| 19(1) | 5-9365 |
| S. Leung | |
| (613) 957-2116 |
March 27, 1990
Dear Sirs:
Re: Price Adjustment Clauses
We are writing in response to your letter of January 3, 1990 wherein you requested our confirmation that it would not be considered by the Department that the conditions in paragraph 1 of Interpretation Bulletin IT-169 would not be met in circumstances where a price adjustment clause contemplates that at the Department's value could be challenged by an appeal to a court of competent jurisdiction and that a final judgement by such a court would be binding as to the fair market value of the property in question.
The Department's position with respect to price adjustment clauses is set out in IT-169. As stated therein, the Department is neither a valuator nor an arbitrator for the parties. The Department's only interest in the valuation is for purposes of administering the Income Tax Act (the "Act") and determining the tax consequences of a transaction. Whether the parties will use the Department's value in their transaction is their choice.
Where all the conditions referred to in paragraph 1 of IT-169 are met, the Department will recognize the price adjustment clause in computing the income of all parties and will not apply subsection 15(1) to tax a benefit to shareholders. However, if a taxpayer disagrees with the Department's valuation and, therefore, does not make the required adjustments, the condition set out in subparagraph 1(c) of IT-169 will not have been complied with and the Department would no longer be bound by its undertaking in IT-169, even though the taxpayer may subsequently agree to make the necessary adjustments as a result of the determination of value by a court of competent jurisdiction.
It should be noted that the Department's acceptance of price adjustment clauses which comply with the criteria set out in IT-169 is an administrative concession only. In our view, it would not be practical to extend this administrative practice to adjust for values finally determined by the Courts since it would be very difficult for the Department to undertake to make all of the necessary adjustments many years later. In addition, unless a reassessment were made the valuation issue would, in most instances, not be brought before the Courts.
We trust the above will be of assistance.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch