CRA policy on business equity valuations (IC 89-3)

Owners and valuators meet IC 89-3 when a share value matters for tax, for example when shares move to family. It is a 1989 policy statement, not a statute. For a dispute over value, see what happens if CRA disagrees with the value used to transfer shares to family.

What the circular says

It defines fair market value as the highest price obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither under compulsion. It lists factors to weigh, such as the nature of the business, its earnings record and its financial condition, and says the valuator must use reasonable judgment and objectivity. It calls the earnings and asset value methods the two most generally accepted bases, and says the fair market value of a business is generally the greater of its liquidation value and its going concern value. BDC describes three main methods: earnings-based, market-based and asset-based.

What to check or ask

• Does the report say it is a valuation for tax purposes, and does it name the valuation date?
• Does it explain which factors it weighted and why?
• Does it account for share restrictions or buy-sell agreements, which the circular says can affect value?
• Could the seller supply the documents the circular says a CRA Regional Valuation Officer may ask for?