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

The rule: two one-way adjustments, not a matched pair

Section 69(1) of the Income Tax Act does not treat an under-value sale between related parties as a single event with one corrected price. Paragraph (b) provides that where a taxpayer disposes of property to a person they do not deal with at arm’s length for less than fair market value, “the taxpayer shall be deemed to have received proceeds of disposition therefor equal to that fair market value”. That adjustment falls entirely on the seller.

The buyer’s side works in the opposite direction and does not automatically follow. Paragraph (a) bumps a related purchaser’s cost only when they paid above fair market value: “the taxpayer shall be deemed to have acquired it at that fair market value”. Nothing in the Act raises a related purchaser’s cost base to fair market value on an ordinary under-value acquisition. So when CRA moves the value upward after the fact, the seller is taxed on the higher deemed proceeds and the buyer’s cost base stays at what was actually paid — the gap is taxed once, on the way out, and never credited on the way in.

When it changes

A properly drafted price adjustment clause, agreed before the transfer and genuinely intended to be acted on, is the basis CRA administratively accepts for a retroactive price correction if a valuation later turns out to be wrong — but that is assessing practice, not a rule written into the Act, and it only works if it is built into the agreement in advance. An independent, contemporaneous valuation from a qualified valuator is the strongest defence against CRA moving the number at all.

Where this plays out

In the Case Files library, the valuation the family used to move shares to the next generation was not the one the CRA used is built on exactly this mechanic: a father’s transfer of landscaping-company shares to his daughter at an independent valuation of $2.10 a share, reassessed three years later at $2.90. a successor's separation that reached the gifted shares and an estate freeze that taxed the founder every year show two adjacent, non-tax versions of the same theme — what a gifted stake is worth once life outside the balance sheet gets involved.

Sources

• • Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s.69 — s.69(1)(a) the acquirer’s cost cap on an over-value acquisition; s.69(1)(b) the transferor’s deemed proceeds on an under-value disposition.
• • Treadstone Law — gifting and transferring assets: capital gains tax in Canada — background on non-arm’s-length transfers generally; it does not walk through the s.69(1)(a)/(b) asymmetry, which is the operative point here.