Does a price adjustment clause protect a freeze if CRA later revalues it?

The rule: it is an administrative position, not a statute

The folio replaces the older Interpretation Bulletin IT-169 and is explicit that it states CRA’s administrative position rather than a provision of the Act. Where a clause meets the stated conditions, CRA will treat the property as transferred for fair market value and the excess-value provisions it lists — including paragraph 85(1)(e.2) and subsection 86(2) — will not produce an income inclusion. Where the clause fails one of the conditions, those provisions apply on the original, unadjusted numbers.

When it changes

The Supreme Court’s decision in Canada (Attorney General) v. Fairmont Hotels Inc. confirmed that rectification is not a backstop for a badly drafted clause — a court will not rewrite a transaction after the fact just because the tax result was worse than intended. The clause has to be drafted and honoured correctly the first time; there is no do-over once CRA has reassessed.

Where this played out — Case Files

One file shows a properly drafted clause standing between a founder and a reassessment on a later valuation challenge. Its companion shows what happens with no clause at all: a section 85 freeze fixed a redemption value with nowhere for the number to move once CRA reassessed it two years later.

Sources

• • Income Tax Folio S4-F3-C1, Price Adjustment Clauses (Canada Revenue Agency) — §1.3–1.7 — canada.ca. An administrative position, not a provision of the Act; the folio says so about itself.
• • Income Tax Act, ss.85(1)(e.2) and 86(2), the excess-value provisions a valid clause protects against — not separately quoted here; see the questions above.
• • Canada (Attorney General) v. Fairmont Hotels Inc., 2016 SCC 56 — cited for the rectification point; not quoted, and not independently re-fetched for this page.
• • No treadstonelaw.ca page in the library covers the CRA’s price adjustment clause doctrine; their similarly named article addresses an ordinary M&A working-capital true-up instead, a different mechanism, so no link is added.