CRA indicates that a limited partnership cannot use a cost recovery earnout

Where a limited partnership with resident and non-resident partners sells shares subject to an earnout, it is difficult to comply with the conditions in paras. 2(e) and (f) of IT-426R respecting use of the cost-recovery method given that the limited partners generally will not have access to the sale contract and they do not declare the capital gain on their own returns in the capacity of vendor. CRA stated:

The conditions of application provided in paragraph 2 of IT-426R were not designed for limited partners of a limited partnership in a situation as described above.

Consequently, the cost recovery method could not be used by a limited partnership in such a situation.

Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.8 under s. 12(1)(g).