Inter-Provincial Asset Transfers

Bulletin TDLB 96-3
Published: December 1996
Content last reviewed: September 2012

Publication Archived

Notice to the reader: Effective January 1, 2009, the Canada Revenue Agency (CRA) administers Ontario's corporate income tax, capital tax, corporate minimum tax, and the special additional tax on life insurers.

As a result, the Corporations Tax Act provisions described on this page and in other publications are only applicable to taxation years ending December 31, 2008 and prior.

For taxation years beginning January 1, 2009, the Taxation Act rules apply.

This publication was archived and kept for historical purposes. Use caution when you refer to it, since it reflects the law in force at the time it was released and may no longer apply.


In order to prevent corporations from avoiding tax on inter-provincial asset transfers, Ontario is changing the way its income tax legislation adopts the elective income tax rollover provisions of section 85 of the federal Income Tax Act (ITA).

Inter-Provincial Avoidance Transactions

Under certain circumstances, corporations have entered into inter-provincial asset transfers to avoid provincial taxes on the sale of assets. This is done by first transferring the asset to a non-arm's length corporation located in another province, and then selling the asset to the ultimate purchaser.

These avoidance transactions are accomplished by using the elective provisions of section 85 of the ITA, which are adopted for Ontario Corporations Tax Act (CTA) purposes. Under these elective provisions, corporations can transfer assets on a tax deferred basis from one province to another without necessarily making provincial elections in both provinces. Additionally, when corporations do elect to transfer assets for federal and provincial purposes, they can choose different provincial elected amounts in different provinces.

The Ontario CTA tie-in provisions to ITA section 85 have permitted the above flexibility to ensure that corporate reorganizations are not impeded by provincial income tax considerations. In the avoidance transactions, however, these flexible rules have been inappropriately used to eliminate rather than defer provincial taxes.

Rules to Prevent the Avoidance Transactions

Ontario will adopt rules to specifically prevent the reduction or elimination of provincial taxes through the manipulation of the ITA section 85 rollover provisions. These new anti-avoidance rules will prevent corporations from increasing the cost of an asset when transferring it to a non-arm's length corporation located in another province on a tax deferred basis. In such cases, either the corporation's proceeds of disposition will be adjusted or the cost to the non-arm's length corporation will be adjusted to eliminate any loss of provincial income taxes.

This measure will apply to any transactions or series of transactions which commenced on or after December 19, 1996, and to any transactions or series of transactions which commenced prior to December 19, 1996 and are completed after this date.

Further Changes to How ITA Section 85 Applies for Ontario Purposes

Ontario will also enact technical changes to the Ontario CTA which will adopt the elective rules under ITA section 85 in a more rigid fashion. For instance, where a corporation transfers an asset and makes an election under ITA section 85 for federal purposes, Ontario will deem the election to have been made for Ontario purposes, and when a corporation transfers assets but does not make an election for federal purposes, it will not be allowed to make an election for Ontario purposes. In addition, the choice of elected amounts in certain circumstances will be restricted.

Further details of these changes will be released at a future date. These new rules will not apply until the details are released, except to the extent that they are applicable for purposes of the anti-avoidance rules discussed above.

Interprovincial Co-ordination

Ontario will continue to work with other Canadian jurisdictions to develop rollover rules which prevent provincial tax avoidance but continue to permit corporations to freely restructure their operations in order to meet their business needs.

General Anti-Avoidance Rule

Section 5 of the CTA contains a general anti-avoidance rule (GAAR) which parallels ITA section 245. Ontario will be working with other Canadian jurisdictions in reviewing asset rollover transactions completed prior to December 19, 1996 where provincial tax was avoided. The GAAR provisions will be applied to these transactions where appropriate.

Corporations voluntarily disclosing that they have previously avoided provincial taxes on asset transfers to a non-arm's length corporation in another province can do so without incurring any interest or penalties on the taxes avoided for periods prior to December 19, 1996. The voluntary disclosure must be made prior to June 30, 1997, and must be made before any audit activities have been initiated with respect to the particular asset transfer transaction.

Ontario Reporting Requirements on Section 85 Transfers

Effective for taxation years ending on or after December 19, 1996, all corporations electing under ITA section 85 to transfer assets to or from a non-arm's length corporation with a permanent establishment in a Canadian jurisdiction other than Ontario will be required to provide the following information with their CT23 returns in order to make a corresponding CTA election:

  • a copy of the federal form T2057;
  • amounts elected for Ontario purposes;
  • the name of the non-arm's length corporation to or from which the asset was transferred, a list of all provinces in which the non-arm's length corporation has a permanent establishment, and the allocation ratio to those provinces for the year; and
  • the non-arm's length corporation's cost of the assets for tax purposes in the other provinces.
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