Two related people can agree on any number they like. Income Tax Act subsection 69(1) then substitutes its own. What makes it dangerous rather than merely inconvenient is that it does not rewrite the transaction — it rewrites one party’s side and leaves the other where it was.
Key takeaways
SECTION 01 OF 10
Section 69 opens “Except as expressly otherwise provided in this Act”, under the marginal note Inadequate considerations. Every rollover elsewhere overrides it; nothing else does. There is no reasonableness defence and no de minimis floor.
Who is inside is decided by section 251. Subsection 251(1)(a): “related persons shall be deemed not to deal with each other at arm’s length” — deemed, so evidence of hard bargaining rebuts nothing. Related persons under 251(2) include individuals “connected by blood relationship, marriage or common-law partnership or adoption”, and a corporation and whoever controls it.
SECTION 02 OF 10
It 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 thereof”, and then deems acquisition “at that fair market value”.
Read what it adjusts. It cuts the acquirer’s cost and says nothing about the vendor’s proceeds; paragraph (b) cannot fill the gap, reaching only proceeds less than fair market value, or a gift. A corporation buying equipment from its shareholder for $400,000 when it is worth $250,000 takes a $250,000 cost; the other $150,000 buys nothing.
The excess is exposed on the other side too: the Folio’s list of provisions the clause heads off opens with subsection 15(1), the shareholder-benefit rule, which Treadstone Law covers as the tax cost of personal use of corporate assets.
SECTION 03 OF 10
Three triggers. Subparagraph (i): a disposition “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 thereof”. Subparagraph (ii): “to any person by way of gift” — any person, related or not. Subparagraph (iii): a transfer to a trust not changing beneficial ownership.
The words are “deemed to have received proceeds of disposition therefor equal to that fair market value”. The CRA restates it plainly: “If you sell property to someone with whom you do not deal at arm’s length and the selling price is less than its FMV, your selling price is considered to be the FMV” (transfers of capital property). Tax falls due on money that never arrived.
SECTION 04 OF 10
Paragraph (c) is the only part that hands cost up. It applies “where a taxpayer acquires a property by way of gift, bequest or inheritance or because of a disposition that does not result in a change in the beneficial ownership of the property”, and then deems acquisition “at its fair market value”.
The list is exhaustive, and a bargain sale is not on it: an agreement naming a price, with money changing hands, is a sale, and beneficial ownership changes. The CRA’s special rules page confirms the bump for gifts: “If you receive property as a gift, you are generally considered to have acquired the property at its fair market value (FMV) on the date you received it.”
Contrast section 68: paragraph 68(a) deems a reallocated part of a blended price to be the vendor’s proceeds and the acquirer “to have acquired it for an amount equal to that part”. One sentence, both sides. Section 69 was not drafted that way.
SECTION 05 OF 10
A parent holds shares with an adjusted cost base of $100,000 and a fair market value of $2,000,000. Her daughter can raise $500,000, so that is the price. Subparagraph 69(1)(b)(i) deems proceeds of $2,000,000 — a $1,900,000 gain on $500,000 of cash.
The daughter’s cost is $500,000. Three years later she sells for $2,000,000 and reports a $1,500,000 gain. The family has reported $3,400,000 of gain on $1,900,000 of real accretion — $1,500,000 taxed twice, because (b) moved the seller and (c) left the buyer where she was.
Treadstone Law’s guide to gifting assets lands in the same place: a below-market family sale is “deemed to occur at FMV, not the price paid”, while the child’s ACB “may be limited to what they actually paid — creating a double-tax problem”.
SECTION 06 OF 10
Run the same paragraphs through a pure gift. Subparagraph (b)(ii) still deems the giver’s proceeds to be fair market value — the same $2,000,000. But paragraph (c) now applies, because the recipient acquired “by way of gift”, so their cost is $2,000,000 and the second layer never forms. As Treadstone Law puts it, a gift “doesn’t avoid the fair-market-value rules that apply to related-party transfers” — but the dollar sale costs more.
It is a choice, not a cure: the giver funds the tax with no proceeds, and under section 160 the recipient becomes jointly liable for the transferor’s tax debt up to the amount by which value “exceeds the fair market value at that time of the consideration given” — on a gift, everything, as a separate article sets out. Treadstone Law on buying from a family member adds that a gift of a business “is a different transaction from a sale… and isn’t something to structure informally”.
SECTION 07 OF 10
Subsection 73(1), marginal note Inter vivos transfers by individuals, deems a transfer to a spouse or common-law partner to occur at adjusted cost base, and the property “to have been acquired at that time by the transferee for an amount equal to those proceeds”. Both sides move together: no gain, no lost cost.
Subsection 85(1) does the same by election: paragraph (a) makes the agreed amount “the taxpayer’s proceeds of disposition of the property and the corporation’s cost of the property” — one number, binding on both, capped at fair market value by paragraph (c). Paragraph 85(1)(e.2) raises it where part of the excess is “a benefit that the taxpayer desired to have conferred on a person related to the taxpayer”. Treadstone Law’s section 85 primer is right about the limit of it: “The gain doesn’t disappear; it moves to a later point in time.”
SECTION 08 OF 10
Freezes, family trusts and Holdco insertions are non-arm’s-length transfers priced at a value nobody outside the family has tested. Each is a subsection 69(1) event unless an election covers it, at a number the CRA can revisit years later.
Subsection 69(11) targets value shifted to use someone else’s attributes: where a below-value disposition forms part of a series and one main purpose is the benefit of a deduction or exemption available to a non-affiliated person, proceeds are deemed to be fair market value — if the later disposition happens, or is arranged, “before the day that is 3 years after” the transfer. Subsection 69(12) lets the Minister reassess “at any time”.
Timing is a separate exposure: Treadstone Law on a Holdco rollover mid-negotiation warns that restructuring a deal “already substantially agreed can attract scrutiny under the… general anti-avoidance rules”. Where shares go back to a related corporation, section 84.1 applies too.
SECTION 09 OF 10
Every operative phrase in 69(1) turns on “fair market value”, which the Act does not define. Treadstone Law gives the test as “the price a hypothetical, arm’s-length buyer and seller would agree on in an open market”, with a Chartered Business Valuator the recognised credential. The CRA is explicit at ¶1.4 that it “is neither an arbitrator nor a valuator”.
The standard is not perfection. Value must be “determined by a fair and reasonable method”; using a different method from the CRA’s, or “the relative inaccuracy of a FMV determination performed in good faith”, is not fatal on its own, and the work “does not have to be completed by a valuation expert”. Not trying is what is not forgiven: a large gap “may indicate that the taxpayers did not make a real effort”. Skipping a valuation to stay informal “removes the objective evidence”.
Subsection 69(1.2) closes one route around the number: where a non-arm’s-length person holds a below-market right to use the property, proceeds are the greater of the actual proceeds and the value “determined without reference to the existence of the agreement”.
SECTION 10 OF 10
The preventive instrument is set out in Income Tax Folio S4-F3-C1: the parties agree that “if the CRA or a court of law determines that the fair market value (FMV) of the transferred property is greater or less than the price otherwise determined in the agreement, that price will be adjusted”. Where it qualifies, the property “will be considered to be transferred for FMV consideration” and the listed provisions — 69(1) among them — produce no inclusion.
Four conditions at ¶1.5 must all be met: a “bona fide intention of the parties to transfer the property at FMV”; a fair and reasonable valuation method; advance agreement to use the value the CRA or a court determines; and that “the excess or shortfall in price is actually refunded or paid, or a legal liability therefor is adjusted”. The last is where clauses fail.
One caution, since both instruments sit in the same agreement: a commercial purchase price adjustment is a different animal — Treadstone Law’s article of that name describes a working capital true-up and does not touch the Income Tax Act or non-arm’s-length transfers. Three things belong in the file at closing: a valuation dated at the transfer, a clause drafted to ¶1.5, and a characterisation chosen deliberately. Where the price also covers services or a non-compete, section 68 reallocates it.
No. Subsection 69(1)(b) deems the parent’s proceeds to be fair market value, so the parent is taxed on the full gain, but paragraph (c) only bumps a buyer’s cost to fair market value on a gift, bequest or inheritance — not on a sale at any price. The child’s cost stays at what they actually paid, so the same value can end up taxed twice when the child later sells.
No, but it can avoid the double taxation a below-market sale creates. A gift still triggers subparagraph 69(1)(b)(ii), deeming the giver’s proceeds to be fair market value, but because the recipient acquired the property by way of gift, paragraph (c) bumps their cost up to that same fair market value — so the second layer of tax on a later sale never forms, unlike a bargain sale.
No. The CRA accepts that value must be determined by a fair and reasonable method, and the work does not have to be completed by a valuation expert. What is not forgiven is skipping the exercise altogether — a large gap between the agreed price and fair market value can indicate the parties did not make a real effort, so having no valuation at all removes the objective evidence a defensible price needs.
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