CRA elaborates that a limited partnership selling shares on an earnout basis cannot utilize the cost-recovery method

CRA provided a more elaborate version of its position (also stated at the 2021 APFF Roundtable) regarding whether use of the cost-recovery method for a share earnout satisfies the conditions of IT-426R, para. 2:

[T]he conditions for the application of the cost recovery method described in paragraph 2 … were not designed to apply to limited partnerships. Therefore, neither a partnership nor the partners of a partnership … may use the cost recovery method [as described in IT-426R, para. 2, regarding earn-outs].

The particular context was a limited partnership with both resident and non-resident partners selling a somewhat small (under 5%) shareholding of a US target company on terms that included an earnout. Although CRA considered that other requirements of IT-426R, para. 2 would not be satisfied in this situation, it made a helpful comment to the effect that the requirement of subpara. 2(c) – that “[i]t is reasonable to assume that the earnout feature relates to underlying goodwill the value of which cannot reasonably be expected to be agreed upon by the vendor and purchaser at the date of the sale” — can be satisfied where (as here) “a particular vendor is not directly involved in the negotiations for the sale of shares.”

Neal Armstrong. Summaries of 17 May 2022 External T.I. 2021-0884651E5 under s. 12(1)(g), s. 96(1)(a) and Reg. 229(1).