Two standards. Same business. Same date. Different numbers. The choice between fair value and fair market value is the single most consequential decision in a business valuation — and in most cases, the legal context makes the choice, not the valuator and not the business owner. Understanding which standard applies and why it matters is the difference between getting the right answer and getting an answer to the wrong question.
| Fair Market Value (FMV) | Fair Value | |
|---|---|---|
| Definition | The highest price, expressed in dollars, that property would bring in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other. | The proportionate share of the business’s total value, determined contextually and without minority or marketability discounts. Not statutorily defined in the OBCA or CBCA — developed through case law. |
| Source | CRA working definition, derived from Henderson Estate, Bank of New York v. M.N.R. (1973) and subsequent jurisprudence. Used in IC 89-3. | Ontario and federal case law, particularly in oppression remedy and dissent proceedings. Contextual and fact-driven. |
| Discounts | May include minority discount (lack of control) and marketability discount (lack of liquidity) for partial interests. | Typically excludes minority and marketability discounts. The departing shareholder receives their proportionate share of the whole. |
| Key word | Market. What would a hypothetical buyer pay in an open market transaction? | Fair. What is the equitable value of this interest given the specific circumstances? |
| Hypothetical parties | Willing, informed buyer and seller with no compulsion. Neither has special knowledge or motivation. Arm’s length. | The specific parties in the actual dispute. The court considers the relationship, the conduct, and the circumstances. |
For a controlling interest, the two standards often produce similar results because discounts do not apply to controlling interests under either standard. But for a minority interest, the gap can be dramatic:
| Standard | Calculation (25% Interest, $2M Business) | Value | Difference |
|---|---|---|---|
| En bloc value (total business) | $2,000,000 | $2,000,000 | — |
| Fair value (no discounts) | 25% × $2,000,000 | $500,000 | — |
| FMV with minority discount only (20%) | $500,000 × 0.80 | $400,000 | −$100,000 |
| FMV with minority + marketability discounts (20% + 25%) | $500,000 × 0.80 × 0.75 | $300,000 | −$200,000 |
The same 25% interest in the same $2 million business on the same date: $500,000 under fair value, $300,000 under FMV with both discounts applied. The $200,000 difference — 40% of the undiscounted value — is entirely attributable to the choice of standard and the application of discounts.
Minority discount (discount for lack of control). A minority shareholder cannot unilaterally sell the business, declare dividends, hire or fire management, or control the direction of the company. A hypothetical buyer in the open market would pay less for a minority interest than for a proportionate share of the whole because the minority interest carries less control. The discount typically ranges from 15% to 30%, depending on the degree of minority, the existence of protective rights, and the specific circumstances.
Marketability discount (discount for lack of liquidity). Shares in a private company cannot be sold on a stock exchange. Finding a buyer takes time and costs money. There is no guaranteed market. A hypothetical buyer would pay less for illiquid private shares than for otherwise equivalent publicly traded shares. The discount typically ranges from 15% to 35%.
When discounts are applied, they compound. A 20% minority discount and a 25% marketability discount do not reduce the value by 45%. They reduce it by 40%: $500,000 × 0.80 × 0.75 = $300,000. Each discount is applied to the already-reduced amount.
Why fair value excludes discounts. In an oppression remedy or forced buy-out, the minority shareholder did not choose to sell. They are being forced out by conduct or by court order. Applying a discount for lack of control would penalize them for a position they did not choose. Applying a marketability discount would penalize them for the illiquidity of a private company they did not choose to leave. The court’s remedy is designed to be fair — not to simulate a hypothetical market transaction where the departing shareholder is at a disadvantage.
| Context | Standard | Discounts? | Why |
|---|---|---|---|
| CRA / Income Tax Act | FMV | May apply | The Income Tax Act is built on FMV. CRA assesses compliance against FMV. IC 89-3 provides valuation guidelines based on FMV. |
| Oppression remedy (OBCA s. 248 / CBCA s. 241) | Fair value (typically) | Typically no | The remedy is designed to compensate for oppressive conduct. Applying discounts would reward the oppressor. Court has discretion. |
| Dissent proceedings (CBCA s. 190) | Fair value | Typically no | The dissenting shareholder did not consent to the transaction. Discounts would penalize them for exercising a statutory right. |
| Shareholder buy-out (agreement specifies) | Per the agreement | Per the agreement | The agreement controls. It may specify FMV, fair value, en bloc value, or a formula. If silent, the court decides. |
| Divorce / family law (Ontario) | FMV (generally) | Debated | Ontario’s Family Law Act uses FMV for property equalization. Whether minority/marketability discounts apply to closely held business interests is contested and depends on the specific facts. |
| Estate / deemed disposition on death | FMV | May apply | The Income Tax Act deems a disposition at FMV on death. Minority discounts may reduce the deemed proceeds and the resulting tax liability. |
| Charitable donation of shares | FMV | May apply | The tax receipt is based on FMV. CRA scrutinizes donations of private company shares closely. |
| Corporate reorganization (s. 85, 86 rollovers) | FMV | Depends on structure | FMV of assets and shares determines the elected amount and any resulting tax consequences. |
| Sale of business (willing buyer/seller) | FMV or investment value | Not typically (selling 100%) | In a sale of the entire business, discounts do not apply. The price is negotiated between the parties. A buyer may pay more than FMV if they perceive strategic or synergistic value (investment value). |
The Canada Revenue Agency’s entire framework for business valuation is built on fair market value. The Income Tax Act does not define FMV explicitly, but the CRA’s working definition — derived from Henderson Estate (1973) and refined through decades of case law — is the standard against which all tax-related valuations are assessed.
CRA’s Information Circular IC 89-3 provides guidelines for business valuations submitted for tax purposes. Regional Valuation Officers review valuations for reasonableness, methodology, and support. A valuation that uses the wrong standard of value — for example, applying fair value when FMV is required — may be rejected regardless of how well the underlying analysis was performed.
For minority interests held for tax purposes, the treatment of discounts is nuanced. CRA may accept a minority discount where it reflects the actual marketability of the interest. But CRA also scrutinizes discounts that appear designed to reduce tax liability — an artificially high minority discount applied to an estate freeze, for example, may be challenged. The valuator must support any discount with evidence: the actual degree of minority, the existence or absence of protective rights (shotgun clause, tag-along, drag-along), the liquidity of the interest, and comparable market data.
The oppression remedy under OBCA s. 248 and CBCA s. 241 gives the court broad discretion to order any remedy it considers fit, including a forced buy-out. Ontario courts have consistently held that a buy-out must reflect fair value — meaning the departing shareholder receives their proportionate share of the business’s total value without minority or marketability discounts.
The rationale is remedial, not theoretical. The oppressed shareholder is being compensated for conduct that violated their reasonable expectations. Applying a minority discount would give the controlling shareholder a financial benefit from their own misconduct — acquiring the minority interest at a price depressed by the very power imbalance that created the oppression. Applying a marketability discount would penalize the minority for the illiquidity of a private company in a transaction they did not initiate.
Similarly, dissent proceedings under CBCA s. 190 entitle a dissenting shareholder to fair value. The shareholder dissented from a fundamental transaction (merger, amalgamation, continuance) they did not consent to. The statute protects them by ensuring they receive fair value for their interest, not a discounted price.
Fair value is not defined in either statute. It is a judicial concept developed through case law. This gives courts flexibility to consider the specific circumstances — but it also means that fair value is contested in virtually every oppression and dissent case. The quality of the valuation evidence determines the outcome.
Family law valuation is provincial. Ontario’s Family Law Act (FLA) uses fair market value for property equalization. A business interest is a property interest. Its FMV must be determined as of the valuation date (typically the date of separation).
Whether minority and marketability discounts apply to a closely held business interest in a divorce context is one of the most contested questions in family law valuation. The arguments:
For discounts: FMV is the standard. FMV contemplates a hypothetical sale. A minority interest in a private company would sell at a discount in the open market. The FLA requires FMV, and FMV includes discounts. Excluding discounts inflates the value and unfairly increases the equalization payment owed by the business-owning spouse.
Against discounts: The business-owning spouse is not actually selling the minority interest. They are retaining it. Applying a discount to an interest that will never be marketed at a discount produces an artificial result. The equalization payment should reflect the real value the business-owning spouse retains, not a hypothetical discounted sale that will never occur.
Ontario courts have gone both ways. The specific circumstances — the size of the interest, whether a sale is contemplated, the existence of a shareholder agreement, and the conduct of the parties — influence the outcome. This is an area where the quality of the expert evidence and the specificity of the on-site findings about the business’s actual characteristics are decisive.
The shareholder agreement is the one context where the parties can choose the standard of value in advance, while they are cooperating and before a dispute arises.
A well-drafted agreement specifies:
| Element | What to Specify | Why It Matters |
|---|---|---|
| Standard of value | Fair market value, fair value, or en bloc value | Determines whether discounts apply. A 30–40% difference for minority interests. |
| Treatment of discounts | Whether minority and marketability discounts apply, and under what circumstances | Even if FMV is the standard, the agreement can exclude discounts. This gives minority shareholders the protection of fair value within an FMV framework. |
| Valuation methodology | Income approach, asset approach, combination, or valuator’s discretion | Prevents disputes over methodology at the worst possible time. |
| Valuation date | Date of triggering event, fiscal year-end, or other specified date | The valuation date affects the result. Specifying it in advance prevents the date itself from becoming a contested issue. |
| Valuator selection | Single joint valuator, each party retains their own, or specified firm | A single joint valuator costs less and produces one number. Separate valuators produce a range the parties must negotiate or litigate. |
The standard of value does not change how the valuator analyzes the business. Normalization, income approach, market approach, and asset approach are the same regardless of whether the standard is FMV or fair value. The on-site inspection, the 25 Factors assessment, and the 5 Senses Inspection Report produce the same findings.
What changes is the final step: how the en bloc value is translated into the value of the specific interest being valued.
Under FMV, the valuator determines the en bloc value, then applies discounts (if appropriate) to arrive at the value of the minority interest. The discounts must be supported by evidence — market data, comparable transactions, academic studies, and the specific characteristics of the interest (rights, restrictions, protections).
Under fair value, the valuator determines the en bloc value, then calculates the shareholder’s proportionate share without discounts. The analysis is simpler at this final step, but the en bloc value itself may be more contested because there are no discounts to absorb disagreements.
In both cases, the quality of the underlying valuation — the accuracy of the normalization, the evidence supporting the capitalization rate, the thoroughness of the asset identification, the specificity of the on-site findings — is what determines whether the result is credible. A poorly supported en bloc value produces a poor result under either standard. A well-supported en bloc value, built on evidence from on-site inspection and documented through the 25 Factors methodology, produces a defensible result under either standard.
Yes. FMV is the standard, but the application of discounts within FMV is a separate question. There are circumstances where FMV produces a result with minimal or no discounts — for example, where the minority interest carries protective rights (veto, tag-along, put option) that reduce the lack-of-control discount, or where a ready market for the interest exists. The valuator assesses whether discounts are warranted based on the specific characteristics of the interest, not as an automatic mathematical exercise.
Only if the standard of value matches. A valuation prepared for CRA using FMV may not be appropriate for a shareholder buy-out where the agreement specifies fair value. The en bloc analysis may be transferable, but the discount treatment and final conclusion will differ. A valuator should be told the purpose of the valuation at the outset so the correct standard is applied from the beginning.
This is a common drafting ambiguity that creates disputes. “Value” is not a defined standard. The parties (or the court) must interpret what was intended. If the agreement was drafted by a lawyer experienced in corporate transactions, the court may look at the surrounding context — the agreement’s structure, the parties’ relationship, and the purpose of the buy-sell provision — to determine whether FMV or fair value was intended. This interpretation is itself a contested issue that adds cost and uncertainty.
Not significantly. The underlying analysis (normalization, approaches, on-site inspection) is the same. The additional work for a FMV valuation with discounts is modest — researching and supporting the specific discount rates. What affects cost is complexity of the business, the quality of available financial records, the number of contested issues, and whether the valuation must withstand cross-examination in litigation.
Both are correct within their context. FMV answers: what would a hypothetical buyer pay for this interest in the open market? Fair value answers: what is this shareholder’s equitable share of the business’s total value? They are different questions. The “correct” standard depends on the purpose of the valuation and the legal context. Applying the wrong standard to the right analysis still produces the wrong answer.
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