Price Adjustment Clause

See Also

Mady v. The Queen, 2017 TCC 112

no jurisdiction to comment on application of price adjustment clause where the affected taxpayers are not appellants

The taxpayer executed an agreement to sell all the shares of his dental corporation (“MDPC”) for $4.5 million and then implemented a s. 86 “estate freeze” transaction on the morning of the closing in which he exchanged all his common shares of MDPC for preference shares with a redemption value of $2 million and for new common shares. He then sold 85% of his new common shares to his wife and two children at a sale price of $0.01 per share (but subject to a price adjustment clause), and they sold the same shares later in the day to the purchaser for $8,645 per share.

Hogan J found that the fair market value of the shares sold by the taxpayer to his wife and children was $8,645, not $0.01, per share, so that the taxpayer realized a corresponding capital gain under s. 69(1)(b)(i).

In declining an invitation of taxpayer’s counsel to comment on the efficacy of the price adjustment clause, Hogan J stated (at para. 143):

The application, or not, of the purchase price adjustment clause… is of relevance only for the Appellant’s wife and two daughters, assuming that the parties agree to apply the provision and that the provision is effective retroactively in its application. This a complex issue. … I have no jurisdiction to decide a matter of consequence to taxpayers that are not appellants before this Court.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 74.5 - Subsection 74.5(11) transfer from wife to higher-income husband was infused with his income-splitting purpose (as well as regulatory breach if she didn’t transfer) 393
Tax Topics - General Concepts - Ownership wife and children did not acquire beneficial interest in shares the taxpayer was to transfer to them, under tax plan, until the share transfer occurred 263
Tax Topics - Income Tax Act - Section 86 - Subsection 86(2) family members did not acquire beneficial interest in new shares until after completion of s. 86 reorg 297
Tax Topics - General Concepts - Fair Market Value - Shares arm’s length sales price established FMV for closing-date internal transfer of same shares 482
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) - Subparagraph 69(1)(b)(i) contemporaneous arm’s length sale price established that shares previously transferred at undervalue 478
Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) was not responsible under s. 163(2) for the unbeknownst sharp practice of his tax advisor 692

Calce Holdings Ltd. v. The Queen, 2005 DTC 959, 2005 TCC 335

The existence of an "anti-flip agreement" allegedly given by the taxpayer in connection with its purchase of shares (under which it would pay to the vendor any consideration received by it, on a subsequent sale by it of the shares, over and above the purchase price) was found not to be supported by the evidence.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Agency 94

Administrative Policy

4 May 2016 External T.I. 2016-0634551E5 - Ss 191(4) and PAC

effectiveness of share price adjustment clause on previously redeemed preferred shares can trigger Part VI.1 tax

CRAindicated that the operation of a price-adjustment clause on previously-redeemd preferred shares to reduce their redemption amount to less than their specified amount would result in the requirement in s. 191(4) - that the specified amount not exceed the fair market value of the consideration for which such shares were issued - not being met.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 191 - Subsection 191(4) operation of a price adjustment clause to reduce preferred shares’ redemption amount to below the shares’ “specified amount” can result in full Part VI.1 tax 349