The foreign-affiliate dumping rules could apply currently, or year-by-year, to earnout clauses, and commercial conflicts can arise re whose PUC (the non-resident parent’s or an arm’s length 3rd-party shareholder’s) is reduced under those rules

There are two interpretations of how to apply an earnout clause in an agreement for the acquisition of a subject corporation by the CRIC: there are successive transfers of property by the CRIC each time a payment obligation is crystallized under the earnout (so that there are successive deemed dividends subject to the PUC offset rules); or the deemed dividend (or PUC offset) is determined only once at the investment time.

The first interpretation produces the peculiar result that the value of the subsequent deemed dividends are measured based on the fair market value of the transferred property at the investment time rather than at the times of their actual subsequent transfers (which might, for example, entail valuing shares at a time that the issuer had not yet been incorporated.) However, this approach nonetheless may be preferable to the second approach, which "would require the contingent obligation to be valued at the investment time and necessitate an analysis of the likelihood of the CRIC being required to make future earnout payments as well as the quantum of such payments."

Potential conflicts can arise between a non-resident parent of the CRIC and an arm’s length 3^rd party who holds all of the shares of one class of shares of the CRIC. Where the CRIC "can demonstrate" that all of the PUC of that class arose as a result of property transferred to the CRIC which was all used to make the investment in the subject corp, the PUC of that class will be automatically reduced under the offset rule in s. 212.3(7)(a). Thus, from the perspective of the non-resident parent, it could reduce the reduction to the PUC of its share investment by causing the CRIC to demonstrate that none of the transaction costs reduced the amount of the investment traceable to the share subscription proceeds of the 3^rd party. Should the 3^rd party get the CRIC to agree that it will not demonstrate that the s. 212.3(7)(a) requirements are satisfied?

S. 227(6.2) generally requires the CRA to accept late-filed forms under s. 212.3(7)(d) for the offset of a deemed dividend otherwise arising under the foreign affiliate dumping rules and refund the Part XIII tax paid on the deemed dividend. However, s. 227(6.2) does not retroactively rescind the deemed dividend so that, even after the s. 212.3(7)(d) form is late-filed, the CRIC is still deemed to have paid a dividend to the non-resident parent for purposes of other provisions, e.g., ss. 129(1), 112(3) and Part IV.

Neal Armstrong. Summaries of Brett Anderson and Daryl Maduke, "Practical Implementation Issues Arising from the Foreign Affiliate Dumping Rules," draft version of paper for CTF 2014 Conference Report under s. 212.3(2), s. 212.3(7)(a), s. 227(6.2), s. 212.3(14)(a), s. 212.3(19) and s. 212.3(1.1).