REVENUE CANADA TAXATION 
 
INTERPRETATION BULLETIN 
 
NUMBER: IT-169 
 
DATE: August 6, 1974 
 
SUBJECT: INCOME TAX ACT 
Price Adjustment Clauses 
 
REFERENCE: Section 3 (also section 69 and subsection 15(1)) 
 
1. Where property is transferred in a non-arm's length transaction, the 
parties sometimes include a price adjustment clause in the covering agreement. 
This bulletin deals with those agreements which state that if the Department 
determines that the fair market value of the property is greater or less than 
the price otherwise determined in the agreement, that price will be adjusted 
to take into account the excess or the shortfall. The Department is only 
concerned in the valuation for purposes of administering the Act and 
determining the tax consequences. It is neither a valuator nor an arbitrator 
for the parties. If the parties have agreed that, if the Department's value is 
different from theirs, they will use the Department's value in their 
transaction, that is their choice and the Department will recognize that 
agreement in computing the income of all parties, provided that all of the 
following conditions are met: 
 
(a) The agreement reflects a bona fide intention of the parties to transfer 
the property at fair market value and arrives at that value for the purposes 
of the agreement by a fair and reasonable method. 
(b) Each of the parties to the agreement notifies the Department by a letter 
attached to his return for the year in which the property was transferred 
(i) that he is prepared to have the price in the agreement reviewed by the 
Department pursuant to the price adjustment clause, 
(ii) that he will take the necessary steps to settle any resulting excess or 
shortfall in the price, and 
(iii) that a copy of the agreement will be filed with the Department if and 
when demanded. 
 
(c) The excess or shortfall in price is actually refunded or paid, or a legal 
liability therefor is adjusted. 
 
2. Whether the method used by the parties to determine fair market value is 
fair and reasonable in the Department's view will depend on the circumstances 
in each case. 
 
3. In recognizing the price adjustment clause, appropriate adjustments in 
computing the income of all parties to the agreement will be made in their 
taxation years in which the property was transferred. If the purchaser has 
filed returns and claimed capital cost allowances, deductions from income 
based on cumulative eligible capital, or exploration and development expenses 
in respect of the property for taxation years subsequent to that in which it 
was transferred, any necessary adjustments will be made in those subsequent 
years. Likewise, any reserves claimed by the vendor to defer the reporting of 
income will be adjusted. 
 
4. Amended Forms T2022 on the sale of accounts receivable or amended 
agreements on the price paid for inventory may be required. 
 
5. If all the conditions mentioned in paragraph 1 are met, the Department will 
not apply subsection 15(1) to tax a benefit to shareholders. 
 
6. Where taxpayers have included price adjustment clauses in agreements that 
relate to transactions reported in tax returns already filed, they should 
notify the District Office immediately if they wish to have the clause 
considered in the light of the comments in this bulletin.