For the past 5 years, your friend has operated a bicycle sales and repair business out of

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Question:

For the past 5 years, your friend has operated a bicycle sales and repair business out of a garage on a rural property he acquired in 2008. Due to the Covid-19 pandemic, there has a been a significant uptick in his business and he tells you that he wants to limit his exposure to risk by incorporating. You explain to him that he must transfer the assets of his business to the newly incorporated company using a section 85 rollover in exchange for shares of the corporation. He has no idea what you’re talking about and demands that you take care of it for him.

The following week, your friend emails you a list of assets with the information you have requested on each asset (FMV, ACB and UCC). He also tells you that he has read up on the s. 85 rollover you told him about and decided that he would help you out by also providing you with the elected amounts for each of the assets! In a follow-up email, he sends you a copy of his personal tax return from the prior year. You note that he has a net capital loss carryforward balance of $45,000 and a non-capital loss carryforward of $10,000.

	FMV	ACB	UCC	Elected Amount
Inventory	$500,000	$425,000		$450,000
Accounts receivable	$90,000	96,000		$90,000
Investment in shares of XYZ Inc.	$950,000	$875,000		$900,000
Machinery	$160,000	$95,000	$90,000	$100,000
Building	$1,000,000	$1,200,000	$1,100,000	$1,000,000

Required:

Explain to your friend the tax implications, if any, of his suggested elected amounts. If you would make any changes to his suggested elected amounts, explain why you are recommending the change and how the change will ensure that he ends up in the best possible tax position.