2015 Ruling 2015-0589471R3 - Earnout -- summary under Subsection 85(1)

In connection with the implementation of an earnout transaction for the purchase of Holdco common shares by a key employee, the (corporate) shareholders of Holdco (a Canadian-controlled private corporation holding Opco) first transfer a portion of their Holdco common shares to Opco in consideration for tracking preferred shares of Opco (with Opco immediately selling the purchased common shares on a five-year earnout basis to the key employee). CRA rules that s. 85(1) would apply to such transfer assuming a s. 85(1) election was made in prescribed manner and within the prescribed time.