A taxpayer (the “freezor”) exchanges his common shares of a corporation for preferred shares of the same corporation, with the purchase price and the value of the preferred shares being subject to a price adjustment clause. (New) common shares of the corporation then are issued to a discretionary family trust. The questioner referred to 2010-0366301I7, where CRA found that s. 75(2) applied to an estate freeze as the undervaluation of the common shares constituted a transfer of share rights attributable to existing equity in the corporation by the freezor to the trust, and that the price adjustment clause related to the issue of the freeze shares was of no assistance to the freezor because at no time were the original proceeds represented by the freeze shares adjusted pursuant to that clause. CRA stated that “in that situation, the taxpayer had not adjusted the price in accordance with the price adjustment clause and it was too late to do so.” CRA then stated:
It is therefore incorrect to conclude that a taxpayer will never be able to rely on a price adjustment clause in the event of a CRA assessment under subsection 75(2).
The CRA will review each situation in determining if a price adjustment clause is valid. In the case of an estate freeze, if the price adjustment clause is valid and the taxpayer makes the necessary changes to the price of the common shares, the redemption value of the freeze preferred shares received and the amount that would have been received for the redeemed freeze preferred shares (by arranging for the corporation to make a refund or payment for the difference, as the case may be), the CRA will consider the tax consequences of the freeze taking into account that clause. Those tax implications will include consideration of the conditions for the application of subsection 75(2).