Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: In an actual fact situation, whether an amount received as a result of an out-of-court settlement is business income or a windfall.
Position: Based on the limited information provided, the amount is business income.
Reasons: The amount was intended to compensate the recipient for lost profits. There is no indication that it related to compensation for the destruction or material crippling of the profit-making apparatus of the business.
Randy Hewlett, B.Comm.
XXXXXXXXXX 613-957-8973
2003-000850
April 1, 2003
Dear XXXXXXXXXX:
Re: Out-of-Court Settlement: Business Income or Windfall
We are writing in response to your letter of March 6, 2003, regarding a technical interpretation request with respect to the above-noted issue.
In your letter, you indicated that your business was a member of a group of businesses that bid on a XXXXXXXXXX project in XXXXXXXXXX. The group's bid was not accepted, but the XXXXXXXXXX proposed were used. As a result, the group filed a lawsuit. In XXXXXXXXXX, an out-of-court settlement was reached. It is apparent from the documentation submitted with your inquiry that the share of the settlement you received is related to fees that your business would have earned as XXXXXXXXXX for the project.
You requested our view on whether your share of the settlement is business income or a windfall under the Income Tax Act (the "Act"). Further, if the amount is business income, you inquire whether expenses incurred "over the litigation period" are deductible. In your view, the amount should be considered a non-taxable windfall because your business suffered financially over the course of the litigation.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Since the particular transactions in this situation are completed, you should address your inquiry to the relevant Tax Services Office. You should include all relevant documentation and a complete description of all the facts. As well, given the relative complexity of your situation, you may also wish to consider obtaining professional tax advice. We are prepared, however, to offer the following general comments.
An amount received from a court settlement will generally be considered business income under the Act if it is intended to compensate the recipient for a loss of profit from the business. As such, the total amount received is included in the calculation of the taxpayer's profit or loss from a business for the year pursuant to subsection 9(1) of the Act. The extent to which expenses are deductible will be a question of fact. For example, in order to be deductible, an expense must be incurred for the purpose of earning the business income, cannot be on account of capital or be personal in nature, and must be reasonable in the circumstances. Depending on the situation, there may also be other restrictions in the Act that are applicable.
If any part of the amount received from a court settlement relates to the destruction or material crippling of the whole structure of the profit-making apparatus of the business, it may be considered on account of capital. In computing the gain, only outlays and expenses for the purpose of making the disposition are deductible.
While we have not reviewed all relevant documentation in this situation, based on our understanding of the facts, the amount you received will be considered business income that is taxable in the year the settlement was reached. In our view, the settlement amount appears to be closely related to the loss of profit from XXXXXXXXXX fees that you would have earned from your involvement in the project. Further, there is no indication that any portion of the settlement was paid because the profit-making apparatus of your business was destroyed or materially crippled.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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