Under an agreement for the sale of a corporation (Target) solely for shares of the purchaser, which were validly issued on the closing, a portion of such shares were placed in escrow at the time of their issuance – then were cancelled to satisfy an obligation of the vendor to repay a downward adjustment to the purchase price equal to such shares’ value (which exceeded their paid-up capital).
CRA indicated that the vendor would be deemed to have received a dividend under s. 84(3) to the extent that the amount paid by the purchaser on the cancellation of the escrow shares exceeded their PUC, and that the amount so paid would equal the amount of the downward adjustment: the vendor should be viewed as having received an amount equal to the downward adjustment on the cancellation of the escrow shares in order to satisfy its obligation to repay the overpayment of the purchase price.
The wording of the question begged the question by describing the transaction as a repayment of the purchase price rather than as a retroactive adjustment to the share consideration, but there was nothing in the wording of the response to suggest that it was sensitive to how the question was framed.