Income Tax Severed Letters - 2025-05-21

Principal Issues: In the context of a sale of assets, the purchase and sale agreement provides that a portion of the purchase price is payable after closing and is subject to a reverse earnout clause. The purchase and sale agreement also provides for a post-closing adjustment pertaining to the net assets. The main issue relates to the tax treatment of the portion of the purchase price that is payable after closing and subject to the reverse earnout clause: 1) whether paragraph 12(1)(g) applies; 2) whether the portion of the purchase price that is payable after closing and subject to the reverse earnout clause is eligible for a reserve under paragraph 40(1)(a); 3) the tax treatment of the purchase price adjustment based on the net assets; 4) whether Opco may pay a capital dividend equal to the non-taxable portion of the capital gain as calculated using the maximum possible proceeds; 5) tax treatment of the downward adjustment to the purchase price.

Position: 1) No. 2) No. 3) Increase of the proceeds of disposition 4) Yes. 5) Reduction of proceeds of disposition resulting in a capital loss in the year where the downward adjustment to the purchase price occurs.

Reasons: The law and previous positions.