Tomorrow morning (November 20, 2012), the Federal Court of
Appeal is scheduled to hear an appeal by Morguard Corporation
("Morguard", formerly operating as Acktion Corporation),
regarding the taxation of a "break fee" received as a
result of a failed takeover bid.
Break fees are an agreed-upon fee to be paid by or on behalf of
a target corporation to a prospective purchaser on
the rejection of that prospective purchaser's bid and
the acceptance of another offer. Break fees are intended
to reflect, more or less, the monetary and non-monetary costs
incurred by the prospective purchaser in making a bid, and are
common in sophisticated takeover transactions.
The Morguard case concerns a $7.7 million break
fee received by Morguard on withdrawal from a bidding war. In
its return, Morguard treated the payment as a capital gain but
was reassessed by the Minister of National Revenue on the basis
that the amount was an income receipt. On
appeal to the Tax Court of Canada, the trial judge agreed with
the Minister's position that, on the facts of the case, the
break fee represented income and should be taxed accordingly. For
our analysis of the Tax Court decision, see our earlier
The taxpayer has appealed the trial judge's decision to the
Federal Court of Appeal on the basis that the lower court erred in
law and in fact. The Appellant has described the issues
raised in the appeal as follows:
(a) Whether the trial judge erred in law by concluding that the
taxpayer received the break fee on income account rather than
(b) If received on capital account, whether the break fee was
received in circumstances that gave rise to a capital gain.
(c) Whether the trial judge made palpable and overriding errors
in finding that the taxpayer was in the business of doing
acquisitions and takeovers, and received the break fee in the
ordinary course of its business similar to the receipt of
dividends, rents, or management fees.
(d) Whether the trial judge made a palpable and overriding error
in finding that the break fee was not linked to a capital purpose
of the taxpayer.
(f) Whether the trial judge erred in law by applying the legal
test developed by the Federal Court of Appeal in The Queen v.
Cranswick (82 DTC 6073) to break fees.
The Crown, on the other hand, has framed the issues as
(a) Whether the trial judge committed a palpable and overriding
error in finding that the negotiation and receipt of the break fee
by the appellant was part of the ordinary course of its regular
real estate business.
(b) Whether the trial judge was correct in concluding that the
break fee should be included in the computation of the
appellant's income because it was received in the ordinary
course of its business.
(c) Whether the trial judge correctly applied the jurisprudence
to conclude that the break fee was not a windfall.
The Appellant's factum is
here. The Crown's factum is
We intend to report again after the hearing in the Federal
Court of Appeal.
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