Does an earn-out count as part of the purchase price?

If you are asking whether an earn-out is part of the purchase price, the short answer is that it is meant to be. It is not a bonus on top of the price. It is a way of paying part of the price later, tied to how the business performs. The harder questions are how much of it will be paid and how it is treated for tax.

How BDC describes it

BDC describes earnouts as contractual clauses in a business sale where part of the purchase price is paid to the seller after the deal closes. It also tells buyers to decide before the sale is agreed whether they will take part in vendor financing or any earnout scenario. When you compare offers, ask what the earn-out’s agreed maximum is and what has to happen for each part of it to be paid.

What the CRA says about tax

The CRA’s bulletin IT-426R covers shares sold subject to an earnout agreement. It describes a cost recovery method, which taxpayers may use if the conditions the bulletin sets out are met, under which the vendor reduces the adjusted cost base of the shares as amounts on account of the sale price become determinable. The CRA has archived the bulletin and says it will not be updating it, and bulletins do not have the force of law. Treat it as background, not as current advice.

Payment timing is not an earn-out

The same bulletin says an agreement that merely determines when amounts are to be paid, as opposed to determining the quantum of proceeds, is not considered to be an earnout agreement. A fixed price paid in instalments is therefore a different arrangement from one where the amount depends on later results. Separately, the CRA explains that when a seller receives sale proceeds over a number of years, the seller may be able to claim a capital gains reserve.

For related questions, see earn-out versus holdback and what happens if an earn-out target is missed.