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S4-F3-C1, Price Adjustment Clauses
The purpose of this Chapter History page is to highlight any amendments to the information contained in an interpretation bulletin that is now reflected in a chapter of an income tax folio as well as to identify any subsequent amendments to a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).
Update November 26, 2015
Minor changes have been made to improve the usability of the income tax folios:
- the Summary section has been moved to the top of each folio chapter to be more immediately visible and helpful to readers;
- the Application and Reference sections have been moved to the end of the Chapter which is more appropriate for administrative content of this nature. However, these sections now appear in the Table of contents for easy access;
- the statement that folios are only available in electronic format has been moved to the end of the Application section; and
- the words “as promulgated under the Act” in connection with the Income Tax Regulations have been removed from the Application section, in the interest of using plain language.
The Reference section of this Chapter has been updated to add legislative references.
Update January 14, 2014
Throughout the French version of the Chapter and its Chapter History, general revisions have been made to improve readability. The following changes have also been made to the Chapter.
¶1.2 has been amended to move the reference to subsection 15(1) to the beginning of the list of subsections in that paragraph.
¶1.3 has been amended to clarify that there will be no income inclusion for either purchaser or vendor.
¶1.5 of the March 28, 2013 version of the Chapter History has been amended to confirm that paragraph 26 of Information Circular IC 76-19R3, Transfer of Property to a Corporation under Section 85 , dated June 17, 1996, no longer reflects the CRA’s views.
¶1.6 has been amended to clarify the comment that a price adjustment may implemented by issuing additional shares or by cancelling issued shares without payment. The former statement, “… such that the net number of shares reflects the adjusted FMV of the property transferred” has been revised so that the sentence now reads, “…such that the FMV of the shares reflects the adjusted FMV of the property transferred.
¶1.12 has been amended to remove the phrase “that governs a transaction” which formerly followed the words “that meets the conditions listed in ¶1.5 in an agreement”. ¶1.12 has also been amended to further clarify that a price adjustment clause cannot be used to retroactively satisfy the pro-rata requirement found in the definition of distribution in subsection 55(1).
Update March 28, 2013
Income Tax Folio S4-F3-C1, Price Adjustment Clauses, replaces and cancels Interpretation Bulletin IT-169, Price Adjustment Clauses.
In addition to consolidating the content of the former interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin are described below. Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended.
Legislative and other changes
There are no statutory rules specifically dealing with price adjustment clauses. The requirements governing the recognition of a price adjustment clause that were established in the case of Guilder News (1963) Ltd. v MNR, 73 DTC 5048 (FCA) are still applicable. However, certain CRA administrative views dealing with price adjustment clauses are reflected in this Chapter:
¶1.1 (formerly included in ¶1 of IT-169) has been amended to confirm that a price adjustment clause providing for the adjustment to the redemption value of shares issued to reflect the fair market value (FMV) of the transferred property can be added to the terms of the shares to be issued by the acquiring corporation. The amendment also confirms that the CRA will take into account a price adjustment clause that requires that the fair market value of the transferred property be determined after a final decision of a court of law is rendered in that regard.
¶1.2 (formerly included in ¶5 of IT-169) has been amended to clarify the negative tax consequences that might result from a transfer of property that is not made at FMV.
¶1.3 has been added to confirm that subsections 15(1), 51(2), 69(1), 74.1(1) and (2), sections 74.2 and 74.3, subsections 74.4(2) and 75(2), paragraph 85(1)( e .2) and subsection 86(2) will not apply when a price adjustment clause satisfies the requirements listed in ¶1.5.
¶1.5 removes the written notification requirement in former paragraph 1(b) of IT-169 in light of numerous CRA administrative views that have confirmed that the failure to comply with such notification requirements does not preclude the parties to the agreement from relying upon the price adjustment clause to the extent that it otherwise meets the requirements established by the case law and CRA’s administrative views. As a result of the aforementioned amendment, the statement found in paragraph 26 of Information Circular IC 76-19R3 entitled Transfer of Property to a Corporation under Section 85 , which is dated June 17, 1996, no longer reflects CRA’s views.
¶1.5(a) (formerly included in ¶1(a) of IT-169) has been amended to provide that the parties to a transaction may be viewed as not having had the intention to transfer a property at FMV when there is a significant difference between the FMV of the property determined by the parties and the FMV of the property determined by the CRA or a Court. It also clarifies that there is no standard to determine what constitutes a significant difference between the FMV of the property determined by the CRA or a court and the transaction price otherwise agreed upon by the parties, and that such a determination will be made on the basis of a complete examination of all the relevant facts.
¶1.5(b) (formerly included in ¶1(a) and 2 of IT-169) has been amended to provide further guidance regarding the parameters having to be taken into consideration to determine whether a fair and reasonable method is used.
¶1.6 has been added to describe certain adjustments where share consideration was received on the transfer of property in application of a price adjustment clause. It specifically warns about difficulties associated with adjustments to the purchase price in the form of issuance of additional shares or the cancellation of previously issued shares.
¶1.7 has been added to describe certain adjustments where non-share consideration was received on the transfer of property in application of a price adjustment clause.
¶1.8 and 1.9 have been added to clarify the tax consequences of the application of an effective price adjustment clause.
¶1.10 has been added to provide that any additional payment made as a result of the application of a price adjustment clause that changed the redemption value of shares redeemed in a previous taxation year will be treated as a dividend under subsection 84(3).
¶1.11 has been added to clarify that an effective price adjustment clause may change the deemed proceeds of disposition of freeze shares under subsection 70(5).
¶1.12 has been added to confirm that a price adjustment clause might not prevent the application of subsection 55(2) in the context of a butterfly reorganization.
¶1.13 (formerly included in ¶4 of IT-169) has been amended to remove the terms “or amended agreements on the price paid for inventory”.
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