This article highlights the importance of price adjustment
clauses in contractual agreements from a tax perspective.
A price adjustment clause is often used in transactions if
property is transferred between non-arm's length taxpayers and
the intention of the parties is for the transaction to occur at
fair market value (FMV). If the transaction is
later determined by the Canada Revenue Agency
(CRA) to be at something other than at FMV,
disastrous tax consequences can result. For example, under the
Income Tax Act (Canada), if a taxpayer acquires property
from a non-arm's length person for an amount in excess of the
property's FMV, then the taxpayer will be deemed to have
acquired that property at FMV. This can be harmful since the
taxpayer's adjusted cost base of the newly acquired property
will only include the FMV amount and not the excess amount. A
non-arm's length transaction under non-FMV circumstances may
also derail certain rollover transactions.
