The Intent
You want to ensure that the value used for tax purposes will withstand CRA scrutiny and not trigger reassessments, penalties, or years of uncertainty.
How I Solve It
CRA relies on the legal definition of fair market value, which assumes informed, arm’s-length parties acting without compulsion. I apply the 25 Factors Affecting Business Valuation to explicitly identify, measure, and value tangible and intangible assets rather than hiding value in a goodwill plug.
Key factors include:
- Factor #1: Purpose
- Factor #4: Return on Investment
- Factor #5: Liquidity
- Factor #24: Risk
- Factor #25: Opportunity
The 5 Senses Inspection Report provides observable, real-world evidence that supports the economic substance of the valuation.
Experience
CRA does not plug your business into a fixed formula; it tests whether a reasonable, well‑supported valuation reflects what a knowledgeable, arm’s‑length buyer would pay in an open market on the valuation date.
CRA’s definition of fair market value
CRA defines fair market value (FMV) as the highest price, in money, that property would bring in an open and unrestricted market between informed, prudent, arm’s‑length parties, with no compulsion to buy or sell. FMV is used for things like deemed dispositions at death, estate freezes, rollovers, shareholder benefits, and related‑party transfers, so CRA watches it closely.
Approaches CRA accepts
CRA’s IC89‑3 “Policy Statement on Business Equity Valuations” says valuators must use reasonable judgment and recognized valuation approaches, and that FMV is usually the greater of liquidation value and going‑concern value. Accepted methods fall into the standard three families:
- Market approach: Comparables and transaction multiples.
- Income approach: Capitalization of normalized earnings or discounted cash flow.
- Cost/asset approach: Adjusted net asset or replacement cost when appropriate.
For private businesses, CRA expects normalized earnings, market‑based assumptions, and clear documentation of methodology and inputs.
How CRA actually “determines” FMV
CRA usually evaluates, rather than directly computes, your valuation:
- Reviews who prepared it (independent, qualified valuator vs self‑prepared).
- Checks that recognized methods and IC89‑3 principles were followed.
- Tests assumptions (growth, risk, multiples) against market data.
- Examines financial statements, asset appraisals, contracts, and legal rights (classes of shares, restrictions, buy‑sell agreements).
If CRA finds the value unreasonable or poorly supported, it can adjust FMV, reassess tax, or commission its own valuation; courts tend to favour valuations that are conservative, well‑documented, and professionally prepared.
Where your “experience / gut–brain axis” point fits
IC89‑3 explicitly says that fair market value depends on the facts and circumstances of each case, and that the valuator must apply reasonable judgment and objectivity to those facts. That is exactly where 10–15 years of business owner‑operator experience matters:
- It improves the quality of judgment about intangible assets, key‑person risk, and real‑world transferability of earnings—all central to going‑concern FMV.
- It makes it more likely your valuation will survive CRA review or court scrutiny because it aligns with the principles CRA itself relies on in IC89‑3.
So, CRA “determines” FMV by measuring your valuation against a principled, judgment‑heavy framework; the stronger and more experienced the valuator, the more likely that number will be accepted.
See my Experience link.
The Result
You receive a valuation that aligns with CRA expectations, significantly reducing audit and reassessment risk.