CRA confirms that a reverse earnout obligation of Buyco for Target shares continues to be an excluded obligation for debt forgiveness purposes following their amalgamation

A Buyco for a purchaser acquires the shares of a Target for consideration including a deferred purchase price (representing a "real" legal obligation), with the unpaid balance subject to reduction pursuant to a reverse earnout clause. Such reduction occurs after the amalgamation of Target with Buyco.

CRA generally considers that by virtue of the contingent amount rule in s. 143.3 applying to reduce the cost to Buyco of its Target shares in the amount of the reverse earnout contingent obligation, that obligation would represent an "excluded obligation" under s. 80(1), so that the debt forgiveness rules would not apply to the extinguishing of the earnout obligation.

Although not mentioned, this interpretation is consistent with s. 87(2)(l.5), which deems Amalco to be a continuation of Buyco and Target for s. 143.4 purposes.

Neal Armstrong. Summary of 10 October 2014 APFF Roundtable, Q. 15, 2014-0538151C6 F under s. 80(1) – excluded obligation.