How does the CRA approach valuing private company shares for tax?

The CRA’s own statement of how it values private company shares is Information Circular 89-3, dated August 25, 1989. It says it outlines the valuation principles, practices and policies the department generally considers and follows in valuing securities and intangible property of closely held corporations for income tax purposes. It is a policy statement, not a statute, so this page says what the circular says. It does not say what any shares are worth.

Fair market value and the approaches

The circular defines fair market value as the highest price, in terms of money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties at arm’s length, neither under compulsion. CBV Institute’s glossary notes that in Canada its own definition should read “highest price” too. The circular says the facts and circumstances of each case are determinative and the valuator must use reasonable judgment and objectivity. It calls the earnings and asset value methods the two most generally accepted bases for determining value.

Control, minority and share rights

The circular defines a closely held corporation as one whose shares are owned by a relatively limited number of shareholders, with no established market because the shares are sold infrequently. It says fair market value must be determined by referring to share rights and restrictions in the articles, by-laws or valid contracts between shareholders, which can have an appreciatory or depreciatory effect. Where the department is satisfied that documentation shows a consistent pattern of group control, it says it applies a rateable valuation to each member’s shares and no minority discount.

The Income Tax Act link

Except as expressly otherwise provided in the Act, s.69(1) deems a taxpayer who acquired something from a person not dealing at arm’s length, at an amount above its fair market value at the time of acquisition, to have acquired it at that value. It also deems a taxpayer who disposed of something to such a person for no proceeds, or proceeds below fair market value at the time of disposition, to have received proceeds equal to that value. Subsection 69(1) also covers gifts and certain other transfers, and section 69 has further subsections, so read it in full. For what follows a disagreement, see what happens if the CRA disagrees with a share value.