Generally, a contribution of certain property, known as eligible property, by a shareholder to a corporation in exchange for shares may be effected on a tax-deferred basis to the shareholder and the corporation itself.
For example, if a sole proprietor may contribute its business and business assets to a newly formed Canadian corporation and receives in exchange only shares of the corporation and certain amount of consideration, such as cash or other property. When the transactions meets certain conditions stipulated in section 85 of the Income Tax Act, the transfer can be carried on a tax deferred basis, with the result that neither the corporation nor the contributing shareholders will be subject to income tax.
The similar provisions allow the transfer of property from a partner to a Canadian partnership or from a partnership to a Canadian corporation.
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