In 2013-0507881E5, the CRA usefully confirmed its view that a payment made pursuant to a valid price adjustment clause – in respect of preferred shares that were redeemed before the payment – is taxed as a dividend in the year of the payment. In the course of asset transfers within a corporate group, it is common that preferred shares of the acquiring company be issued as consideration in order to access a rollover under s. 85(1). Such preferred shares have a redemption amount that is typically set at a bona fide best estimate of the value of the property transferred, which is subject to adjustment if this value is later determined to be wrong (see Income Tax Folio S4F3¬C1, Price Adjustment Clauses). If the preferred shares are later redeemed, the subsequent adjustment may come as an additional payment to the former holder. In 2013-0507881E5, the CRA considered a case where the preferred shares were issued in year 1 and redeemed in year 5. A payment was made to the former holder (of the preferred shares) in year 7 pursuant to a valid price adjustment clause. The CRA confirmed its position that such a payment would be taxed as a dividend to the former holder in the year of the payment (i.e., year 7), such that no penalties or interest would apply.
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CRA confirms its position on price adjustment clauses
Canada December 4 2013
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