How do Ontario corporations determine the price for issuing new shares?

Under the Ontario Business Corporations Act, the directors of a corporation set the price at which new shares are issued. The OBCA requires that consideration for shares be in the form of money, property, or past services that the directors consider fair, and the directors must pass a resolution authorizing the issuance and stating the consideration.

For initial founder shares issued when the company is newly incorporated with no assets or track record, the shares are typically issued at a nominal value — sometimes one cent or one dollar per share. This is generally accepted as fair market value for a company with no history.

As the corporation grows and acquires value, the price of new share issuances must reflect the actual fair market value of the existing shares, taking into account the company's current assets, earnings, and reasonable valuation multiples. Issuing new shares to insiders below fair market value can create adverse tax consequences, particularly if the recipients are employees who may have a taxable employment benefit equal to the discount.

When bringing in external investors, the price is typically negotiated at arm's length, which provides strong evidence of fair market value. For any material share issuance, particularly to family members or insiders, a documented and defensible valuation is important.