Principal Issues: (a) Would the damage/compensation receipts be taxable for income tax purposes? (b) Would these receipts be included in computing resource profits if they are on account of income?
Position: (a) Generally Yes (depending on the facts of the situation) (b) Generally No (depending on the facts of the situation)
(a) It is always a question of fact as whether a damage/compensation receipt, either pursuant to a court judgment or an out-of-court settlement, would be considered as on account of income, capital or windfall to the recipient and whether it would be taxable. It is necessary to look at the true nature of both the purpose and the effect of the receipt. A damage/compensation receipt could be considered as on account of income under section 9 of the Act if such receipt is intended to compensate the recipient for its loss of profits. However, a damage/compensation receipt which is intended to compensate the recipient for its loss of profits resulting from destruction or materially crippling the whole structure of the recipient's profit-making apparatus, such a receipt would be considered as a price paid for the loss or sterilization of a capital asset and would therefore be a capital and not an income receipt. A damage/compensation receipt which is on account of capital would be taxable if it could be considered as "eligible capital amount" for the purpose of section 14 of the Act or if there would be "disposition" and "proceeds of disposition" of "property" for the purposes of sections 13, 38, 39, 40 and 54 and subsection 248(1) of the Act. It is our view that a damage/compensation receipt would not be taxable for the income tax purposes only if it is considered as true "windfall" within the criteria as stated in the case of Cranswick, including a receipt in respect of personal injury, exemplary or punitive damage.