Need to use your personal vehicle for business? You can transfer ownership of the vehicle from yourself to your company. There are a variety of reasons you may need to transfer personal property to your small business. The Canada Revenue Agency (CRA) has a specific process on how to account for these transactions, and the steps vary based on your business structure. Ensure that you handle these transactions correctly to avoid future headaches.
Transfer Personal Assets to Sole Proprietorships
If you’re a sole proprietor, you must transfer assets using fair market value. Imagine that you bought a computer for $1,000. You use the computer personally for a couple of years and its value declines. To determine its fair market value currently, you look at the prices of similar used computers for sale and assess that the computer is worth $500. When you transfer the computer to your business, you treat the transaction as if your business purchases 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 you transfer personal assets to a partnership or corporation, but in these cases, you could opt to use elected value instead. Elected value is an amount you and the business agree on for the transaction, and it doesn’t have to be the same as the fair market value of the item. If the elected amount is more than the original sales price of the item, you may need to report a capital gain on your personal tax return.
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 own personal tax records, you may need to do a few more calculations. If you only pay $60,000 for the building, you have to report $40,000, 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 When Selling Personal Assets
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, and who doesn’t love a tax refund? When you transfer personal property to your business, you should calculate the sales tax based on the fair market or elected value of the property you transfer.
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 non-tangible 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 increase business expenses on paper, which ultimately lowers your taxable income and your tax liability.
Part of running a successful business is keeping up with its financial details. Keep your books accurate and up to date automatically. Change the way you manage your finances now.