Anonymised, illustrative composite. Three siblings co-owned an equipment-rental company equally. One wanted out. The company's value was not in dispute. What her one-third block was actually worth was.
At a glance
Three siblings had run an equipment-rental business together for two decades, each holding an equal one-third of the shares under a unanimous shareholder agreement. One sister wanted to exit — amicably, with no dispute about the company's overall health or prospects — and the agreement's buyout mechanism required the remaining two to purchase her shares at a value determined by an independent business valuator.
Nobody disputed that the company as a whole was worth $6,000,000; a broker opinion obtained the previous year, and unchallenged by any of the three, supported that figure. The departing sister's expectation, reasonably enough from where she sat, was straightforward arithmetic: one-third of $6,000,000 is $2,000,000, and that is what her shares were worth.
The valuator engaged under the agreement's mechanism did not use that arithmetic. A one-third block in a private company with no market for its shares is not simply a third of the enterprise — it is a specific piece of property with its own characteristics, and those characteristics reduce what a hypothetical willing buyer would actually pay for it.
Starting from the pro-rata figure of $2,000,000, the valuator applied a discount for lack of control — a minority block cannot direct dividend policy, cannot force a sale, cannot appoint management, and a buyer pays less for shares that come with none of that power — bringing the figure to $1,700,000. A further discount for lack of marketability followed: there is no public market for shares in a closely-held rental company, no ready buyer, and a private-company minority block is materially harder to sell than a comparable public security, bringing the final figure to $1,360,000. The two discounts, applied in sequence, accounted for the full $640,000 gap between what the sister expected and what the valuation produced.
No statute prescribes the size of a minority discount or a marketability discount, and none was drafted around as though one did. What the Income Tax Act does establish, in provisions like s.69(1) and s.70(5), is the general principle that Canadian tax law values the specific property actually transferred — a particular block of shares, with whatever rights and limitations attach to it — rather than treating shares as an interchangeable fraction of the enterprise's total value. That principle is why a valuator asked to price a one-third block does not simply divide the whole company by three; the question is what an arm's-length buyer would actually pay for this non-controlling, non-marketable interest, not what a proportionate slice of control would be worth if control were what was being sold.
This is a question professional business valuators are trained to answer, using recognised methodology — discount rates drawn from comparable minority transactions, control premiums observed in the market and run in reverse, and marketability discounts benchmarked against restricted-stock and pre-IPO studies. It is evidence, tested and weighed like any other expert evidence, not a rule fixed by legislation. Two competent valuators can reasonably land on different discount percentages for the same block; what they cannot reasonably do is skip the discount altogether and call a minority block a pro-rata fraction of the whole.
The three siblings had, wisely, built a single-valuator mechanism into their shareholder agreement rather than a dueling-experts process — each side hires its own valuator and a third breaks the tie is a common alternative, and a far more expensive and adversarial one. The departing sister's counsel reviewed the valuator's working papers, confirmed the discount rates were within the range professional standards would support for a company of this size and sector, and she accepted the $1,360,000 figure rather than contest it.
The buyout closed on a promissory note from the two remaining siblings' holding company, amortized over four years, with the discount built into the payment schedule rather than litigated.
Had the agreement instead specified a flat pro-rata formula — enterprise value divided by ownership percentage, with no discount mechanism at all — the two remaining siblings would have overpaid $640,000 for a non-controlling interest neither of them would ever hold again once the third owner exited and the company consolidated to two equal holders. A pro-rata buyout formula quietly transfers value from the buyers to the seller on every minority exit, because it prices control the departing shareholder never actually had.
The tell was not a red flag in the numbers; it was a gap in the original agreement's drafting. The unanimous shareholder agreement specified who would value the shares on an exit and roughly when, but said nothing about what was being valued — enterprise value, or the actual block. That silence is exactly where a departing shareholder's honest expectation and a valuator's honest methodology diverge, and it is worth closing in the agreement itself rather than leaving it to be worked out for the first time when someone actually leaves.
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