Quick Read: 2025 Valuation Issues
As we begin 2025, there are two valuation issues that may impact your practice in the coming year, including the following:
?Each of these issues is discussed below.
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?1.???? (Potential) Increase in the Capital Gains Inclusion Rate
?On June 11, 2024, the Federal Government introduced legislation to increase the capital gains inclusion rate from 50% to 66.67% for corporations, trusts and capital gains in excess of $250,000 for individuals. This proposed increase was to become effective on June 25, 2024.
As of now, this proposed legislation has yet to be passed by Parliament, and with the announced plans for the resignation of Mr. Trudeau and the suspension of the Government until March 24, 2025, uncertainties and confusion exist regarding the applicability of this proposed legislation.
On January 7, 2025, it was reported that the Finance Department stated that convention requires that taxation proposals such as the capital gain inclusion rate changes are effective as soon as the Government introduces them in the House of Commons.
The Finance Department further states that CRA-issued forms will be in accordance with the new proposal, although this could change dramatically when parliament resumes if the Government signals that it will no longer proceed with the proposed legislation and/or a new government is formed by the Conservative Party who have indicated their intention to repeal this proposed change.
This uncertainty gives rise to valuation challenges, including how a valuation as at a current date, for example, should consider latent capital gains taxes with respect to the “old inclusion rate” as opposed to the “new inclusion rate”.
It seems that, at least for the moment, the new inclusion rate ought to be utilized, although we may find in the next several months that such an approach turns out to be incorrect. If the inclusion rate increase proposal does not materialize in law, other issues, such as the use of hindsight, will have to be considered.
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One valuation alternative might be to reflect two scenarios in cases where the inclusion rate issue is significant.
Discussion with counsel should be undertaken before any valuation report is completed in this current state of uncertainty with respect to this issue.
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2.???? Exposure Draft for CBV Standards for Draft Reports and Oral Communication
On January 8, 2025, the CBV Institute released its latest and final exposure draft of its Practice Standards for valuation reports which are set to be finalized later this year.
The major changes in this exposure draft that we find relevant are as follows:
?i. Draft Reports
“A work product in the process of being complete (i.e. draft or preliminary) is not a Valuation Report provided that it is issued to a client or knowledgeable third party in circumstances where all four of the following conditions are met and explicitly disclosed on the work product:
?a. The work product is clearly marked as being in draft form and may be subject to significant change;
b. The work product is issued for the purposes of obtaining comment, further instructions or information from the client(s), required to complete the Valuation Report;
c. The Valuator knows, or reasonably ought to know, that the intended reader(s) does not intend to rely on the work product or distribute the work product to a third party who might rely on such work product; and
d.?The Valuator has a reasonable expectation at the time the work product is issued that the valuation report will be completed and issued in due course.”
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This new change is significant because, for the first time, the CBV Institute is specifically addressing draft reports, an issue that has been relevant to business valuators and litigation and family law lawyers for a long time.
In our experience, some valuation firms have prepared preliminary schedules or draft calculations for mediation proceedings or settlement discussions. These types of communications will no longer be permissible under the CBV Practice Standards (if they ever really were).
Because of the uncertainties regarding this issue in the past, it has been our firm’s policy to ensure that draft reports are compliant with CBV standards in all significant ways.
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ii.?????????????? Oral Communications
“In the rare circumstance where a Valuation Conclusion is only communicated orally by a Valuator (without any accompanying written work product), the Valuation Conclusion must still comply with Practice Standards No.100, 120 and 130. The Valuator must document in the working papers the substance of the oral report communicated to the client. In these circumstances, Valuators should verbally disclose the required components of Practice Standard No. 110 to the intended users.”
This is the first instance where the CBV Institute is providing standards for oral communications.
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We have three significant concerns regarding this potential new standard as follows:
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Our firm has made submissions to the CBV Institute in this regard and we will be waiting to see whether any changes might be made to this proposed standard regarding oral communications.
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We hope that this discussion of these important valuation issues may be useful and helpful to your practice in the upcoming year. If you have any questions regarding any valuation issues, we would be happy to be of assistance.
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For more information, please contact Wayne B. Rudson, CPA, CA·IFA/CBV, ASA, CFE ([email protected]) or Vincent Lam, CBV, MAcc ([email protected]) at 416-598-4500.