Value of Company Attributable to Voting Non-Participating Shares
Question
What is the CRA’s position on the value of a private company that is attributable to voting non-participating shares?
Response
The CRA does not have an established position on valuing different types of property. Information Circular 89-3 (IC 89-3), Policy Statement on Business Equity Valuations, outlines the valuation principles and policies that CRA generally considers and follows in the valuation of securities and intangible property of closely held corporations for income tax purposes.
IC 89-3 discusses, in general terms, the approaches applicable to closely held or private corporations, recognizing that the facts and circumstances of each case will be determinative of fair market value. The valuator must use reasonable judgment and objectivity in the selection and analysis of the relevant facts of each case.
For the above-noted reasons, it is not the intention of the CRA to write a policy or state a formal position regarding this issue.
When we value different classes of shares in a company, we generally determine the “en bloc” fair market value and then allocate the value to each class in isolation. The fair market value of each class of shares must be determined on its own merits according to the individual rights and restrictions of each class. In other words, we consider what a hypothetical arm’s length purchaser would be willing to pay for a particular class of shares based on the rights, restrictions and conditions, which ultimately affect the economic benefits to be derived from ownership. Given the above, there may be many factors, which might influence the value of voting control.
We are not aware of any case law that deals specifically with the allocation of value amongst various classes of shares where voting rights were separated from participation.
It is the opinion of the CRA that a hypothetical purchaser would be willing to pay some amount for the voting control of a company. It is difficult to ascertain what a pure voting right would be worth. However, the answer to this question will depend upon facts and circumstances of each case.