Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
TAXATION ADVISORY COMMITTEE
7. Valuations
It is the opinion of the Head Office Business Equity Valuation Section that property transferred on a rollover transaction should be valued at the highest price estimated to be available in an open, unrestricted market between informed and prudent parties acting at arm's length and under no compulsion, expressed in terms of money or money's worth. This is the generally accepted definition of fair market value.
The assumption by the transferee of the transferor's cost base and the attendant potential tax liability for any ultimately realized capital gain, etc., in an eventual disposition is an aspect of the transaction which should not affect the price which an arm's-length purchaser would have paid for the asset, and in our view is not one of the components of value of the specific asset.
Where preferred shares are taken back as part of the consideration and these shares have not sufficient investment qualities to warrant valuation at the par value for which they were issued, an arm's-length purchaser would demand a discount for the deficiency, and this view is shared by the Valuation Section. If the share issue relies on a retractible feature to justify par value, our opinion is that the shares could not be valued at par unless the issuing company could, on demand, redeem them at par and satisfy the tax liability resulting from any asset sales required to raise funds for the redemption.
Rulings Division has issued favourable opinions regarding rollovers where such retractible preferred shares are involved, to accomodate legitimate estate freezes, but has not explicitly confirmed that these shares would be worth their par value. Valuations Section and Rulings Division have this question under study to ensure consistent treatment of these situations.
It is recommended that details of specific cases where inconsistent treatment is encountered should be referred to Head Office, Rulings Division.
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© Her Majesty the Queen in Right of Canada, 1981
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© Sa Majesté la Reine du Chef du Canada, 1981
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