Last updated: Dec. 22, 2023
Most small business owners use some of their personal assets to get their businesses up and running. In fact, banks want to see that you have a personal stake in the business before lending any money.
In addition to seeing you use your personal money, this can also include using personal property, such as a desk you have in storage, your own cellphone, laptop, or a vehicle. In the case of personal property, you can transfer ownership of these items from yourself to your small business.
As expected, the Canada Revenue Agency (CRA) has a specific process you need to follow to account for these transactions. The rules vary based on your business structure.
Below are some small business tax tips for bringing personal assets into your business.
Fair Market Value of Your Assets
If you are a small business owner, chances are good you’ll be bringing some personal assets into your business. According to the CRA, you can transfer these assets to the small business at their fair market value.
The CRA looks at it as if you have sold the assets to the small business at a price that is equal to the fair market value.
If the amount is higher than the original purchase price, you need to report the difference as a capital gain on your income tax and benefit return.
Transferring Assets to a Sole Proprietorship
For example, if, as a sole proprietor, you previously purchased a computer for $1,500. You used the computer for your personal use before you started a small business.
Over the years, the value of the computer declines. To determine the fair market value of your computer, look at the prices of similar used computers for sale. You discover that your personal computer is worth just $500.
When you transfer that personal asset into your small business, the CRA treats it as if your business purchased it from you for $500. Use that figure when determining your capital cost allowance (CCA) on your tax return.
Transferring Assets to Partnerships and Corporations
The rules are a little different if you transfer property to a partnership or corporation.
In these cases, you transfer the property for an elected amount, which may be different from the fair market value. To do so you must meet certain conditions.
For example, you have a building you want to transfer to your partnership; you and the partners decide on $125,000 as the elected value. The partnership uses this amount as the purchase price for its records.
But, for your own personal income tax, you’ll need to run a few more calculations. If you paid $50,000 for the building, you need to report the $75,000 difference as a capital gain on your tax return.
It can get confusing, which is why it’s best to talk to a tax professional who has experience working exclusively with small business owners.
Buying a Business
If you are starting up a small business, you will either be starting a new one or purchasing an existing one.
The way in which you account for the purchase of the business assets for income tax purposes varies depending on which route you go.
When you buy a small business, you pay an agreed-upon amount for the entire business. The sales agreement might set out a price for each asset, the value of the inventory, and the amount attributed to goodwill.
You can use these prices to calculate your claim for CCA. If the individual prices are not set out in the sales contract, you need to determine how much of the purchase price you should attribute to each asset, how much to inventory, and, if applicable, how much should reasonably attribute to goodwill.
The amount you give to each asset and to inventory should be its fair market value. The balance will go toward goodwill. Once this is done, you need to sort the assets into their appropriate classes in order to claim the CCA.
GST/HST Tax Credits
If your small business charges GST/HST, you may be able to claim an input tax credit on any personal assets you transferred to your own company. This rule applies whether your business is structured as a sole proprietorship, partnership, or corporation.
The input tax credit provides a tax refund on any sales tax paid on business expenses. When you transfer personal property to your business, calculate the sales tax based on the fair market value (or elected value) of the transferred property.
For the most part, these transfer rules only apply to capital property. Transferring office furniture to your small business is an example of transferring capital property. Transferring office supplies, like paper and pens, is not eligible.
Capital property can also include things that are non-tangible, including debt obligations.
Accounting for any and all transactions helps increase your business expenses, at least on paper, which helps lower your tax income.
FBC – Helping You Prepare Your Taxes Accurately and On Time
While transferring personal assets into a small business is common, there are a large number of tax implications that follow these types of transfers. Each business structure must follow different rules; failing to follow the rules can lead to unexpected taxes.
The accounting professionals at FBC can help you plan for these tax issues, minimize the taxes you pay, and maximize your returns.
Why FBC? Since 1952, the tax experts at FBC have worked exclusively with small business owners, self-employed contractors, farm operators, independent contractors, and entrepreneurs, prepare and file their annual taxes accurately and on time.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.