A non-arm’s length transaction is a deal between related parties, family members, a shareholder and a corporation, or entities under common control, where the CRA presumes the price may not reflect fair market value.
The Income Tax Act deems certain relationships to be non-arm’s length automatically. Others are determined by the facts, based on whether one party has sufficient influence over the other to direct the terms of the transaction. In either case, the CRA can substitute fair market value if it concludes the actual price is not consistent with what unrelated parties would have agreed.
The consequences extend beyond the immediate transaction. A pattern of non-arm’s length transactions priced below fair market value, shareholder loans at below-market interest, assets transferred at understated values, or management fees without commercial substance creates exposure across multiple years and can result in significant reassessments, interest, and penalties.
See also: Arm’s Length Transaction · Shareholder Loan · Deemed DividendEvery transaction inside a related-party structure needs to be priced and documented as if it could be reviewed. See how Wefinx approaches tax planning.