What happens if CRA disagrees with the value used to transfer shares to family?

Transferring shares to a child or other relative usually happens without an outside buyer to set the price, so the family chooses a value. The Canada Revenue Agency is not bound by that choice. The Income Tax Act has a rule for transfers between people who do not deal at arm’s length, which includes related people, and it can override the price on paper. Understanding it helps families document a defensible value before filing rather than after a reassessment.

Why related-party prices get tested

The Act says related persons are deemed not to deal with each other at arm’s length. Where a taxpayer disposes of something to a non-arm’s-length person for less than fair market value, section 69 deems the taxpayer to have received proceeds equal to that fair market value. The same applies to a gift. A family price below market therefore does not lower the amount the seller is taxed on.

What a reassessment can change

If CRA concludes the value was too low, it can reassess the transferor’s return using its own figure, together with interest and any penalties. The recipient can be affected too: section 69 caps the recipient’s cost at fair market value where more than that was paid, and a person who receives property as a gift acquires it at fair market value. The Minister may reassess within the normal reassessment period, and later in listed circumstances, such as when a waiver has been filed.

Challenging the reassessment

A taxpayer who objects to an assessment may serve a notice of objection in writing under section 165, setting out the reasons and all relevant facts. The objection will turn on what value the evidence supports, so the method, the valuation date and the information relied on all matter. The Act sets time limits for objecting, so the notice of assessment should be acted on promptly.

Questions to settle before filing

• Is there a written valuation from a qualified, independent professional, dated close to the transfer?
• Have the financial statements and assumptions behind that valuation been kept?
• If a rollover is planned, has the section 85 election form, T2057, which the CRA describes as the form a taxpayer and a Canadian corporation use to jointly elect, been prepared alongside the valuation?
• If the shares may qualify for the lifetime capital gains deduction, how would a higher value affect the gain and the limit the CRA describes?