If you hold private shares in a US startup and are planning to move to Canada, you may owe no tax on pre-move gains, but only if you get your FMV valuation right before you cross the border. Here’s what you need to know.
Since 2020, 56,240 Americans have been admitted as permanent residents to Canada. Many of those emigrants are startup founders, early employees, and investors carrying private equity shares across the border. American private equity-holders can move into Canada without worrying too much about tax implications because of the deemed acquisition provision.
This article explains how deemed acquisition rules affect private shareholders, how FMV is determined under Canadian standards, and what CRA expects in a compliant valuation.
What is the deemed acquisition provision?
Under Section 128.1 of the Canadian Income Tax Act (ITA), the moment you become a Canadian resident, you are subject to a deemed acquisition provision. Simply put, you are treated as though you sold your private shares and immediately repurchased them at fair market value (FMV) on the day your residency began.
This establishes a new cost base equal to the FMV, ensuring that only gains accruing after residency are subject to Canadian taxation.
Are there any exceptions to this rule?
Stock option rights characterized as compensation rights rather than capital property are excluded from the deemed disposition provision. This exception applies only when these stock options give you the right to receive compensation for your services in that same year or the previous year.
For instance, if you hold ISO options from services rendered in the current or prior year, those are excluded from the FMV step-up and will be taxed as employment income in Canada when exercised.
For such rights, there is no FMV step-up. They will instead be taxed in Canada when exercised. And for all other private equity holdings, the FMV assigned at deemed acquisition sets your Canadian cost base and, by extension, shapes your future tax liability.
How Does Canada Define Fair Market Value (FMV)?
Canada Revenue Agency (CRA) defines FMV as the highest price that a property would achieve in an open, unrestricted market, between a buyer and a seller who are each knowledgeable, prudent, and acting entirely independently of one another.
The IRS-accepted definition is similar in spirit: the price at which two knowledgeable, willing parties would enter a transaction for the company’s equity under normal market conditions.
The key distinction is the phrase “highest price”.
This does not mean an outlier sale or an unusually favorable transaction. In practice, this means your Canadian valuation may be higher than a 409A valuation you had done in the US, because the appraiser must justify the highest defensible value, not a conservative or midpoint estimate. This can actually benefit emigrating shareholders by establishing a higher cost base, reducing future Canadian capital gains.
For private company shares, this matters enormously. Unlike publicly traded securities with visible market prices, private equity has no observable prices. The appraiser must reconstruct what an arm’s-length transaction would look like in the kind of market described by the CRA and then choose the highest possible price.
What to do before your move date
Understanding the rules is one thing. Acting on them in time is another. Here is a simple sequence to follow before you become a Canadian resident:
- Step 1: Identify all private equity holdings – Make a complete list of every private company share, option grant, or convertible instrument you hold. Note the company, share class, grant date, and number of units. Don’t overlook advisor shares, carried interest, or any equity received as compensation.
- Step 2: Confirm your residency start date – The deemed acquisition is triggered on the day you become a Canadian resident,not the day you file taxes or arrive in Canada. Work with an immigration attorney to pin down the exact date, because your FMV valuation must be tied to that specific day.
- Step 3: Commission a Section 128.1-compliant valuation – Engage a qualified business valuator before your move date, not after. The valuation must reflect FMV as of your residency date, and that is much harder to reconstruct retroactively.
- This is where Eqvista comes in. Step 3 is the one most emigrants leave too late. Eqvista prepares audit-defensible Section 128.1 valuations. Contact us as soon as your move date is confirmed.
- Step 4: Retain all documentation for CRA – Keep the full valuation report, supporting schedules, and any transaction records. CRA does not require you to file the valuation upfront, but if your return is ever reviewed, you will need to produce it.
What Kinds of Valuation Reports Does CRA Expect?
For most early-stage startup shareholders, direct transaction evidence is unavailable making professional appraiser opinion the operative method. The stronger the market evidence your appraiser can bring in, the more defensible the report.
Below is a hierarchy of valuation methods CRA recognizes, ordered from strongest to weakest in evidentiary weight.
Cost or Selling Price
The most persuasive evidence of FMV is a recent, arm’s length transaction for the shares of the private company in question. If these shares changed hands through a funding round, secondary sale, or acquisition discussion close to your emigration date and under normal market conditions, that transaction price carries significant weight.
For this to hold, the sale must have been between independent, fully informed parties, and neither of them should have been acting under compulsion.
If such a transaction did occur, you must document the purchase price, source, and date of acquisition carefully. CRA expects appraisers to demonstrate that this information was considered, and if it was ultimately not used, to explain why.
Sales of Comparable Companies
Where no direct transaction exists, the next strongest approach is referencing transactions involving comparable companies at a similar stage, in the same sector, and with a comparable financial profile.
The strength of this evidence depends on three factors, which are:
- Similarity: The closer the comparable to your company, the stronger the argument, with explicit adjustments made for any meaningful differences in scale, financial profile, or market position.
- Timing: Transactions should be as close as possible to your emigration date, and older data must be adjusted to reflect the current value.
- Arm’s length nature: Only completed sales between independent parties qualify. Asking prices and indicative offers do not count as FMV evidence.
- Replacement Cost
Where transaction evidence is limited, replacement cost may be considered. This refers to what it would cost to rebuild the company. However, the International Society of Appraisers (ISA) has observed that replacement cost frequently exceeds FMV. So, this method is quite unlikely to satisfy CRA scrutiny for most private company shares.
Opinions of Professional Appraisers
Opinions of professional appraisers carry the least evidentiary weight when unsupported by market data. However, in practice, a well-prepared valuation report integrates professional judgment with verifiable evidence and applies established methodologies to interpret limited or imperfect data.
So, when direct market evidence is unavailable, as is often the case with private company shares, the appraiser’s role becomes central to FMV calculations. For such appraiser opinions to hold under CRA scrutiny, the underlying assumptions, data sources, and adjustments must be clearly documented and defensible.
Cost of Getting it Wrong
If you don’t obtain a valuation or use an unsupported FMV, CRA may reassess your cost base, potentially treating a larger portion of your eventual gain as Canadian-sourced income. The cost of a compliant valuation report is typically far less than the tax exposure of getting this wrong.
Eqvista – Get Your Private Shares Valued Before You Cross the Border!
The deemed acquisition provision under Section 128.1 is not a technicality you can revisit later. The FMV established on the day you become a Canadian resident determines your cost base, your future capital gains exposure, and how much of your equity upside is taxed in which country.
Eqvista primarily serves the US market, but brings the same research-backed, audit-defensible valuation methodology that CRA expects. Whether your move is weeks away or still in the planning phase, our valuation experts can prepare a report built to withstand regulatory scrutiny on both sides of the border.
Contact Eqvista today to get ahead of your emigration tax obligations!
