On April 23, Morguard Corporation filed an appeal with the
Federal Court of Appeal of the decision of Boyle J in the Tax Court
of Canada, 2012 TCC 55, (Date: February 24, 2012) holding
that a $7.7 million break fee was taxable. See my colleague
Sebastian Elawny's earlier
blog post about the trial decision.
The taxpayer's principal argument at trial (and, one
assumes, on appeal): that the break fee was a non-taxable windfall.
Windfalls are a very rare species in Canadian tax law. The last FCA
decision to examine the issue of windfall in any detail dealt with
penalty interest on an expropriation: Bellingham v. The Queen (1996) 50 DTC
6075 (per Robertson JA):
Against this background, we are left to pursue the judicial
understanding of what items fall outside the grasp of paragraph
3(a). I begin with the recognized exclusionary categories: gambling
gains, gifts and inheritances, and the residual category of
windfall gains. I shall deal briefly with the first two categories
as they provide the underlying framework for the third.
Gambling gains are non-taxable provided the taxpayer is not in
the business of gambling: see Graham v. Green,  2
K.B. 37; Minister of National Revenue v. Walker William,
S.,  Ex. C.R. 1; Morden, Harry Edgar v. Minister of
National Revenue,  Ex. C.R. 29. The classical reason for
excluding such receipts from income is that a "bet" is
based on an "irrational agreement". A more compelling
argument is that a gambling gain does not flow from a productive
source. That is, a source that is capable of producing income: see
F. E. LaBrie, The Principles of Canadian Income Taxation,
(Don Mills, Ont.: CCH Canadian Ltd., 1965), at page 25.
There is no need to cite authorities for the proposition that
gifts and inheritances are immune from taxation. It is well
accepted that these items represent non-recurring amounts and the
transfer of old wealth. Underlying the source doctrine is the
understanding that income involves the creation of new wealth.
Gifts do not flow from a productive source of income. Where a gift
emanates from what otherwise is regarded as a productive source,
e.g. the taxpayer's employment, then the issue is one of
concealed wages and employee benefits (see section 6 of the Act).
To qualify as a gift, there must be voluntary and gratuitous
transfer of property. There must be an absence of valuable
consideration. Hence, a payment that takes the form of a quid
pro quo will not be characterized as a gift.
The precise scope of the residual category "windfall
gains" has proven problematic. At best, it can be said that a
payment which is unexpected or unplanned and not of a recurring
nature, is more likely than not to be characterized as a windfall
gain. But like all generalizations, this observation must be
The only somewhat recent Supreme Court of Canada decision to
indirectly examine the question of windfall was Canada v. Fries,  2 S.C.R. 1322
(per Sopinka J):
We are not satisfied that the payments by way of strike pay in
this case come within the definition of "income . . . from a
source" within the meaning of s. 3 of the Income Tax
Act, S.C. 1970-71-72, c. 63. In these circumstances the
benefit of the doubt must go to the taxpayers. The appeal is
therefore allowed and the decision of the Tax Review Board is
restored. The appellant is to have his costs throughout.
If Morguard succeeds in its windfall argument in the Federal
Court of Appeal, it will be a rare event – not unlike
sighting a yeti. The odds are high that the Court will not disturb
the careful reasons of Boyle J.
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