Goudreau – Tax Court of Canada finds that price adjustment clauses were effective to avoid the conferral of a s. 85(1)(e.2) benefit

The three taxpayers, who held all of the (Class A) common shares of their corporation (“PBI”), engaged in an estate freeze transaction in which they exchanged their shares on a s. 85(1) rollover basis for newly created Class I redeemable preferred shares of PBI, and then caused their respective family trusts to subscribe for Class A shares of PBI for nominal consideration.

The exchange occurred at a price (being the redemption value of the Class I shares) of $439,890, as determined in a one-page valuation prepared by their tax adviser (Mr. Ducharme). CRA assessed gains on them pursuant to s. 85(1)(e.2) on the basis that the fair market value (FMV) of the exchanged Class A shares was over $3.1 million.

The taxpayers now acknowledged that the exchanged Class A shares had had an FMV of $2,275,683. (Lafleur J. preferred this valuation by their expert to the higher valuation of the CRA valuator.) She nonetheless found that s. 85(1)(e.2) did not apply.

First, the taxpayers had intended for their transactions to occur at FMV. In this regard, she stated:

[N]othing indicates that the Appellants knew they could not rely on the services and advice of Mr. Ducharme, who holds the CPA designation and presents himself as a tax specialist (D.Fisc).

Second, such intention was corroborated by a price adjustment clause in the rollover agreement with PBI. This clause provided, inter alia, that if the fair market value established by a tax authority was higher than the consideration stipulated in the agreement, an adjustment would be made by issuing additional shares of PBI or by increasing the redemption value of the Class I shares.

Lafleur J, citing Shell, found that tax law should follow the legal relationships of the parties in the absence of sham. Accordingly:

The price adjustment clauses provided in the Rollover Agreements have the effect of adjusting the sale price of the Class A shares of PBI's share capital and increasing the value of the consideration paid by PBI to the Appellants as of the effective date of the Rollover Agreements.

She went on to indicate, obiter, that in fact it appeared that the family trusts had not received a benefit. This was established by the existence of a price adjustment clause in the Class I shares, which provided for an increase in the redemption value (in the event of a challenge to the agreed FMV) if agreed to by the parties or, if disputed, as finally determined by a court or through the settlement of a court proceeding.

Neal Armstrong. Summaries of Goudreau v. The King, 2026 CCI 142 under s. 85(1)(e.2) and General Concepts – FMV – shares.