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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Question 61
Where price adjustment clauses are employed as part of a butterfly reorganization, what is the Department's position if one price adjustment clause (for example a clause which would adjust the redemption amount of preference shares in a transferee corporation issued to the particular corporation in exchange for assets of the particular corporation if the parties had under-estimated the value of the transferred assets) triggers an equal adjustment in the redemption price of common shares of the particular corporation held by the transferee corporation and redeemed in the course of the butterfly reorganization? In other words, is the Department concerned where the price adjustment clauses are designed so that there are no circumstances under which a party to the transaction can be either adversely or favourably economically affected by the operation of the clause? Answer
The conditions under which the Department will recognize the effects of price adjustment clauses in computing the income of parties to the clause are set out in IT-169 dated August 6, 1974. As noted in paragraph 25 of IC 76-19R2 dated June 15, 1990, the Department will generally require that any elections under section 85 of the Act affected by the price adjustment clause be amended.
In a butterfly reorganization (that is, a divisive reorganization of the sort described in paragraph 55(3)(b) of the Act) the central requirement is that each corporate shareholder/transferee of assets of a particular corporation receive the "appropriate proportion" of each type of property held by the particular corporation immediately before the transfers begin. The "appropriate proportion" is the value of the shares in the particular corporation held by the shareholder/transferee divided by the value of all of the outstanding shares of the particular corporation. If the parties incorrectly value the assets transferred to a transferee shareholder, each shareholder transferee may not receive its appropriate proportion of each type of property and subsection 55(2) may apply to dividends paid in the course of the reorganization. The operation of a price adjustment clause would not change this result.
CTF November 1992 National Tax Conference Round Table D.J. Powri October 6, 1992 0 - 922962 Paragraph 55(3)(b) and price adjustment clauses
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