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.
Dear Sirs:
This is in reply to your letter of September 10, 1985 wherein you requested our views on the applicability of the Department's administrative policy dealing with shares sold subject to an earnout agreement (as expressed in Interpretation Bulletin IT-426), when the sale of shares is also structured as a "share exchange" for purposes of subsection 85.1(1) of the Act.
To illustrate the situation you posed the following hypothetical facts:
- • Company A and Company B, who deal at arm's length, hold a 75% and 25% interest in a partnership respectively,
- • The shareholders of Company B sell their shares of Company B to Company A in exchange for preferred shares of Company A which are redeemable over a five year period.
- • The sale is subject to an "earnout clause" which provides for the issue of additional preferred shares.
In our view, the application of the Department's administrative position set out in IT-426 would not be appropriate in the above circumstances. That position does not contemplate a sale of shares subject to a "rollover" provision of the Act.
It is also our view that the "earnout clause" in the sale agreement would prevent the application of subsection 85.1(1) of the Act. The vendor of the shares will have received a "right" as consideration for his shares which would constitute "consideration other than shares" as described in paragraph 85.1(2)(d) of the Act.
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© Her Majesty the Queen in Right of Canada, 1985
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© Sa Majesté la Reine du Chef du Canada, 1985
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