What if I sell business assets to a related company for less than fair market value?
Under section 69 of the Income Tax Act, if you dispose of assets to a person you do not deal with at arm’s length for less than fair market value, you are deemed to have received proceeds equal to that value. You are measured against the market figure, not the lower price in the agreement. Other provisions can displace this.
Moving assets into a related company for a low price can look like a simple internal step. When the buyer is not at arm’s length and the price is below fair market value, the Income Tax Act does not tax the seller on the price in the agreement.
What section 69 does to the seller
Subsection 69(1) begins with the words “Except as expressly otherwise provided in this Act”. Its paragraph (b) then says that a taxpayer who disposes of anything to a person with whom the taxpayer was not dealing at arm’s length, for no proceeds or for proceeds less than the fair market value at the time, is deemed to have received proceeds of disposition equal to that fair market value.
Who counts as not at arm’s length
Section 251 deems related persons not to deal with each other at arm’s length. Related persons include individuals connected by blood relationship, marriage, common-law partnership or adoption, and two corporations controlled by the same person or group. For anyone else, paragraph 251(1)(c) makes it a question of fact. The CRA’s folio adds that failing to carry out a transaction at fair market value may be indicative of a non-arm’s-length transaction.
What the buyer’s side looks like
Paragraph 69(1)(a) runs the other way: it deems a taxpayer who acquired something from a non-arm’s-length person at more than fair market value to have acquired it at that value. For depreciable property, the CRA says that if you buy it in a non-arm’s-length transaction and pay less than the seller paid, your capital cost is the amount the seller paid.
Provisions that can displace or add to it
Section 85 can apply when property is disposed of to a taxable Canadian corporation for consideration that includes shares and the two jointly elect in prescribed form; see what a section 85 rollover is. Section 160 can make a non-arm’s-length transferee and the transferor jointly and severally liable; see joint liability under section 160.
Questions for your accountant
- Is the buyer related to us under section 251, or is it a question of fact?
- What fair market value will we support, and who will document it?
- Does an exception or election such as section 85 apply to this transfer?
Related reading
5 pages on the same subject, grouped by topic.
Tax
Sources
This answer is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of Canada (Department of Justice)GovernmentIncome Tax Act, section 69 (inadequate considerations)
- 02Government of Canada (Department of Justice)GovernmentIncome Tax Act, section 251 (arm’s length)
- 03Canada Revenue AgencyGovernmentIncome Tax Folio S1-F5-C1, Related Persons and Dealing at Arm’s Length
- 04Government of Canada (Department of Justice)GovernmentIncome Tax Act, section 160 (tax liability re property transferred not at arm’s length)
- 05Government of Canada — Justice LawsGovernmentIncome Tax Act, section 85 (transfer of property to a corporation by a shareholder)
- 06Canada Revenue AgencyGovernmentNon-arm’s length transactions
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