Many estate plans include a transfer of property (e.g. shares of a privately held corporation) to a company and freeze the value (or price) of the transferred property to the current owners at the transfer date. To avoid some punitive provisions in the Income Tax Act associated with non-arm’s length transfers, transfer agreements often include a price adjustment clause (“PAC”) which provides for a retroactive adjustment to the transfer value or price in the event the Canada Revenue Agency (“CRA”) or a Court make a determination sometime after the transaction date that the fair market value of the transferred property was greater or less than the value ascribed at the time of transfer.
What makes for a bona fide price adjustment clause? In a recent bulletin, CRA has updated its position on the conditions for the recognition of a PAC:
- The Agreement reflects an intention of the parties to transact at fair market value. If a significant difference in valuations arises, that may place some doubt on the parties’ intentions.
- The fair market value determination for the purposes of the PAC is based on fair and reasonable methods.
- The parties agreed at the outset that a subsequent determination of fair market value by the CRA or a Court will be the value used for the transferred property.
- The excess or shortfall arising from the subsequent determination will give rise to a paid refund or legal liability as the case may be.
About Steven Frye, MBA, CPA, CA, CBV, CF
Steven has been assisting a wide variety of companies in the financial services, high technology, communications and manufacturing industries for over 20 years. Steven has developed expertise in the areas of assurance, project financing and financial feasibility reviews, budget, cash flow and bank presentation assistance, accounting and management information systems, succession planning and related tax planning, valuations, litigation support acquisitions and divestitures, operations analysis and organizational reviews.
CW group is a firm of professional advisors providing a comprehensive suite of services to a diverse client base. Our experienced and skilled team can provide personal and corporate solutions to maximize growth potential, wealth and value.
