McNeill v. The Queen, 2000 DTC 6211 (FCA)

Some years after the taxpayer sold his chartered accountancy practice to another firm, he was ordered to pay damages and costs of $465,908 in respect of the breach of his covenants in the sale agreement to provide consultancy services and not to compete with the purchaser as well as for breach of an independent fiduciary duty to the purchaser.

After noting that the Tax Court had found that the taxpayer's objective in breaching these covenants was to keep his clients and his business, Rothstein J.A. found that the analysis in 65302 British Columbia Ltd. respecting the deductibility of fines and penalties also applied to a court award of damages. As the Court was not satisfied that the taxpayer's conduct was so egregious or repulsive that the damages subsequently awarded were not justified as being incurred for the purpose of producing income, the damages were deductible.

Some years after the taxpayer sold his chartered accountancy practice to another firm, he was ordered to pay damages and costs of $465,908 in respect of the breach of his covenants in the sale agreement to provide consultancy services and not to compete with the purchaser as well as for breach of an independent fiduciary duty to the purchaser.

Rothstein J.A. found the amount of damages to be deductible in the year of the damages award notwithstanding that it related to prior periods, given that the amount of the damages was contingent until the time of the award.

Damages paid by the taxpayer as a result of breaching a non-compete covenant were deductible. Rothstein J.A. found that the analysis in 65302 British Columbia Ltd. respecting the deductibility of fines and penalties also applied to a court award of damages.

In responding to a Crown's contention that the damage award could be considered to be incurred on capital account, Rothstein J.A. indicated (at pp. 6214-6215) that "the finding of fact of the learned Tax Court Judge that the appellant's object in breaching the agreement was to keep his clients and business is conclusive. The damages were awarded for lost profits".

After noting that the Tax Court had found that the taxpayer's objective in breaching these covenants was to keep his clients and his business, Rothstein J.A. found that the analysis in 65302 British Columbia Ltd. regarding the deductibility of fines and penalties also applied to a court award of damages.

In responding to a Crown's contention that the damage award could be considered to be incurred on capital account, Rothstein J.A. indicated that "the finding of fact of the learned Tax Court Judge that the appellant's object in breaching the agreement was to keep his clients in business is conclusive. The damages were awarded for lost profits" and found the damages amount to be deductible.