River Hills Ranch - Tax Court considers the "factual matrix" surrounding a termination contract to recharacterize an apparent business receipt as a capital receipt

A pharmaceutical company agreed to pay a number of farming corporations in order to cancel contracts for the collection of pregnant mare urine ("PMU").  The agreements characterized 80% of the payments as being for "feed and herd health expenses," which the Minister took to mean payments to cover operating expenses.

Hogan J found that the parol evidence rule did not prevent him from finding that the payments were really to compensate the taxpayers for the destruction of their PMU businesses, and hence capital receipts, and had been dressed up as "feed and herd health expenses" because of pressure from animal rights groups.  A contract must be interpreted "with regard to the objective evidence of the factual matrix underlying the negotiation of the contract."

He did not discuss how the capital receipts should be treated.  Although Pe Ben suggests the proceeds might receive capital gains treatment, this was before the eligible capital amount definition was amended to make it completely circular, as discussed in a previous post on Mertrux.

Scott Armstrong.  Summary of River Hills Ranch Ltd v. The Queen, 2013 TCC 248, under s. 9 - Compensation Payments and General Concepts - Evidence.