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. CRA found that no capital gains reserve could be claimed, stating:
To be eligible for a capital gains reserve under subparagraph 40(1)(a)(iii), the sale price must be determinable. To be determinable, the taxpayer must have an absolute right to receive the sale price. In accordance with our longstanding position, where a transaction includes a reverse earnout clause, the sale price is not determinable at the time of disposition, as it is subject to reduction.