CRA apparently contemplated that a post-amalgamation earnout payment could be applied to increase an s. 88(1)(d) bump of capital property of the amalgamated target

A Canadian Acquisitionco acquired Canadian Targetco for a cash base price plus earnout obligations, and then immediately merged with Targetco under a short-form amalgamation. The Rulings Directorate rejected Amalco’s treatment of the earnout payments subsequently made by it as eligible capital expenditures, stating:

[R]egardless of whether the [Targetco] Shares existed at the time that the Earnout Payments became payable or paid, the Earnout Payments nevertheless are part of the cost of the Shares. Mandel…appears to dictate such a result….

The Directorate went on to note that the cost of the Shares “is only relevant in regards to bump room for the assets of Targetco, if a bump was available under paragraphs 87(11)(b) and 88(1)(c),” - but, of course, there was no bump for eligible capital property, which might have been the principal appreciated asset of Targetco. It then stated:

Allowing…a re-characterization of cost of non-depreciable property to ECE would in effect allow a bump on eligible capital property. Such a result is offensive….

Neal Armstrong. Summaries of 14 March 2016 Internal T.I. 2015-0609671I7 under s. 88(1)(d) and s. 14(5) - eligible capital expenditure.