All About Estates

PRICE ADJUSTMENT CLAUSES IN ESTATE PLAN AGREEMENTS

Many estate plans include a transfer of property (e.g. shares of a privately held corporation) to a company and freeze the value (or price) of the transferred property to the current owners at the transfer date. To avoid some punitive provisions in the Income Tax Act associated with non-arm’s length transfers, transfer agreements often include a price adjustment clause (“PAC”) which provides for a retroactive adjustment to the transfer value or price in the event the Canada Revenue Agency (“CRA”) or a Court make a determination sometime after the transaction date that the fair market value of the transferred property was greater or less than the value ascribed at the time of transfer.

What makes for a bona fide price adjustment clause? In a recent bulletin, CRA has updated its position on the conditions for the recognition of a PAC:

• The Agreement reflects an intention of the parties to transact at fair market value. If a significant difference in valuations arises, that may place some doubt on the parties’ intentions.

• The fair market value determination for the purposes of the PAC is based on fair and reasonable methods. More in this in my next blog.

• The parties agreed at the outset that a subsequent determination of fair market value by the CRA or a Court will be the value used for the transferred property.

• The excess or shortfall arising from the subsequent determination will give rise to a paid refund or legal liability as the case may be.

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