Shareholders of Canco sell their shares, which are not taxable Canadian property, to an arm’s-length third purchaser for a purchase price that includes an earnout payment that relates to the goodwill of the business (EBITDA over a two-year period), with the earnout being paid in the third year following the closing. Although the resident shareholders rely on the CRA administrative position in IT-426R, there are also non-resident shareholders. Does s. 212(1)(d)(v) require that the purchaser withhold tax on the earnout payment made to the nonresident shareholders -= and, if so, would a Treaty exemption be available?
After repeating the first four conditions of IT-426R, CRA noted that in 2005-0145311C6 (2005 APFF Roundtable), CRA indicated that an amount payable under an earnout feature in a sales agreement is subject to s. 212(1)(d)(v), but indicated that, in a situation where the shares are TCP, it would not generally apply s. 212(1)(d)(v) to the TCP, assuming that the first four conditions in IT-426R, para. 2 were met. This answer to the first question rendered the second question moot.
For shares that are not TCP, as indicated in the 2005 answer, the fair market value of the right to receive an amount under the earnout clause should generally be included in the proceeds of disposition where the four conditions of paragraph 2 of IT-426R are met.
In the situation provided, s. 212(1)(d)(v) should not apply.