Cases
Darling v. Canada (Attorney General), 2003 DTC 5489, 2003 FCA 282 (FCA)
The taxpayer and his brother established a partnership to acquire a real estate investment and received $15,000 from each of 19 potential limited partners on the basis that that money would be returned, with interest, to the investors if all 30 limited partnership shares in the partnership (rather than just 19) were not sold to investors. Notwithstanding that this condition was not satisfied, the money along with unauthorized mortgage financing was used to acquire the property, and the property later was repossessed by the mortgagee. The Ontario Court (General Division) found that the taxpayer and his brother were liable for the fraudulent misrepresentation of the brother, and the Ontario Court of Appeal characterized the taxpayer's actions as a breach of trust.
Rothstein J.A. found that even if damages collected from the taxpayer otherwise were deductible, their deduction was prohibited by s. 18(1)(b) as the payment was on account of capital, stating (at para. 14):
The amount the applicant was ordered to repay...were funds advanced on account of capital, tht is, for the acquisition of farm property. The repayment ordered was a repayment of capital.
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| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense | 65 |
McNeill v. The Queen, 2000 DTC 6211 (FCA)
Damages paid by the taxpayer as a result of breaching a non-compete covenant were deductible. Rothstein J.A. found that the analysis in 65302 British Columbia Ltd. respecting the deductibility of fines and penalties also applied to a court award of damages.
In responding to a Crown's contention that the damage award could be considered to be incurred on capital account, Rothstein J.A. indicated (at pp. 6214-6215) that "the finding of fact of the learned Tax Court Judge that the appellant's object in breaching the agreement was to keep his clients and business is conclusive. The damages were awarded for lost profits".
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| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | damages from contractual breach were deductible | 154 |
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Timing | 102 | |
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss - Damages | damages incurred to keep clients were deductible | 122 |
Vanguard Trailers Ltd. v. The Queen, 80 DTC 6001, [1980] CTC 42 (FCTD)
A payment of $250,000 made by the plaintiff to the chief executive officer of its U.S. parent, in settlement of a threatened action by him against another U.S. parent of the plaintiff for misrepresentation respecting his dealings in shares of the two U.S. parent companies, was a non-deductible capital expenditure.
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| Tax Topics - General Concepts - Evidence | 69 |
See Also
102751 Canada Inc. v. Agence du revenu du Québec, 2019 QCCQ 7378, aff'd 2021 QCCA 605
The taxpayer (Mobile), which was owned by the Waibel family in Europe, sold its two Toronto properties in 2002 and 2003 for $7.3 million, with $7.258 million of that sum being diverted by one of its directors (Black) without the authorization of the family. After this was discovered in 2004, an action was commenced against Black and the other director (Black’s mother), with the action being settled in 2012 by the payment by Black of a sum plus interest thereon at 5%. The ARQ reassessed to deny the deduction by Mobile of legal and other professional fees incurred by it in investigating the disappearance of the sales proceeds and in relation to the Superior Court action, primarily on the basis that they were capital expenditures.
In finding that the legal expenses were deductible, Cameron JCQ stated (paras. 77, 82, TaxInterpretations translation):
The outcome of the dispute, as far as the Waibel family is concerned, is the confirmation, by a settlement agreement that is as valid as a judgment and that has been implemented, of Mobile's right in the capital, a right that Mobile also had as soon as the funds were misappropriated, and the establishment of an interest rate of 5% on this capital, all secured by real estate guarantees. The result: the receipt of amounts, as interest, that was not a capital transaction, and that was income arising from property, the property being Black's obligation arising from the misappropriation, as confirmed by the legally binding effect of a settlement. …
The analogy with the Kellogg and Evans cases is not perfect, because the former involved a business and the latter involved income from a trust, but it is sufficient to convince us that an expense is not capital in nature simply because the expense is not recurring or extraordinary.
Due to an insufficiency of funds of Mobile, some of the expenses in question were funded by a limited partnership (KG) of the Waibel family, with the KG subsequently reimbursed by Mobile. Cameron JCQ found that this manner of funding the expenses did not detract from expenses in such amount having been incurred by Mobile.
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| Tax Topics - Income Tax Act - Section 169 - Subsection 169(1) | written protocol for appeal was equivalent of notice of objection | 374 |
ZR v. The Queen, 2007 DTC 1577, 2007 TCC 598
The taxpayer was permitted to deduct as a business loss amounts paid by her in settlement of claims brought by a franchisor against her bankrupt husband, who had personally guaranteed franchise obligations of companies in which they had invested. McArthur J. noted (at para. 18) that in determining the potential deductibility of damages "it is appropriate to focus on the origin of the claim" and found that the origin of the claim was a franchise agreement which was entered into by the two companies for the purpose of earning income from a hotel business. He went on to find that if the purpose of making the settlement was instead relevant, that purpose was to allow the taxpayer and her husband "to continue carrying business in the motel industry" (para. 23) and that although the settlement also preserved the assets to the corporations, this was a secondary purpose.
| Locations of other summaries | Wordcount | |
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| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | 147 |
Administrative Policy
9 June 2005 Internal T.I. 2004-0105421I7 F - Déductibilité des frais juridiques et d'intérêts
The taxpayer, who had contracted with a construction firm for the firm to enlarge the taxpayer’s building, failed to pay invoices of the firm based on alleged deficiencies in the work, and then was ordered under a judgment in the resulting action to pay the balance of the unpaid invoices to the firm plus the interest accrued thereon, plus legal costs and interest thereon.
The Directorate stated:
[T]he legal costs were incurred to defend against the existence of a claim and the amount of that claim, i.e. a liability of the taxpayer. It appears, therefore, that the legal fees were incurred as a capital expenditure the deduction of which would be denied under paragraph 18(1)(b).
| Locations of other summaries | Wordcount | |
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| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | legal fees to defend against claim for unpaid construction fees on building addition were not a capital cost addition | 127 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii) | interest paid pursuant to a judgment requiring payment of construction fees would be deductible but for s. 18(3.1) | 165 |
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) | interest paid pursuant to a judgment requiring payment of construction fees would be capitalized to the construction costs to the extent of accrual during construction period | 165 |
14 September 2004 Internal T.I. 2004-0080911I7 - Swap-termination payments
The CRA position that all amounts payable or receivable pursuant to an interest rate swap agreement (including a termination payment) will be considered to be on income account, is consistent with the decision in Shell (99 DTC 5699).
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| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Swaps | interest rate swap termination payment on income account | 72 |
16 September 1999 Internal T.I. 9913460 F - CONF. CONS. TECHNIQUES - DOMMAGES
General discussion as to whether damages paid to the local municipality to repair damages to sewers caused by the corrosive waster discharged by the taxpayer’s industrial operation would be deductible. CCRA comments included that:
[T]he reimbursement of costs incurred by the City to repair sewers should receive the same tax treatment as the cost of repairing environmental damage carried out by the company itself. …
[If] the expenses [were] incurred voluntarily or with the intention of discharging a legal obligation made to restore a site or repair environmental damage that was caused directly by the company's operations … [then] those expenses would generally be considered a cost of doing business.
IT-467R2 "Damages, Settlements and Similar Payments"
A payment for damages will usually be on account of capital if the payment creates an enduring benefit or it preserves or protects a capital asset.
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| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Damages | deductibility assessed at time of conduct | 69 |
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Contract or Option Cancellation | 74 |
Articles
Joel A. Nitikman, "Taxability and Deductibility of Judgments and Awards", 1991 British Columbia Tax Conference, Volume 1.
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| Tax Topics - Income Tax Act - Section 9 - Compensation Payments | 0 |