Share for Share Exchange – Escrow

Subparagraph 40(1)(a)(iii) permits a reserve where a portion of the proceeds of disposition is payable after the end of the taxation year.

The determination of whether an amount is “payable” is a question of fact based on the terms of the agreement and the legal obligations between the parties.

An amount is generally considered payable where there is a genuine and enforceable obligation to pay, meaning the vendor retains a legal claim to receive payment at a future time.

Where the purchaser has fully satisfied the purchase price—including by issuing shares or trust units to the vendor—the purchaser’s obligation is considered discharged, and no amount remains payable.

In the situation where shares or units are issued to the vendor but held in escrow:

• The vendor is the registered owner of the units,
• The vendor is entitled to distributions and voting rights, and
• The purchaser has no remaining payment obligation.

Accordingly, the fact that the units are subject to escrow restrictions or released over time does not result in any portion of the proceeds being considered payable after the end of the year.

Escrow arrangements are generally intended to secure indemnity obligations and do not affect whether the purchase price has been paid.

This situation is distinguishable from cases involving promissory notes or deferred payment obligations, where an enforceable right to future payment may exist.