM®. Partner: Novel Wealth. Portfolio Manager: Q Wealth Partners
