Tax rules for non-arm's-length transactions below fair market value
Inadequate considerations
Section 69 ensures that transfers of property between non-arm's-length parties (family members, controlled corporations) are treated as occurring at fair market value for tax purposes, preventing under-reporting of gains and inflating of losses.
Plain-language explanation
Section 69 is the ITA's general rule for non-arm's-length transactions. When property is transferred between related parties for less than (or more than) fair market value (FMV), the Act intervenes to ensure the correct tax consequences flow.
s.69(1)(a) — Transfer to non-arm's-length person for less than FMV (gifting): The transferor is deemed to have received proceeds equal to FMV. So if you give your child a stock portfolio worth $50,000 (ACB: $20,000), you are deemed to have sold it at $50,000 — you have a $30,000 capital gain even though you received no money.
s.69(1)(b) — Transfer from non-arm's-length person at more than FMV (overpayment): The transferee (buyer) is deemed to have acquired the property at FMV, not the inflated price. The excess paid is deemed to be a gift or shareholder benefit — not added to the ACB.
s.69(1)(c) — Transfer to non-arm's-length person at below FMV (acquisition by recipient): The recipient is deemed to have acquired the property at FMV (not the price actually paid). This prevents the recipient from claiming artificially low ACBs.
Attribution: For transfers to spouses and certain trusts, additional attribution rules (s.74.1, s.74.2) may attribute the resulting income or capital gains back to the transferor if no election was made.
Example
Parent sells her rental property (FMV: $400,000, ACB: $150,000) to her son for $1 (as a gift). Under s.69(1)(a), she is deemed to have received $400,000 — capital gain of $250,000. Her son is deemed to have acquired the property at $400,000 ACB under s.69(1)(c). Neither the gain nor the adjusted ACB can be avoided.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Revised s.69 rules to address transfers to and from partnerships, clarifying that the FMV rule applies consistently to partnership interest transfers in non-arm's-length contexts.
Common questions
If I sell property to my corporation for less than FMV, what happens? +
Under s.69(1)(b), your corporation acquires the property at FMV — it cannot claim a higher ACB just because it overpaid you. And if you sold at below FMV, you are deemed to have received FMV under s.69(1)(a). To transfer property to your corporation without triggering a gain, you need the s.85 rollover election.
Does s.69 apply to arm's-length garage sales? +
No. Section 69 only applies to non-arm's-length transactions. If you sell property between arm's-length parties (strangers, unrelated businesses) at a market price both agree on, s.69 does not apply — even if the price turns out to be lower than FMV.
Key terms
Related sections
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 69. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.