The Judicial Determination of Fair Market Value
| Author | Hon. Karen R. Sharlow |
| Pages | 3-22 |
3
Chapter 1
The Judicial Determination of
Fair Market Value
hon. karen r. sharlow*
A. INTRODUCTION
The purpose of this paper is to explain the process by which the cour ts
resolve valuation disputes. I have been asked to focus on fair market value
cases, as seen from t he point of view of the Federal Court of Appeal. In a
“fair market value case,” the object of the litigation is to establish the fair
market value of something. I do not propose to discuss t he many cases in
which the value of something is relevant but not in dispute. For example,
there are numerous cases involving a person who receives something as an
employee or as a shareholder, where an issue arises as to whether the value
of that thing is subject to tax. Often, there is a debate as to whether any
benefit has been received at all.1 Alternatively, sometimes it is agreed that
there is a benefit, but there is a dispute as to whether the value of the bene-
fit should be measured by the cost incurred to provide it or the amount the
recipient would have had to pay to obtain it.2 Such issues are usually matters
of statutory interpretation. I do not classify those as fair market value cases,
* I am grateful for t he editorial assistance of my law c lerk, Renée Miller, and for the com-
ments and advice of Justices Ma rshall Rothstein and Marc No ël, who reviewed an early draf t
of this paper. Any rema ining errors and omissions are m ine.
1 See, for e xample, McGoldrick v. Ministe r of National Revenue, [20 04] 3 C.T.C. 264, 2004
DTC 6407 (F.C.A.); Colubr iale v. Her Majesty the Qu een, 2005 FCA 329, 2005 DTC 5609 .
2 See, for example, Youngman v. Ministe r of National Revenue , [1990] 2 C.T.C. 10, 90 DTC
6322 (F.C.A.).
4 hon. karen r. sharlow
unless it is determined that the benefit in question must be valued at its fair
market value and the fair market value is a matter of controversy.
Cases on the determination of fair market value arise in many dif ferent
contexts. Many of the import ant fair market value cases from past decades
involved succession duties, estate ta xes, and property taxes.3 Today, in the
Federal Court of Appeal and the Tax Court of Canada, valuation issues arise
most often in appeals of assessments under the federal Incom e Tax Ac t4 and
Part IX of the Excise Tax Act5 (which imposes the federal goods and services
tax, the GST).6
In the context of tax appeals, many fair market value cases are collec-
tion matters. The most common examples are appeals of assessments made
under section 160 of the Inco me Tax A ct or section 325 of the Excise Tax Act,
on the basis that a tax debtor has t ransferred property to a related person
for less than fair market value consideration, which causes the recipient of
the proper ty to become liable for some or all of the tax debt. Many other
tax appeals deal w ith provisions, such as sect ion 69 of the Income Tax Act,
that require transac tions to be valued on some objective basis, such as fair
market value.
Typically, transactions that require an objective valuation for tax purposes
occur in circu mstances in which it may be assumed that the normal market
pressure s are absent (t hat is, there is no incentive for the buyer to ba rgain for
a lower price, or for the seller to bargain for a higher price). That may occur if
the relationship between the parties to the transaction is such that the inter-
ests of one party will coincide with, or be subordinate to, the interests of the
other. For example, the parties may be connected by family ties or, in the case
of commercial undertakings, common ownership. The incentive to depart
from marke t prices may be pa rticular ly strong if one of t he parties res ides in
a ju risd ictio n wit h a sig nifi cant ly hig her t ax rat e tha n the other, as may occu r
in cases that attract the application of the transfer pricing rules.
In tax appeals, difficult fair market value cases have arisen in relation
to technology or knowledge-based property for which there is little or no
established market (such as seismic data or software). Typically, the prop-
3 See, for exa mple, Grierson v. City of Edmont on (1917), 58 S.C.R. 13; Untermyer E state v. British
Columbia (Attor ney General), [1929] S.C.R. 84 [Untermye r Estate]; Montreal Isl and Power Co.
v. The Town of Laval des R apides, [1935] S.C.R. 304; Attor ney General of Albe rta v. Royal Trust
Company (In re Withycombe Es tate), [1945] S.C.R. 267; The King v. Jones, [1950] S.C .R. 286.
4 R.S.C. 1985 (5th Supp.), c. 1.
5 R.S.C . 1985, c. E-15.
6 Trivia buffs will want to k now that, according to a computer search, t he word “value” is used
555 times in the Incom e Tax Act, and 139 times in Part I X of the Excise Tax Act. The ph rase
“fair market va lue” is used 391 times in the Incom e Tax Act, and 61 times in Part IX of t he
Excise Tax Act.
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