Could Price Adjustment Clauses Help Charities Manage Private Benefit Risk? Lessons from Goudreau c. Le Roi

Although Goudreau c. Le Roi is not a charity law case, its reasoning may be relevant to charities that use contractual safeguards to manage valuation risk and prevent unintended private benefits.

In particular, the decision provides a useful starting point for considering whether a properly drafted price adjustment clause can help demonstrate that a charity acted in good faith and did not confer excess value where the CRA later disagrees with the valuation used in a transaction or funding arrangement.

Summary of the Decision

The Tax Court of Canada recently released its decision in Goudreau c. Le Roi, 2026 CCI 142 (Goudreau). The case addresses how a price adjustment clause applies in an estate freeze transaction where the CRA disagrees with the taxpayers’ valuation of the transferred shares.

In Goudreau, the Court held that paragraph 85(1)(e.2) of the Income Tax Act did not apply to increase the elected amount for shares that the CRA determined had a higher fair market value, in part because:

• the taxpayers relied in good faith on a valuation and intended for the transaction to occur at fair market value; and
• the governing agreement contained a price adjustment clause requiring the consideration to be corrected if a tax authority later established a higher fair market value.

The Court also observed, in obiter, that the price adjustment clause may have prevented a benefit from being conferred in the first place. Since the transferred value was always subject to the price adjustment clause, the taxpayers always had a contractual right to have the excess value returned if the CRA determined the price in the transaction was too low.

Potential Implications for Charity Funding Arrangements

In recent audits, the CRA has increasingly taken the position that if a Canadian charity provides funding to a foreign charity, the foreign charity may receive a private benefit. Goudreau suggests that the private benefit analysis should not stop at the fact that excess value moved from the Canadian charity to the foreign charity.

The CRA should also consider, among other things, whether the charity acted in good faith in determining the amount required to carry out the funded activities. That determination may be based on internal assessments of program costs, budgets, deliverables, and related financial assumptions, or, where appropriate, through an objective external valuation or pricing analysis. The CRA should also consider whether the funding arrangement included a price adjustment clause to correct any excess amount disbursed.

Applying the reasoning from Goudreau, a Canadian charity that relies in good faith on a reasonable determination of the amount required to carry out funded activities and includes a price adjustment clause in its funding arrangement with a foreign charity may be better positioned to respond if the CRA alleges that the arrangement resulted in an excessive private benefit.

If the CRA later concludes that the amount disbursed exceeded what was required, the price adjustment clause can require the foreign charity to repay the excess amount. This should be relevant evidence that the charity did not intend to confer excess value and took steps to comply with the Income Tax Act.

Many charities already include provisions in their funding agreements requiring unused or improperly applied funds to be returned. A price adjustment clause can build on those existing safeguards by addressing a different risk: the possibility that the CRA later concludes that the amount disbursed exceeded what was required to carry out the funded activities. Including that type of clause may provide additional protection for the charity and help demonstrate its good faith intention to comply with the rules in the Income Tax Act, by ensuring that any excess amount identified by the CRA is contractually required to be returned.

Key Takeaway

Although Goudreau c. Le Roi is not a charity law case, its reasoning offers a useful framework for considering how price adjustment clauses may operate in the charity context. Where a Canadian charity relies in good faith on a reasonable determination of the amount required to carry out funded activities and includes a clause requiring any excess amount to be returned, the charity should be able to argue that those steps are relevant evidence of its intention to avoid conferring excess value and to comply with the rules in the Income Tax Act.

While the courts have not yet considered the application of price adjustment clauses in charity law, Goudreau supports the broader proposition that good faith reliance on a reasonable determination, combined with a contractual mechanism to correct any excess transfer, may be relevant to the analysis.