Fair Market Value (FMV)

Fair market value (FMV) is the standard of value Canadian tax law applies whenever property changes hands, or is deemed to, outside a genuine arm's-length bargain. The Income Tax Act uses the term throughout but does not define it. Courts and the CRA work from the definition given by the Federal Court of Canada, Trial Division, in Henderson Estate v. MNR (1973): in substance, the highest price an asset might reasonably be expected to bring if sold in the normal way, in a market under no undue stress, between willing buyers and sellers dealing at arm's length and under no compulsion to act.

The CRA's capital gains guide puts it in plain terms: FMV is usually the highest dollar value you can get for your property in an open and unrestricted market between a willing buyer and a willing seller who are acting independently of each other.

Four features follow from that definition:

• It is notional. FMV assumes a hypothetical sale even when nothing is sold, as on an estate freeze or a deemed disposition.
• It is a price, not a cost. What the owner paid, or what the business means to the family, does not set FMV.
• It depends on what is valued. All the shares of a company can be worth more than the sum of separately valued minority blocks, because a buyer pays for control.
• It is an opinion within a range. Two qualified valuators can disagree, which is why the evidence behind the number matters.

For a private company, a business valuation report prepared by a Chartered Business Valuator (CBV) is the usual way to support FMV. A free tool such as Lamba Law's business valuation calculator can frame expectations, but it is not evidence of FMV.

FMV is the anchor in every non-arm's-length transaction: a deal between related people, or between a corporation and its controlling shareholder, where no real bargaining keeps the price honest.

• Transfers at the wrong price: under section 69 of the Income Tax Act, a buyer who pays a non-arm's-length seller more than FMV is deemed to acquire the property at FMV, and a seller who sells below FMV to a non-arm's-length buyer, or gives property away, is deemed to receive FMV. On an overpayment or an undervalue sale, only one side of the deal is adjusted, so the same value can be taxed twice. A gift is different: the recipient is also deemed to acquire the property at FMV.
• Section 85 rollovers: in a section 85 rollover, the elected amount cannot exceed the FMV of the property transferred and cannot be less than the FMV of any non-share consideration received. If the property is worth more than everything received and the shortfall can reasonably be seen as a benefit to a related person, the elected amount is increased.
• Estate freezes: in an estate freeze, the fixed-value freeze shares must be worth the FMV of the shares given up. If they are worth less, value has shifted to the new common shareholders, often a family trust or the owner's children.
• Benefits to shareholders: a corporation that sells an asset to a shareholder below FMV, or buys one from a shareholder above it, risks the difference being taxed as a shareholder benefit under subsection 15(1) of the Income Tax Act.

Because FMV is an opinion, parties to a non-arm's-length transfer often include a price adjustment clause: if the CRA or a court determines a different FMV, the price, or the redemption amount of freeze shares, changes to match. The CRA's Income Tax Folio S4-F3-C1 says it will recognize such a clause only if all four conditions are met:

1. The agreement reflects a bona fide intention of the parties to transfer the property at FMV.
2. FMV for the purposes of the clause is determined by a fair and reasonable method.
3. The parties agree that the price will be adjusted if the CRA or a court determines a different FMV.
4. The excess or shortfall is actually refunded or paid, or the related liability is adjusted.

A clause is not a substitute for evidence. A round number chosen without a valuation will struggle with the second condition, and a clause the parties never act on fails the fourth.

The CRA and the courts look at what the parties knew and documented at the time of the transaction. For private company shares, that usually means a contemporaneous CBV report at a level that suits the stakes, plus any arm's-length evidence, such as recent third-party offers or sales of shares between unrelated parties. The valuator should see every offer the owner has received, including offers the owner declined. Our guide to related-party transactions in Canada covers the approvals, written agreements and consistent tax reporting these deals also need.

Corporate law often uses a different phrase. Under section 185 of the Ontario Business Corporations Act (OBCA), a shareholder who exercises dissent rights is entitled to be paid the fair value of the shares, determined as of the close of business on the day before the resolution was adopted. In an oppression case, section 248 lets the court order the corporation or another person to buy a shareholder's securities, and the court sets the price.

Neither phrase explains itself in a private contract. A shareholder agreement that says fair market value without saying whether a minority discount applies invites a dispute when the buyout clause is triggered.

Wen Tang owns all 100 common shares of an Oakville software company. In 2022 she wants future growth to accrue to her two adult children through a family trust, so she freezes: she exchanges her common shares for fixed-value preferred shares, and the trust subscribes for new common shares for $100.

A CBV's Estimate report values the company at $2.4 million, so the preferred shares carry a redemption amount of $2.4 million. The share exchange agreement includes a price adjustment clause drafted to meet the CRA's four conditions.

In 2025 the CRA reviews the freeze and takes the position that FMV at the freeze date was $2.9 million. It points to a letter of intent at that price from a strategic buyer, which Wen declined two months before the freeze and never mentioned to the valuator.

Because the clause is in place, the directors increase the redemption amount of Wen's preferred shares to $2.9 million and record the change. Without it, the $500,000 of value that moved to the trust could have been treated as a benefit conferred on related persons. The lesson for Wen's advisers: a declined offer is evidence of FMV, and keeping it from the valuator weakened the original number.