In Henco Industries Limited v. The Queen, 2014 TCC 192, a company carried on the business of developing land for sale in Caledonia, Ontario.  In 2006, certain members of local Aboriginal groups occupied the area, which made continuation of the company’s business physically impossible.  Ontario subsequently refused to enforce injunctions against the occupiers and rezoned the company’s property; this made continuation of the company’s business legally impossible.  These actions essentially put the company out of business (paragraph 166).  Ontario ultimately agreed to pay the company $15.8 million in exchange for land, chattels, certain covenants, and a final release of any claims against Ontario.  In a wide-ranging judgment, the Tax Court of Canada (TCC) held as follows:

  1. In substance the $15.8 million payment was not for the sale of the company’s land inventory (paragraph 156).
  2. Rather, the payment was to make the company “go away”: to enable Ontario to acquire control of a volatile situation and restore peace in the area (paragraph 162).
  3. In addition, the payment was to compensate the company “…for the whole loss of its business” or “…for certain rights, or more accurately the extinction of certain rights: the right to sue Ontario and the right to takes steps to enforce the injunction it obtained” (paragraph 170).
  4. The payment was not caught by s. 14 as it then read (paragraph 200).
  5. At the time the payment was made, the company had no source of income; the payment represented a non-taxable capital receipt (paragraph 203).

Strangely the TCC did not consider the Supreme Court of Canada’s decision in Tsiaprailis v. The Queen, 2005 SCC 8 (dealing with the tax character of settlement payments).  On an unrelated valuation issue, the TCC helpfully said that where a taxpayer chooses a value which falls within a range of reasonable fair market value, that choice should not be disturbed (paragraph 131).