Non Arm’s Length Transaction: A  transaction which occurs between people or parties which the CRA deems to be related.

Included in the definition of related (non arm’s length) parties includes related individuals and can also include corporations.

Paragraph 251(1)(a) ITA deems that related persons do not deal with each other at arm’s length. This is the case regardless of how they actually deal with one another.  So if you decide to sell your $1,000,000 business to your child for $1, the CRA will treat the transaction for tax purposes as if you sold the business for its Fair Market Value (“FMV”). This means that if you bought the shares for $100 when you first established the business, in this case you would have a capital gain of $999,900 – regardless of the fact that you received $1 as the purchase price from your kid.

Subsection 251(2) defines related persons for the purposes of the Act. Subsections 251(3) to 251(6) clarify and expand on the definitions.

Paragraphs 251(2)(b) and (c) set out the statutory rules for determining when a corporation and another person will be considered to be related persons for purposes of the Act.

It is very important to get proper legal advice prior to making transfers between non-arm’s length parties when the transferor has a tax debt, or where the consideration paid is less than FMV.  It is important to ensure that you have been advised when engaging in a Non Arm’s Length Transaction.

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