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10 October 2014 APFF Roundtable Q. 15, 2014-0538151C6 F- 2014 APFF Roundtable, Q. 15- Section 143.4 & Reverse Earn-out-- summary under Excluded Obligation Summary Under Tax Topics- Income Tax Act- Section 80- Subsection 80(1)- Excluded Obligation reverse earnout obligation of Buyco re Target was excluded obligation A newly formed corporation ("Newco") purchases the shares of a target corporation ("Target") for consideration that includes an earn-out clause (resulting in a debt which is subsequently forgiven). ... However we can offer the following general comments which nonetheless, in some circumstances, would not apply in a particular situation. … … (a) …[A] reduction in the cost of the shares in the capital stock of Target through the application of subsection 143.4(2) prior to the amalgamation would in general permit the debt to qualify as "excluded obligation" as defined in subsection 80(1), by reason of the application of paragraph (a) of that definition. Paragraph (d) of the definition of "excluded obligation in general could not apply because the debt was of a capital nature. … (b) In such situations, it appears to us that in general the extinguishing of the debt could generally give rise to a "forgiven amount" given that the debt would not qualify as an "excluded obligation" as per the definition provided in paragraph 80(1).In the situations presented in this question (with ITA subsection 143.4(2) not being applicable), the fact that the shares no longer existed following the amalgamation and that consequently their cost would not be reduced, does not appear relevant to the question of there being a "forgiven amount" as defined in paragraph 80(1). ...