Fair market value

How BC law treats it

The classic definition comes from Henderson Estate v MNR, 73 DTC 5471 (FCTD): the highest price, expressed in money, obtainable in an open and unrestricted market between informed and prudent parties acting at arm's length and under no compulsion to act. Valuators apply it using income, market or asset based methods, depending on the business. Fair market value drives many federal tax rules. Under section 69 of the Income Tax Act, a transfer between non-arm's length parties for less or more than fair market value can be deemed to occur at fair market value, sometimes producing double tax. Section 85 rollovers, used in incorporations, reorganizations and estate freezes, require the shares received to reflect the value of the property transferred. Freeze shares must be worth the fair market value of the business on the freeze date. Price adjustment clauses are used to protect against a later CRA valuation challenge. Fair market value is not the same as fair value. When a shareholder dissents under the Business Corporations Act, SBC 2002, c 57 (BCBCA), the company must pay the payout value, defined as the fair value of the shares immediately before the resolution was passed. Courts in dissent and oppression cases often value minority shares proportionately, without the minority discount that a market buyer would apply. In a share or asset sale between arm's length parties, the agreed price is usually strong evidence of fair market value.

What it means for your business

Fair market value affects how much tax a business owner pays on a reorganization, a family transfer, or a sale to a related party. A wrong valuation can trigger reassessments, penalties and double tax years later. In disputes between shareholders, the choice between fair market value and fair value can change a buyout price significantly. Founders, investors and family business owners should obtain an independent valuation when a transaction is not at arm's length. Example: A Burnaby business owner freezes her company in favour of a family trust. She obtains a valuation showing a fair market value of $4 million and fixes the redemption amount of her freeze shares at that figure, with a price adjustment clause in case the CRA disagrees.

Risks and common mistakes

Transferring assets to a family member or related company at a nominal price without a valuation. Treating fair market value and fair value under the BCBCA as interchangeable in a shareholder dispute. Relying on book value from the financial statements as if it were fair market value. Omitting a price adjustment clause from a freeze or rollover agreement. Assuming a single offer from a motivated buyer proves fair market value.