An arm’s length transaction is a deal between unrelated parties acting independently in their own interests, the standard the CRA uses to assess whether a price reflects fair market value.

Most commercial transactions are arm’s length by default. The complexity arises within corporate groups and family structures, where the CRA presumes that related parties, a shareholder and a corporation, two companies under common control, family members transacting with each other, are not dealing at arm’s length regardless of the price agreed.

The practical consequence is that every transaction between related parties needs to be priced as if it were arm’s length and supported by documentation to match. Management fees between a HoldCo and OpCo, compensation paid to family members, asset transfers within a corporate group, each is subject to CRA review, and the CRA’s remedy when it disagrees with the pricing is to substitute fair market value and reassess. Documentation is the only defense.

Related-party transactions without proper documentation are one of the most common CRA reassessment triggers.. See how Wefinx approaches tax planning.

← Back to glossary