Henco – Tax Court of Canada finds that compensation received for a destroyed business was completely tax-free

The Ontario government capitulated to Six Nations protesters, who occupied the subdivision property of the taxpayer (Henco), by passing a by-law prohibiting any use of the property (thereby rendering it valueless and (per C. Miller J) thereby converting it to capital property as it no longer was a trading asset) - and subsequently agreed to pay Henco $15.8M for relinquishing its rights to the property and for a release.

C. Miller J found that as Henco’s business had been destroyed by the time it received the $15.8M, it had no source of income so that the $15.8M was tax-free. There was no eligible capital amount under the now-repealed mirror image rule, and the $15.8M was compensation for Henco’s destroyed goodwill rather than a (now) "useless, worthless piece of land."

An interim compensation payment of $650,000, which Henco received from the government after work had stopped but before Henco’s development business had been conclusively destroyed by the by-law, also was tax free. C. Miller J reasoned that although this amount was received "in the course of business," s. 12 (1)(x) did not apply as the amount was not received in the course of "earning income from" the business as required by s. 12(1)(x)(i)(A).

Finally, he arguably enunciated a principle that if the taxapyer picks a valuation which is within a range of what is reasonable but which is not the best estimate of value under the expert valuation evidence, the figure picked by the taxpayer should prevail over the best-estimate figure.

Neal Armstrong. Summaries of Henco Industries Limited v. The Queen, 2014 DTC 1161 [at 3528], 2014 TCC 192 under s. 9 – compensation payments, s. 12(1)(x), s. 14(5) – cumulative eligible capital, s. 23, General Concepts – fair market value – land, and General Concepts – evidence.