On the closing date for the sale by Opco of the assets, being capital property with an ACB of $150,000, of one of its two businesses to an arm's length purchaser, it was agreed that the purchaser would pay $3,500,000 on the closing date, pay an adjustment (the “Adjustment”) based on the net assets of the sold business upon approval of its closing-date financial statements no later than 90 days after the closing date, pay an amount of $300,000 12 months after the closing date, and a further $200,000 18 months after the closing date provided, in the case of each such deferred payment, the purchased business had achieved targeted customer retention rates.
The two deferred payments were not made on the agreed dates because of disagreements about the method for their computation. 21 months after the closing date, the parties agreed that a deferred payment of $50,000, rather than $200,000 + $300,000, would be paid.
CRA indicated that, based on IT-462, para. 9, s. 12(1)(g) would not apply to the maximum amount provided for in the contract (here, of $4,150,000 including the Adjustment of $150,000), provided that it was equal to the FMV of the sold business’s assets on the closing date, even if that amount was subsequently reduced if the customer retention was not met.
Accordingly, Opco realized a capital gain of $4,000,000 in its taxation year of the closing and therefore had appropriately paid a capital dividend of $2,000,000 shortly after the date of the payment of the Adjustment. CRA further indicated that when it was agreed that the deferred payments would be reduced to $50,000, at that point, Opco incurred a capital loss of $450,000. This reduced Opco's CDA by $225,000 at that time, but would not affect the validity of the $2,000,000 capital dividend previously paid (even if that capital loss was carried back).
No capital gains reserve could be claimed in the taxation year of sale since the $4,150,000 sales proceeds were not “determinable” (i.e., were subject to a contingent reduction).