Principal Issues: The taxable status of an amount received in respect of the termination of a business contract.
Position: Question of fact. The general position of the Canada Revenue Agency regarding the taxable status of amounts received in respect of non-performance under business contracts is outlined in Interpretation Bulletin IT-365R, Damages, Settlements and Similar Receipts. It must be determined whether the amount received by the taxpayer is considered on account of income or capital.
Reasons: Generally, where the amount is intended to compensate the taxpayer for lost profit, that amount will be considered on account of income and must be included in the taxpayer's business income pursuant to subsection 9(1) of the Income Tax Act (the "Act"). Where the amount relates to a particular asset that is sold, destroyed or abandoned as a consequence of the non-performance, that amount will be considered proceeds of disposition for purposes of determining the gain on the asset. Where the amount received does not relate to a particular asset and the effect of the non-performance is the destruction or material crippling of the whole structure of the profit-making apparatus of the taxpayer's business, that amount will be considered an "eligible capital amount" for purposes of determining the taxpayer's income inclusion under subsection 14(1) of the Act.