In some cases, you may need to transfer personal property to your business. For example, if you have a personal vehicle that you want to use for your business, you can transfer it. The Canada Revenue Agency has a specific process on how to account for these transactions, and the steps vary based on your business structure.
If you are a sole proprietor, you must transfer assets using their fair market value. To explain, imagine you bought a computer for $1,000. You’ve used the computer personally for a couple of years, and its value has declined. To determine its fair market value, you look at the prices of similar used computers for sale, and you asses that the computer is worth $500. When you transfer the computer to your business, you treat the transaction as if your business purchased the computer from you for $500. This is the number you use when establishing your capital cost allowance for your tax return.
Partnerships and Corporations
You may also use fair market value when transferring personal assets to a partnership or corporation, but in these cases, you may opt to use elected value instead. Elected value is an amount that both you and the business agree on for the transaction, and it is not the same as the fair market value of the item. If the elected amount is more than you paid for the item, you may need to report a capital gain on your personal tax return. For instance, imagine you have a building that you plan to transfer to your partnership. You and your partners decide on $100,000 as the elected value of the building. As explained above, the partnership treats this amount as the purchase price of the item for its records. For your personal tax records, you may need to do a few more calculations. Pretend you only paid $60,000 for the building. In this case, you have to report $40,000, or the difference between your original purchase price and the elected value, as a capital gains on your tax return. In some cases, you can delay the reporting of that gain, but you may want to talk with an accountant before taking that deferral.
Input Tax Credits
If your business is a GST/HST registrant, you may be able to claim an input tax credit on transferred personal assets. This rule applies regardless of your business structure. Generally, the input tax credit provides a refund of any sales tax paid on business expenses. When you transfer personal property to your business, you should calculate the sales tax paid based on the fair market or elected value of the property you are transferring.
In most cases, these transfer rules only apply to capital property. For example, if you transfer office furniture to your business, that is a transfer of capital property. In contrast, if you transfer a few office supplies, such as paper or pens, you are not eligible to use this rule. Capital property can be real property, but it can also include things such as debt obligations. If you need to use personal assets in your business, don’t forget to account for the transfer. Accounting for these transactions helps to increase business expenses on paper, which ultimately lowers your taxable income and your tax liability.