CRA indicates that a cost-recovery method earnout can be based on the earnings of a lower-tier corporation

The proceeds of disposition of the shares of Company A are determined pursuant to an earnout clause, which is basede on the future earnings (i.e., its goodwill) generated by Company B , whose shares are held by Company A.

CRA indicated that the mere fact that the earnout feature relates to the underlying goodwill of Company B will not preclude the application of the cost recovery method in IT-426R. This position reverses 2013-0480561E5, and follows 2015-0589471R3.

Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.12 under s. 12(1)(g).