Whether s. 12(1)(g) can apply to a share sale (p. 3)
- Since most contingent consideration for a share sale will relate to earnings or other contingent amounts “inside” the subject corporation, but not income earned on the sold shares, it could be argued based, e.g., on Wain-Town, 50 DTC 856 (Ex Ct) [rev’d by SCC] (which found that contingent payments from a sold franchise were not taxable under an s. 12(1)(g) because the payments were based on the use of another property) that s. 12(1)(g) would not apply to the sale proceeds.
Use of purchaser special shares and s. 85(1) election in lieu of cash earnout (pp. 4-5)
- S. 12(1)(g) issues can be avoided by embedding the contingent payment terms in the provisions of special shares of the purchaser, whose retraction terms reflect the economics of the agreed contingent consideration .
- Provided that the purchaser is a taxable Canadian corporation, a s. 85(1) election can then be made.
- To avoid the Pt. VI.1 and IV.1, or IV, taxes arising on retraction of the special shares, a put/call arrangement with an upper-tier entity in the buyer group might be implemented.
- It would be important to embed the terms of the earn-out in the special shares themselves so as to not engage the derivative forward arrangement rules.
Use of rights to acquire shares of purchaser (pp. 5-6)
- Where the vendor has the contingent right to receive additional shares of the purchaser, the fact of some purchaser shares being received at closing will satisfy that precondition for s. 85(1) to apply [see also Dale], whereas the contingent right to receive shares will not constitute boot under the s. 85(1)(b) wording, thereby permitting the s. 85(1) deferral.
- Such rights presumably are acquired at a deemed cost of nil, the exercise of such rights would not be a disposition by virtue of s. 49.1, and the shares would appear to be acquired at a nil cost.
- The election form (T2057) creates difficulties in that it refers only to the “share consideration” rather than also including rights to receive shares in that quoted phrase.
Application of s. 87(7) to earnout payments (p. 6)
- S. 87(7) (which also applies to s. 88(1) wind-ups by virtue of s. 88(1)(e.2)) has the effect of deeming Amalco, as successor to the purchaser, as having incurred an earnout obligation of the latter (citing Dow Chemical).
Accessing the s. 110.6(14)(b) exception under a plan of arrangement (pp. 12-13)
- S. 110.6(14)(b) provides that, regarding whether a corporation is a small business corporation or a CCPC for purposes of the QSBC exemption in s. 110.6 , a right referred to in s. 251(5)(b) excludes a right under a “purchase and sale agreement” relating to a share of the corporation.
- 2002-0156745 interpreted the phrase “purchase and sale agreement” in s. 110.6(14)(b) to mean “a bilateral contract binding on both parties” and, thus, more narrowly than the rights referred to in s. 251(5)(b).
- Accordingly, it is problematic that neither an arrangement agreement (to which shareholder may not be considered a party) and the related plan of arrangement readily fit within the above CRA concept of a purchase and sale agreement.
- This suggests that it is desirable to (1) avoid securing a majority of shareholder votes in voting support agreements since such are unlikely to constitute a "purchase and sale agreement"; (2) expressly state in the arrangement agreement that it is a purchase and sale agreement; and (3) add to the plan of arrangement statements that on the effective date the shareholders are deemed to be parties to the arrangement agreement and that their share dispositions are deemed to be under the arrangement agreement.
Planning to engage s. 111(4)(e) before closing of CCPC acquisition (pp. 14-18)
- Includes a discussion of s. 111(4)(e) planning in a pre-substantive CCPC context.
Application of FAD rules in exchangeable share structures (p. 8)
- Includes a discussion (at pp. 14-18) of various issues (mostly US other than under ITA s. 212.3) regarding exchangeable share structuring.
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