Related-Party Transfers: Why Fair Market Value Matters
When property or other assets move between a corporation and a shareholder, family member, or other related party, the agreed sale price doesn’t necessarily determine the tax outcome.
Fair market value can play an important role. If the value used for a related-party transaction doesn’t reflect genuine market conditions, the Canada Revenue Agency (CRA) may challenge the transaction and its tax treatment.
A low appraisal may not settle the issue
An independent appraisal can be important evidence of fair market value, but simply having an appraisal doesn’t guarantee that the value will be accepted.
If a valuation is challenged, factors such as the appraiser’s independence, methodology, assumptions, and supporting information can become important.
The question isn’t only whether an appraisal exists. It’s whether the valuation can be supported if the CRA asks how the value was determined.
What does fair market value mean?
Fair market value generally considers what an informed and willing buyer would pay an informed and willing seller in an open market, with neither party under pressure to complete the transaction.
Related-party transactions require additional care because the relationship between the parties may influence the agreed price. A transaction between family members or between a corporation and its shareholder doesn’t necessarily reflect the same conditions as an arm’s-length sale.
Why does the valuation matter?
If the CRA challenges the value used in a related-party transfer, the difference can have significant tax consequences.
Depending on the circumstances, transferring corporate property for less than fair market value may create a shareholder benefit or other tax implications. The supporting valuation and documentation therefore matter before the transaction is completed, not just if questions arise later.
Build a defensible valuation
If you’re planning a related-party transfer, consider whether the valuation is supported by appropriate evidence and can withstand independent review.
Before completing the transaction, consider:
- Whether an independent valuation is appropriate.
- Whether the appraiser has complete and accurate information.
- Whether the valuation methodology fits the asset being transferred.
- Whether the assumptions and supporting evidence are clearly documented.
- Whether the transaction and its tax treatment have been reviewed before closing.
Strong documentation prepared at the time of the transaction is generally more useful than trying to reconstruct the reasoning years later.
Plan before you transfer
Related-party transactions can look straightforward because the buyer and seller know each other. From a tax perspective, that relationship can make the valuation more important, not less.
Davidson can help you understand the tax implications of a related-party transfer and work with you to make sure the transaction is supported by appropriate valuation and documentation.
This article is provided for general information only and should not be considered accounting, legal, or tax advice. Your individual circumstances may differ. Contact your trusted advisor for guidance specific to your tax needs.
