10 March 1999 External T.I. 9829125 - PRICE ADJUSTMENT CLAUSE & 80(2)(G)

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.

PRINCIPAL ISSUE:

Whether a price adjustment clause can be used in conjunction with paragraph 80(2)g) of the Act.

Position TAKEN:

Yes, provided that the price adjustment clause meets the condition set out by IT-169. Also, an acceptable price adjustment clause cannot adjust the quantity of the shares issued.

REASON FOR POSITION TAKEN:

IT-169 and IC-76-19R3.

XXXXXXXXXX 			5-982912
L. J. Roy, CGA
Attention: XXXXXXXXXX 

March 10, 1999

Dear Sirs:

Re: Application of Price Adjustment Clauses

This is in reply to your letter of November 5, 1998 wherein you requested a technical interpretation with respect to the application of a price adjustment clause in the context of the issuance of common shares as consideration for the settlement of a debt where the parties were not dealing at arm’s length.

Written confirmation of the tax implications inherent in particular proposed transactions are given by this Directorate only where the transactions are outlined in an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3 dated December 30, 1996. Questions concerning actual fact situations should otherwise be directed to your tax services office. Although we cannot provide a specific answer or a ruling with regard to your query, we offer the following general comments which are not binding on the Department.

Where a corporation issues shares to a person as a consideration for the settlement of a debt issued by the corporation and payable to the person, paragraph 80(2)(g) of the Income Tax Act provides that the amount paid is the fair market value of the shares issued by the corporation.

Consequently, pursuant to section 80 of the Income Tax Act, there will not be a forgiven amount where the fair market value of the shares issued and other consideration is equal to the amount of the debt repaid.

Where the parties are not dealing at arms length, the Department will recognize, as part of a reimbursement agreement, a price adjustment clause which meets the conditions set out in Interpretation Bulletin IT-169. However, an acceptable price adjustment clause should not involve the cancelling of issued shares or the issuing of additional shares.

The foregoing opinions are not rulings and in accordance with the guidelines set out in IC 70-6R3 they are not binding on Revenue Canada.

We trust the above comments will be of assistance to you.

Manager
Financing and Plans Section
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislative Branch