《What is the difference between Non Arm’s Length and Arm’s Length transaction》

Author: Yong Chen (Financial Security Advisor, cell: 4163004768)

Definition:

Non Arm’s Length Transaction is a transaction which occurs between people or parties which the CRA deems to be related, including individuals and corporations, such as family members, business partners or close friends, as well as a corporation you own over 40% shares.

Arm’s Length Transaction is a transaction which occurs between the parties who involve in don’t have close relationship, they only represent their own interest.

After knowing the definition, you might understand why it is important that transactions stay arm’s length.

Obviously, Non Arm’s Length transaction can lead to prices not in line with fair market value and, in extreme cases, even fraud. For example, the parents may sell their property to their child at a deep discount in order to avoid paying taxes. The owner might sell the property to his corporation at a high price to defraud other parties involved in the transaction, such as a mortgage lender. Non Arm’s Length transaction can manipulate the price or engage in illegal activity, CRA, lenders, assessors and other parties have to scrutinize these types of transaction more strict.

The parties of Arm’s Length transaction can act independently of one another and in their own self-interest. This helps the transaction is fair and objective. In an arm’s length transaction, each party has the same information and neither the buyer nor seller has an advantage over the other, both the buyer and seller are trying to get the best price possible. The seller wants to sell at the highest price and the buyer wants to buy at the lowest price. As both parties negotiate, the transaction price will typically be close to the fair market value.

However, Non Arm’s Length transactions is not illegal, but will face greater scrutiny since there is greater chance of fraud. The related parties should be more carefully to examine the transaction. People still use this type of transaction, for example in a real estate transactions between related parties, the benefit is lower closing costs due to not using a real estate agent to save the price of commissions. Also they can save costs on inspections, as well the flexibility for the closing date of the transaction.

This article is intended only for the purpose of informational reference which is completely personal opinions of the author himself, neither constitutes specific sales proposals or insurance advice, nor expressly proposes or implies the purchase, or endorsement of any specific any financial products. Prior to any financial planning, please consult a professional and qualified Financial Advisor, or contact the author himself for a personal discussion. All contents are intended only for the reading by residents and citizens of Ontario Canada. My cell: 4163004768.