28 May 1991 Ministerial Letter 91M05088 F - Price Adjustment Clauses

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Q.15 Price Adjustment Clauses

Price adjustment clauses are commonly used in connection with shares issued in the context of section 85 rollovers.  They usually take the form of either:

(a)     a clause forming part of the rights, privileges, restrictions and conditions attaching to the shares which provides for the  adjustment of the redemption price to reflect the fair market  value of shares exchanged or property transferred; or

(b)     a clause in a purchase and sale agreement or share exchange  agreement which provides for the issuance of additional shares or cancellation of issued shares without payment such that the net number of shares will reflect the fair market value of the shares exchanged or property transferred.

In response to Question 14 of the 1980 Revenue Canada Round Table, the Department expressed a preference for the first category of price adjustment clauses because of a host of technical problems associated with price adjustment clauses that adjust the number of shares taken back on the rollover.  Has the Department's policy changed since 1980 and, if not, what are some of the technical concerns associated with the second category of price adjustment clauses?

Department's Position

The Department's policy regarding price adjustment clauses outlined in Interpretation Bulletin IT-169 will apply to both types of price adjustment clauses provided that the transactions designed to adjust the purchase price are legally effective.  As indicated in our response to Question 14 of the 1980 Revenue Canada Round Table, the first type of price adjustment clause is clearly preferred.  We are still of the view that the second type carries with it a number of legal and technical difficulties that are best avoided from the perspective of both the taxpayers and the Department.  For instance, where there has been an intervening transaction, such as a sale or redemption of the shares or a winding-up, amalgamation or reorganization of the issuer, between the date of issuance and the date that the adjustment clause takes effect, it might not be possible for additional shares of the same class to be issued or for shares that were issued on the transfer or exchange to be cancelled without payment.

Taxpayers and their advisers should be reminded that the Department will not provide the administrative relief described in Interpretation Bulletin IT-169 unless there is evidence of a bona fide intention of the parties to transfer property at fair market value and of their efforts to arrive at that value by a fair and reasonable method.  While a taxpayer's failure to notify the Department on a timely basis of the existence of a price adjustment clause will not necessarily preclude the application of the Department's relieving position, the mere existence of such a clause will also not guarantee the application of such position in the absence of the evidence referred to above.

Prepared by:  Jake HarmsDate: May 27, 1991File: 7-911278