An estate freeze entailed the exchange by Mr. A of his common shares of Opco by way of purchase for cancellation for Class A preferred shares with a redemption value of $1 million, followed by a common share subscription by his two adult children for nominal consideration. The exchange agreement contained a price-adjustment clause providing that in the event of a CRA challenge to the FMV of the Class A preferred shares received by Mr. A as consideration, Mr. A and Opco would agree to exchange the those Class A preferred shares for an equal number of Class B preferred shares.
After noting that in such a situation “it is not subsection 15(1) that the CRA would consider applying if the FMV of the freeze preferred shares was less than the FMV of the exchanged common shares, but rather subsection 51(2),” and that the price adjustment clause was not one described in IT-169 as it addressed adjusting the consideration received rather than the purchase price, and that the clause as described “would not be acceptable because … it did not provide for the necessary measures to settle any difference between the FMV of the consideration in relation to the transferred assets, should the preferred shares be redeemed before the CRA contests the FMV of the preferred shares,” CRA stated:
The CRA would generally agree to recognize a clause for adjustment to the consideration and not apply subsection 51(2), where the facts (including the contract) evinced that the parties actually intended to deal in the shares at their FMV and established the FMV of the preferred shares for the purposes of the arrangement, by a fair and reasonable method, and the relevant adjustments provided for in the adjustment clause were effected by the parties where the FMV of the preferred shares was less than the FMV of the common shares. …