Principal Issues: (1) Does the employee deal at arm's length with the vendor? (2) Does the administrative treatment in respect of earnout proceeds, described in IT-426R, apply in respect of the sale of shares by the vendor corporation to the key employee? (3) Are dividends subject to subsection 55(2)?
Position: (1) Yes, in these circumstances. (2) Yes, in these circumstances. (3) Yes, to some of the dividends.
Reasons: (1) Based on the law as applied to these facts. (2) The facts satisfy the criteria set out in paragraph 2 of IT-426R. (3) Certain dividends will be considered to reduce a capital gain and the reduction will not be attributable to safe income.