Would CRA consider deferred taxes on properties owned by a corporation in determining the fair market value of its shares? Consider, for example, Father who wishes to sell to Son the shares of a corporation without debt and holding a building with a FMV of $1,000,000 and an estimated latent tax liability of $150,000. Per the questioner (TaxInterpretations translation):
According to the CRA position, Son must pay $1,000,000 to Father for his acquisition of the shares, even though a third party would offer a reduced amount for the shares because there would be a discount for the amount of the latent taxes… .
After referring to share FMV being a question of fact that is not affected by who the parties are, and to IC 89-3, CRA stated:
In the above example, it is likely that the FMV of the shares would be evaluated in accordance with the going concern value of the enterprise.
In general…deferred tax is not considered as property of the enterprise because it is not receivable (or payable). …[D]eferred taxes are not considered in the determination of FMV in the context of a butterfly distribution…as well as in a rollover under subsection 85(1). Furthermore, the CRA is of the view that a deferred tax asset is not an asset for purposes of the definition of a small business corporation and of a qualified small business corporation share.
In the situation provided, the CRA would not accept the deferred taxes respecting the assets held by the corporation being considered in the determination of the FMV of the shares of the corporation.