Anonymised, illustrative composite. Two related corporations, an intercompany transfer priced at book value on the assumption that common ownership meant no tax consequence, and a mismatch that runs in only one direction.
At a glance
A family-owned distribution business was preparing to sell its core operating company to an outside buyer. Ahead of the sale, the family's bookkeeper — without bringing in a tax advisor at that stage — carved a warehouse and equipment division out of the operating company (Opco) into a newly incorporated related company (Newco), both owned by the same family trust. The plan was to keep the warehouse operations separate from what was being sold, a common and often sensible pre-sale step.
The transfer was documented as a sale at Opco's net book value for the equipment: $250,000. The reasoning, as the bookkeeper later described it, was that because Newco and Opco were owned by the same people, there was “nothing to trigger” — the group's overall position hadn't changed, so why would moving assets between two of its own companies create tax.
Months later, as part of preparing Opco's financial statements for the buyer's diligence, the accountant obtained a proper valuation of the transferred equipment as of the transfer date: $900,000, reflecting the division's real going-concern value, well above the $250,000 book value the intercompany invoice had used.
Because Opco and Newco do not deal at arm's length, the price the parties actually put on the invoice does not control the tax result. The Income Tax Act's inadequate-consideration rule applies to a disposition at less than fair market value between related parties — and it does not work the same way on both sides of the transaction.
Book value at which the intercompany transfer was priced and invoiced: $250,000. Fair market value of the same assets on the transfer date, per the later appraisal: $900,000. Gap: $650,000.
Opco was reassessed as though it had received the full $900,000 — a $650,000 taxable amount it never actually collected in cash, arising in the year immediately before the sale to the outside buyer was meant to close.
Newco's cost for the same assets remained $250,000 — what it actually paid. Nothing in the Act increased it to match what Opco was deemed to have received.
ITA s.69(1), marginal note “Inadequate considerations”, applies “Except as expressly otherwise provided in this Act”, and has two paragraphs that matter here. Paragraph (a) applies “where a taxpayer has acquired anything from a person with whom the taxpayer was not dealing at arm's length at an amount in excess of the fair market value” — it steps a related buyer's cost down to fair market value when it paid too much. Paragraph (b) applies where a taxpayer “has disposed 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… the taxpayer shall be deemed to have received proceeds of disposition therefor equal to that fair market value”.
Read the unit, and read the asymmetry. Paragraph (b) always corrects the vendor's proceeds up to fair market value, in every below-market related-party disposition. Paragraph (a) only ever corrects the buyer's cost, and only when the buyer overpaid. Here Newco paid less than fair market value, which is exactly the case paragraph (a) does not reach — there is no “excess” for it to correct. Newco's actual cost of $250,000 simply stands. The Act deems the seller to have received more than it did; it does not deem the buyer to have paid more than it did. Those are two different rules doing two different jobs, and only one of them fires on a below-market sale.
This is the default the Act applies whenever a related-party transfer happens outside a rollover. A joint election under ITA s.85(1) exists precisely to let related parties choose an elected amount — as low as the transferor's own cost, in the ordinary case — and have “the amount that the taxpayer and the corporation have agreed on in their election in respect of the property… deemed to be the taxpayer's proceeds of disposition of the property and the corporation's cost of the property”, with the same figure standing on both sides of the transaction. No election was filed here. Without one, s.69(1) fills the gap, and it fills it asymmetrically.
Opco's tax bill on the reassessed $900,000 in deemed proceeds came due in the year before the sale to the outside buyer was scheduled to close, drawing down cash reserves the family had been counting on to fund closing costs and an earn-out holdback. The deal itself did not fail, but the family funded the unplanned liability out of proceeds that were meant to go to them, not to the CRA on a transaction where no cash had actually changed hands for the taxed amount.
Newco's $250,000 cost base stands unchanged going forward. When Newco eventually disposes of those same assets — whether by sale, wind-up or a further reorganization — the $650,000 that was already taxed once in Opco's hands is taxed again against Newco's low cost base. Nothing in this rule, or any other, credits the tax Opco already paid against Newco's future disposition.
Had the family filed a joint s.85(1) election at the time of the original transfer — naming an elected amount at or near Opco's own cost — the transfer could have moved tax-deferred, with Newco inheriting that same cost as its own. The $650,000 gap would not have disappeared; it would have moved with the assets into Newco rather than being crystallized as an immediate, uncredited tax cost to Opco in the year before a sale. The mechanic that actually fired — s.69(1) — is not a penalty provision; it is simply what happens by default when the election that exists for exactly this situation is not used.
The tell was the phrase “nothing to trigger”. Common ownership changes who ultimately bears a tax cost; it does not change whether a disposition has legal effect between the two separate corporate persons who are parties to it. Every intercompany transfer, at any price, between related corporations is a real disposition for tax purposes unless a specific relieving provision — an election, a rollover, an exempt reorganization — is affirmatively used.
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