Ten months after the formation by him of a small business corporation, Mr. A agrees with an arm’s length employee of the corporation to sell 1/3 of his shares to him for their fair market value on that agreement date, but with the transfer of ownership postponed for 14 months, in order that the two-year holding requirement in the qualified small business corporation definition can satisfied.
CRA confirmed that if the sale price was fixed, this would likely qualify as a “synthetic disposition arrangement” (SDA), so that the shares would be deemed to be disposed of for their FMV at the time of making the agreement. CRA went on to state that, if the agreement instead provided that the aggregate share price would be increased by 20% of the profits made during the 14-month period, “it appeared” that there would no longer be an SDA (i.e., although there still was no downside risk - other than credit risk, which was not discussed - the opportunity for gain was no longer substantially eliminated), stating:
[A]lthough the agreement reached in these circumstances appears to have the effect of eliminating the possibility of sustaining losses, it appears that it would not have the effect of eliminating all or substantially all of the opportunity to realize gains or profits in respect of the shares of the corporation held by Mr. A. If this were the case, it is possible that the agreement does not qualify as a "synthetic disposition arrangement" within the meaning of paragraph 248(1), and subsection 80.6(1) would not apply.