Glencore – Tax Court of Canada finds that a break fee was income from a business

An integrated nickel-mining public company (“Falconbridge”), entered into merger agreements with a more junior public company (“DFR”) which, through a 75%-owned subsidiary, held a valuable deposit at Voisey’s Bay in Newfoundland. The merger agreements provided for the immediate payment by DFR of a “Commitment Fee” of $28.2 million, and for the payment of a break fee of $73.3 million (calculated to bring the total of the two fees to 2.5% of the transaction value) on a failure of DFR to complete the merger. In fact, another public company (“Inco” – the 25% minority shareholder) made a subsequent offer that was accepted by DFR, thereby triggering the payment by it of the break fee.

In finding that the fees were income from a source, namely, a business, Favreau J drew an analogy with the findings in Ikea that payments received in the day-to-day conduct of a business, namely, tenant inducement payments received as “necessary incidents” of the conduct of that business in rented premises, were income receipts. He stated:

The potential acquisition of the Voisey’s Bay deposit was part of Falconbridge’s strategy for earning income from its business.

Falconbridge was carrying on its business when it negotiated the Merger … Agreement[s], … which provided for the fees in dispute. … The … Fees were ancillary business income received by Falconbridge in the course of earning income from business.

Neal Armstrong. Summary of Glencore Canada Corporation v. The Queen, 2021 TCC 63 under s. 9 – compensation payments.