Duhaime's Law Dictionary


Arm's Length Definition:

A transaction or relationship where there is an absence of control the one over the other.

In Galaxy Sports, Justice Newbury of the British Columbia Court of Appeal used these words:

"[A]rm's length has generally been defined to mean that there are no bonds of dependence, control or influence, between the corporation and the person in question."

In MNR v Sheldon, Justice Esson of Canada's Supreme Court wrote:

"The expression is one which is usually employed in cases in which transactions between trustees and cestuis que trust, guardians and wards, principals and agents or solicitors and clients are called into question....

"Where corporations are controlled directly or indirectly by the same person, whether that person be an individual or a corporation, they are not by virtue of that section deemed to be dealing with each other at arms length."

In Skalbania, the judgment of the British Columbia Court of Apeal used these words:

"Arm's length ... a relationship between two parties who are unrelated or strangers; thus each owes no special obligation to the other party. The term is commonly applied in areas of taxation, corporate law and contracts, describing parties who carry out a particular transaction, each acting in self-interest....

"Arm's length transaction ... a transaction negotiated by unrelated parties, each acting in his or her own self interest; the basis for a fair market value determination. Commonly applied in areas of taxation when there are dealings between related corporations, e.g. parent and subsidiary ... The standard under which unrelated parties, each acting in his or her own best interest, would carry out a particular transaction.

"[A] transaction not at arm's length is one in respect of which unrelated persons are, in the eyes of the law, in the same position as persons related by blood or marriage. In other words, if a transaction between unrelated persons has the same essential characteristics as one between related persons, i.e., the parties are influenced in their bargaining by something other than individual self-interest, those unrelated persons are said not to deal at arm's length."

In McNichol, tax judge Bonner suggested that three criteria or tests are commonly used to determine whether the parties to a transaction are dealing at arm's length:

  1. The existence of a common mind which directs the bargaining for both parties to the transaction,
  2. Parties to a transaction acting in concert without separate interests, and
  3. De facto control.

In Gestion Yvan Drouin, Judge Archambault added:

"In my opinion, although Judge Bonner (like many others) sets out three separate tests for identifying arm's length dealing, they constitute essentially just one test that may be summarized succinctly as follows: is there control of one party by the other?

"What the three tests are intended to determine is the existence of a relationship between persons who are parties to a given transaction where one of the parties exercises over the other an influence such that this other party is no longer free to participate in the transaction in an independent manner.

"With respect to the second test--acting in concert without separate interests, which is the one relied on by the Minister in this case--one can say that it will be met where a person merely participates in a transaction, not for his own benefit but for someone else's or, even if he is acting for his own benefit, if he is also acting for someone else in a context of reciprocity. That person is acting without a separate interest and not independently in his own interest."

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