Background
Jean Goudreau, Sébastien Charland, and Michel Gervais held the participating Class A shares of Portes Berthier Inc. In a June 29, 2016 estate freeze recommended by their advisers, they transferred those shares to the corporation in exchange for non-participating Class I shares. Family trusts then subscribed at nominal cost for new participating shares. The taxpayers and the corporation filed elections under section 85 of the Income Tax Act, using agreed transfer amounts of $101 for Goudreau, $118,250 for Charland, and $82,775 for Gervais.
The Minister reassessed the taxpayers for 2016 under paragraph 85(1)(e.2), reasoning that the transferred Class A shares were worth substantially more than the Class I shares issued in exchange and that the taxpayers intended to confer a benefit on related family trusts. The reassessments added taxable capital gains of $724,932 for Goudreau, $418,270 for Charland, and $292,322 for Gervais. The Minister also declined to recognize price-adjustment clauses in the rollover agreements. The three appeals were consolidated.
At trial, the taxpayers accepted an expert valuation placing the fair market value of all the Class A shares immediately before the transfers at $2,275,683, rather than the lower valuation used when the reorganization was completed. The remaining dispute included whether paragraph 85(1)(e.2) applied and whether the contractual price-adjustment clauses should be given effect.
The Court’s Holding
Justice Dominique Lafleur allowed all three appeals with costs. The Court fixed the fair market value of the Class A shares immediately before the transfers at $2,275,683 and held that the price-adjustment clauses in the rollover agreements applied.
Accordingly, the Court held that no taxable capital-gain amount was to be added under paragraph 85(1)(e.2). It referred the reassessments back to the Minister for reconsideration and reassessment on the basis that each taxpayer’s proceeds of disposition equalled the amount that taxpayer and PBI had elected under section 85.
The Court did not decide the separate denial of capital-gains deductions claimed by Charland and Gervais because they did not contest that issue in their appeals.
Key Takeaways
- A later determination that transferred shares had a substantially higher fair market value did not, in this case, justify paragraph 85(1)(e.2) additions because the rollover agreements’ price-adjustment clauses were effective.
- The Court accepted $2,275,683 as the fair market value of PBI’s participating Class A shares immediately before the June 2016 estate freeze.
- The taxpayers’ disposition proceeds remained the respective agreed amounts reported in their section 85 elections, and the reassessments were returned to the Minister on that basis.
Why It Matters
The decision illustrates the tax significance of properly documented price-adjustment mechanisms in a section 85 rollover when the parties’ original business valuation is later shown to be too low. An effective clause may prevent a valuation discrepancy from producing the benefit and capital-gain consequences asserted under paragraph 85(1)(e.2).
The judgment also underscores that valuation remains fact-intensive: the taxpayers abandoned the original valuation and accepted a much higher fair market value, yet still succeeded because the Court gave effect to the contractual adjustment provisions and preserved the elected rollover amounts.