Fair market value vs fair value in Canadian business valuation

The standard of value changes the number. A 25% minority interest in a private company could be worth dramatically different amounts depending on whether the valuator applies fair market value or fair .value. The difference is not academic. It determines how much tax you owe, how much a departing shareholder receives, or what a court awards in an oppression remedy.

Business owners often assume "value" is a single number. It is not. Canadian valuation practice recognizes multiple standards of value, and the two most common are fair market value (FMV) and fair value. Understanding which applies, and why, is essential before you commission a business valuation.

What is fair market value?

Fair market value is the standard used by the Canada Revenue Agency for tax purposes. The CRA defines FMV as the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between informed, prudent parties acting at arm's length and under no compulsion to act.

Every element of that definition matters. The hypothetical buyer and seller are knowledgeable. Neither is forced to transact. The market is open, meaning any buyer could participate. FMV reflects what a notional market participant would pay, not what a specific buyer with unique synergies might offer.

Because FMV assumes an open market transaction, it typically incorporates discounts that reflect the realities a buyer would face. A minority interest with no control over operations, distributions, or strategy is worth less than a controlling stake. A private company interest that cannot be freely traded on a stock exchange is worth less than an equivalent public company holding. These are commonly referred to as minority discounts and marketability discounts.

What is fair value?

Fair value arises most often in the context of shareholder disputes and oppression remedies under the Canada Business Corporations Act (CBCA) or provincial equivalents such as the Business Corporations Act (British Columbia). When a court orders a buyout of a shareholder's interest under an oppression remedy or dissent proceeding, it typically applies the fair value standard.

The critical distinction: fair value generally does not apply a minority discount. The reasoning is equitable. A minority shareholder who has been oppressed or squeezed out should not suffer an additional penalty through a discount that reflects the very lack of power the majority used against them. Courts have consistently held that applying a minority discount in these circumstances would reward the oppressor.

Fair value may or may not include a marketability discount depending on the jurisdiction and specific circumstances. Canadian courts have been inconsistent on this point, and the treatment varies by province and by the facts of each case.

When FMV applies

FMV is the required standard for virtually all tax-related valuations in Canada:

Estate freezes: When a business owner freezes the current value of their shares and transfers future growth to the next generation, the freeze price must reflect FMV. Overstating or understating FMV creates tax exposure for either the freezor or the next generation.

Section 85 rollovers: Transferring assets to a corporation on a tax-deferred basis under Section 85 of the Income Tax Act requires elected amounts within a range bounded by FMV.

Deemed dispositions: Death triggers a deemed disposition at FMV. The valuation determines the capital gain on the terminal return.

Share transactions between related parties: Any transfer of shares between non-arm's length parties is measured against FMV to determine whether a benefit has been conferred.

Charitable donations of private company shares: The tax receipt amount must reflect FMV.

In all of these situations, the CRA can reassess if it disagrees with the FMV conclusion. A well-supported independent valuation is the best defence against reassessment.

When fair value applies

Fair value is dictated by the legal proceeding, not chosen by the valuator:

Oppression remedies: Under the CBCA or BCBCA, a court may order the purchase of a shareholder's interest at fair value when oppressive conduct is established.

Dissent rights: When a corporation undertakes a fundamental change (such as an amalgamation or sale of substantially all assets), dissenting shareholders have the right to be bought out at fair value.

Shareholder buyout agreements: Some shareholders' agreements specify fair value as the standard for mandatory buyouts, though this depends on the drafting of the agreement itself.

The practical impact

Consider a private company with an enterprise value of $10 million. A shareholder holds a 25% interest.

Under FMV, a valuator might apply a minority discount of 15% to 25% and a marketability discount of a similar magnitude to reflect the lack of control and liquidity. The resulting value of the 25% interest could be well below $2.5 million.

Under fair value, the same 25% interest would typically be valued at its pro rata share of the total equity value, without a minority discount. The result would be closer to $2.5 million, or potentially the full pro rata amount.

The gap between the two conclusions can be significant, sometimes exceeding 30% to 40% of the pro rata value. This is why the standard of value is one of the first things a Chartered Business Valuator determines before beginning the analysis.

The valuator does not choose the standard

A common misconception is that the valuator selects the standard of value. In practice, the standard is dictated by the purpose of the valuation. A CBV engaged for a tax matter applies FMV because the Income Tax Act requires it. A CBV engaged for a shareholder dispute applies fair value because the court proceeding demands it.

This is also why it matters to work with a valuator who understands both standards and the legal contexts in which they arise. At KitsWest Capital, we work closely with legal counsel to ensure the valuation reflects the correct standard and is defensible in the relevant forum, whether that is the CRA, the Tax Court of Canada, or a provincial superior court. Learn more about our valuation services or read additional insights articles on related topics.

Frequently asked questions

What is the main difference between fair market value and fair value in Canada?
Fair market value assumes an open market transaction between arm's length parties and typically includes minority and marketability discounts. Fair value, used in shareholder disputes and oppression remedies, generally excludes minority discounts to protect the interests of the affected shareholder. The standard applied depends on the legal context of the valuation.

Does the CRA use fair value or fair market value?
The CRA uses fair market value for all tax purposes, including estate freezes, deemed dispositions, Section 85 rollovers, and share transactions between related parties. Fair value is a legal standard used by courts, not a tax standard.

Can a minority discount reduce the value of my shares for tax purposes?
Yes. Under the FMV standard used for tax, a minority interest in a private company is typically subject to a minority discount reflecting the holder's lack of control. The size of the discount depends on the specific facts, including the rights attached to the shares and the terms of any shareholders' agreement.

Who decides which valuation standard applies?
The legal context determines the standard. Tax matters require FMV under the Income Tax Act. Court-ordered buyouts under the CBCA or BCBCA typically require fair value. A Chartered Business Valuator identifies the correct standard based on the engagement's purpose and applicable legislation.

Should I get a valuation before a shareholder dispute arises?
Having a current, independent valuation can strengthen your position and inform negotiations before a dispute escalates. A well-documented valuation also helps when drafting or updating shareholders' agreements that specify buyout terms. Contact us to discuss your situation.