Is a minority shareholder's stake valued as a straight fraction of the whole company, or at a discount?

What the ITA actually establishes, and what it doesn't

Income Tax Act s.69(1) sets the general non-arm's-length valuation principle: where a taxpayer disposes of property to a related person for less than fair market value, “the taxpayer shall be deemed to have received proceeds of disposition therefor equal to that fair market value.” ITA s.69(1)(b) The section fixes WHAT must be valued at fair market value — the specific property disposed of — but it says nothing about HOW a minority shareholding is valued relative to the company as a whole. s.70(5) applies the identical fair-market-value principle in the deemed-disposition-on-death context, for the same reason: it is cited for the general valuation principle, not because a death is involved in every case that turns on it.

Why that leaves the discount question open

A one-third shareholding is legally distinct property from a one-third share of the company's underlying assets or enterprise value: it carries whatever voting rights, information rights and liquidity that specific block actually has, which are usually less than a pro-rata slice of control. Because no statute prescribes a discount percentage — or forbids one — the size of any minority or marketability discount is a matter of valuation evidence and professional valuation practice, argued and decided case by case, not read off a legislated formula.

What this means in a shareholder buyout

Whether a departing minority shareholder receives a straight pro-rata fraction of enterprise value, or a discounted figure reflecting the block's minority status and marketability, therefore depends on how the transaction or shareholders' agreement defines the buyout price — and, absent a defined mechanism, on which valuation methodology and discount evidence the parties or a court accept. Assuming either answer by default, without checking what the actual valuation instructions say, is the mistake.

Where This Plays Out in the Case Files

• • The departing sister wanted a third of what the company was worth, and a third of the shares is not that — three siblings co-owning a company equally, where the company's value was not in dispute but what the departing sister's one-third block was actually worth was.

Sources

• • Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) — s.69(1) (fair market value on a non-arm's-length disposition, quoted above), s.70(5) (the same principle in the deemed-disposition-on-death context).
• • No statute sets the size of a minority or marketability discount; this is a matter of valuation evidence and professional practice standards, not legislation.
• • Treadstone Law — valuing shares in an Ontario shareholder buyout and does a minority shareholder get the same price per share as the majority? — directly on the buyout-valuation mechanics and the discount question above.