CRA confirms that an arrangement which eliminates all risk of loss nonetheless “appears” not to be a synthetic disposition arrangement if there is decent upside participation
10 months after the formation by him of a small business corporation, A agrees with an arm’s length employee of the corporation to sell 1/3 of his shares to him for their fair market value on that agreement date, but with the transfer of ownership postponed for 14 months, in order that the two-year holding requirement in the qualified small business corporation definition can be satisfied.
CRA confirmed that if the sale price was fixed, this would likely qualify as a “synthetic disposition arrangement” (SDA), so that the shares would be deemed to be disposed of for their FMV at the time of making the agreement. However, if the agreement instead provided that the aggregate share price would be increased by 20% of the profits made during the 14-month period, “it appeared” that there would no longer be an SDA, i.e., although there still was no downside risk (other than credit risk, which was not discussed), the opportunity for gain was no longer substantially eliminated.
Neal Armstrong. Summary of 20 February 2018 External T.I. 2017-0727811E5 F under s. 248(1) – synthetic disposition arrangement – para. (b).