Glencore Canada – Federal Court of Appeal finds that a break fee was a capital receipt, but was includible under s. 12(1)(x)

An integrated nickel-mining public company (“Falconbridge”), entered into merger agreements with a more junior public company (“Diamond Fields”) 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 Diamond Fields 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 (the “Fees”) to 2.5% of the transaction value) on the completion by Diamond Fields of any competing offer. This occurred – the offer of another public company (Inco – the 25% minority shareholder) was accepted by the Diamond Fields shareholders, thereby triggering the payment by Diamond Fields of the break fee.

In reversing the Tax Court’s finding that the Fees were income from a business and that they instead were capital receipts, Woods JA found that the Fees were received on capital account because they were linked to a proposed acquisition of a capital asset (the Diamond Fields shares).

The break fee did not qualify as proceeds of disposition of a Falconbridge right to merge, as she did not consider there to be such a right: Diamond Fields could not promise the acceptance by its shareholders of the Falconbridge offer nor could it fetter the fiduciary obligations of its board – there was no capital gain.

Woods JA concluded that the fees (less a reduction for bid-related expenses pursuant to s. 12(1)(x)(vii)) were required by s. 12(1)(x) to be included in computing Falconbridge’s income from a business or property. Among other findings:

• “Diamond Fields paid the Fees in order to entice Falconbridge to make an offer pursuant to the merger arrangements” so that it was “reasonable to consider that the Fees were received by Falconbridge as an inducement for the purposes of s. 12(1)(x)”;
• “The Fees were linked to Falconbridge’s operations as a nickel mining company”, which “required access to ore deposits” so that they were received “in the course of” those activities (a phrase which she essentially equated with "in connection with"); furthermore, “the Fees were linked to an acquisition of shares that had the capacity to produce property income” so that they were “also received in the course of earning income from property”.

S. 12(1)(x) was enacted to ensure the recognition for tax purposes of tenant inducement payments and of the relocation allowances addressed in Consumers' Gas, i.e., in connection with assets used directly in the income-generating process. The above interpretation accorded to "in the course of" earning income from a business of property suggests that the scope of s. 12(1)(x) may be broader than what initially was principally targeted.

Neal Armstrong. Summaries of Glencore Canada Corporation v. Canada, 2024 FCA 3 under s. 9 – compensation payments, s. 248(1) – property and s. 12(1)(x).