Canada: Windfalls In The Tax Court

Henco Industries Limited v. The Queen 2014 TCC 192
Last Updated: October 29 2015
Article by Andrew Stirling

A former land developer in Henco Industries Limited  v. The Queen 32 successfully argued before the Tax Court that a $15.8 million payment from the Ontario government should be characterized as a non-taxable capital receipt and a separate payment of $650,000 from the Ontario government should be characterized as a non-taxable windfall. Although the decision is noteworthy for concluding that these payments are not taxable, the decision by Miller J should also interest members of the tax community because of its analysis of various other issues discussed in the final ruling, including the distinction between eligible capital amounts and non- taxable capital receipts, the scope of paragraph 12(1)(x), the nature of inventory in the context of section 23, and the applicability of the parol evidence rule in interpreting agreements before the Tax Court.

Although legislative amendments may in part limit the relevance of the Henco decision to future cases attempting to delineate the boundary between eligible capital amounts and non-taxable capital receipts, the case raises broader structural questions about the nature of Canadian taxation and the types of payments that are subject to taxation under the Act. As noted by Miller J in his decision on costs,

[f]inding  a payment to be a non-taxable capital receipt is not something any Tax Court of Canada judge does lightly. It can have serious repercussions in our overall system of taxation as to what is a source of income that is subject to Government taxation. Circumstances are rare that a payment, perhaps shrouded in a commercial light, is non-taxable. But cases that peak under that shroud, and give both Government and taxpayers alike guidance as to what can and cannot be swept into the taxing regime, should be of keen interest.33


Henco was in the business of developing land in and around Caledonia in south- western Ontario. As of February 2006, Henco's landholdings included properties described in the decision as (1) the Douglas Creek Estates (DCE), (2) the Seneca property, and (3) the Morrison property.34

Beginning in February 2006, protests on or near the site of the DCE land by certain First Nation members and their supporters made development of the land impossible. The protesters were reported to dispute, among other things, whether the land had been properly surrendered by the First Nation during the 19th century. According to the agreed statement of facts, the protests were held "to try to stop, or at least disrupt, further development of the subdivision."35

Henco obtained certain injunctions from the Ontario Superior Court of Justice to clear the protesters from the DCE land. However, the Ontario Provincial Police declined to enforce the injunctions following a failed attempt to disperse the protest in April 2006.

After the police failed in their attempt to disperse the protest, the Ontario government offered Henco the $650,000 payment. The documentation accompanying the payment indicated that it was made "to mitigate the impact of continued occupation of DCE."36 The documentation also stated that the DCE "Funding Assistance is in respect of development, building and other related costs and expenses that have been incurred by Henco in connection with the [DCE land] because of the occupation."37  Henco's representatives indicated that the terms were not negotiated nor agreed to by Henco.  Although Henco accepted payment on May 3, 2006, it signed nothing to confirm its acceptance of the offered terms and nothing to confirm that it was to do or refrain from doing anything as consideration for the payment.

In its T2 income tax return for the taxation year that ended on April 29, 2006, Henco wrote down the value of the land inventory in respect of the DCE to $7. The Canada Revenue Agency (CRA) and Henco each had valuation reports prepared that confirmed that the DCE property had only nominal fair market value on May 1, 2006.

Representatives of the protesters, the Ontario government, and the federal government entered into a three-party agreement on May 16, 2006, agreeing to halt any development on the DCE land for an indeterminate  period of time. Provincial zoning regulations enacted on May 17, 2006 generally prohibited development of the DCE land.

Before February 2006, Henco estimated that it would earn profits of approximately $30 million in respect of the development of the DCE land on revenues of approximately $45 million.

An agreement was signed in June 2006 pursuant to which Henco sold the DCE land and certain related business assets to the government of Ontario in exchange for $15.8 million. Henco was also obliged under the terms of the agreement to stop developing the DCE land, take steps to have the injunction removed, and release Ontario from any and all claims in respect of the land. As part of the agreement, the government of Ontario agreed to reimburse  Henco for reasonable costs relating to the retention of consultants, legal advisers, appraisers, experts, advisers, or other third parties, subject to a maximum amount of $300,000.

Parol Evidence

At the beginning of the trial, the Crown brought a motion seeking to exclude, among other things, extrinsic evidence that Henco might try to admit to interpret or contextualize the agreement. The Crown brought the motion on the basis that this evidence was not admissible pursuant to the parol evidence rule. Quoting Wad- dams, the Crown described the parol evidence rule as follows:

By the general rules of the common law, if there be a contract which has been reduced into writing, verbal evidence is not allowed to be given of what passed between the parties, either before the instrument was made, or during the time that it was in a state of preparation, so as to add to, or subtract from, or in any manner to vary or qualify the written contract.38

The Crown acknowledged that there are certain exceptions to the parol evidence rule that permit courts to review extrinsic evidence to interpret a contract. In argument, it suggested that these circumstances are limited to situations in which there is either a patent or a latent ambiguity in the contract. Accordingly, the Crown took the position that evidence concerning the circumstances at the time of contracting should be admitted only when the words of the contract, viewed objectively, bore two or more reasonable interpretations.

However, the Crown acknowledged that certain courts have accepted extrinsic evidence to establish the "factual matrix" or "surrounding circumstances" that led to the formation of an agreement to assist them in determining the parties' contractual intentions as they would be determined by a reasonable person.39 A factual matrix or the surrounding circumstances can help a court to understand what the parties meant by the words that they used in a contract. Henco went further, suggesting that such an analysis was necessary to the proper interpretation of a contract, citing River Hills Ranch Ltd. v. The Queen, in which it was found that "the objective contextual scene in which the written agreement was made is an integral part of the interpretive process and is not something that is resorted to only where the words viewed in isolation suggest some ambiguity."40

In considering the parties' positions, Miller J observed that "there is no discernible bright line establishing a factual matrix (clearly admissible) and evidence of subjective attention [sic] (perhaps inadmissible)."41

The court noted the difference between the task before the civil courts, where two parties to a contract may be disputing the presence or significance of unwritten contractual rights or obligations, and the task before the Tax Court, which must assess the correctness of the characterization of the nature of a payment by a third party, the government of Canada. In the latter case, the court noted that the factual matrix is essential in determining the true nature of the payment for the purposes of assessing tax.

The court expressed concern that a contract may be drafted without due consideration of its tax implications or, more significantly, may be misleadingly drafted to affect the character of the transaction for tax purposes. A broad interpretation of the parol evidence rule in these circumstances could produce inappropriate results that are inconsistent with the object and purpose of the Act. As an example, the court cited the line of jurisprudence distinguishing employment relationships from independent contractor relationships. In these circumstances, the courts are required to look beyond the text of the contracts to the actions of the parties. Similarly, section 68 requires the courts to look beyond the stated allocation of the parties to determine a reasonable allocation in the circumstances. Such an inquiry into reasonableness would almost certainly necessitate an examination of the surrounding circumstances.

Applying the above principles to the Henco decision, the court found that a review of the factual matrix or surrounding circumstances giving rise to the signing of the agreement was imperative in interpreting the nature of the payments made under the agreement. Rather than being an ordinary commercial arrangement that was committed to writing, the agreement was drafted in "exceptional circumstances" in which market forces did not play a material role.42

Moreover, the terms of the contract itself invited the use of extrinsic evidence: the preamble stated "[w]hereas based on circumstances relating to the use and development of the property."43 The court also found that the agreement was ambiguous because it failed to allocate the payment among the assets being sold. The parties' failure to make such an allocation made the examination of extrinsic facts necessary in order to allocate these amounts for tax purposes.44

Income or Windfall: The $ 650,000Payment

The Crown argued that the $650,000 payment fell within the scope of paragraph 12(1)(x). In general terms, paragraph 12(1)(x) deems certain amounts to be included in a taxpayer's income from a business or property, including certain amounts paid by a government that are received by a taxpayer in the course of earning income from a business or property, to the extent that the payment can reasonably be considered to have been received as assistance in respect of an outlay or expense.

The court summarized the four criteria that would have to be satisfied for the $650,000 payment to be included in Henco's income pursuant to paragraph 12(1)(x):

1) The $650,000 must have been received by Henco "in the course of earning in- come from a business or property";

2) The payment must have been from a government;

3) The payment can reasonably be considered to have been received as assistance in respect of an outlay or expense;

4) The payment was not for the acquisition of Henco's business or property.45

Henco's position before the court was that the $650,000 payment did not fall within the scope of paragraph 12(1)(x) because (1) the payment had not been received in the course of earning income from a business or property, and (2) the payment could not reasonably be considered to have been received as assistance in respect of an outlay or expense. In the alternative, Henco argued that the $650,000 had been received in respect of Henco's disposition of the DCE land.

In the Course of Earning Income from a Business or Property

Henco emphasized that the first requirement could be satisfied only if the $650,000 payment were received by Henco "in the course of earning income from a business or property." This wording contrasts with the wording in paragraph 12(1)(a), which merely requires a payment to have been received "in the course of a business." Commenting on this distinction, the court observed that it would be possible that a taxpayer could receive a payment while in business yet not in the course of earning income from a business.

Henco was clearly in business and receiving revenue in the course of earning in- come from a business in 2005 and the first part of 2006 (until the protests began in February 2006). However, the court observed that the $650,000 payment was not made in respect of this period. Rather, it was made in respect of the period beginning in late February 2006 and ending on May 3, 2006, when the payment was received. The court found that it was this latter period that must be examined to determine whether the payment was made in the course of earning income from a business or property.

The court concluded that Henco was not taking steps in the course of earning income from a business during the protests. Rather, it was attempting to preserve the business itself, with an expectation that the protests would eventually cease, thereby permitting it to resume earning income in the course of a business. An example of a step taken by Henco during the protests was the seeking of the injunctions before the Superior Court of Justice.

To view this article in full, please click here.


32 2014 TCC 192.

33 2014 TCC 278, at paragraph 9.

34 The court also made rulings relating to (1) the fair market value of the Seneca and Morrison properties and (2) whether the Seneca property was held on income or capital account.

35 Supra note 32, at paragraph 9.

36 Ibid., at paragraph 29.

37 Ibid.

38 S.M. Waddams, The Law of Contracts, 6th ed. (Aurora, ON: Canada Law Book, 2010), at paragraph 320, note 10, quoted in Henco, supra note 32, at paragraph 82.

39 Supra note 32, at paragraph 84.

40 2013 TCC 248, at paragraph 42.

41 Supra note 33, at paragraph 88.

42 Ibid., at paragraph 92.

43 Ibid., at paragraph 95.

44 Ibid., at paragraph 98. Paragraphs 100-16 of the court's reasons considered which forms of extrinsic evidence would be admitted into evidence under one of the exceptions to the hearsay rule. The court found that certain government press releases were admissible into evidence, but it prohibited the admission of the affidavits of certain public officials. If counsel for Henco wished to have the evidence admitted, Henco would have to have called the public officials as witnesses.

45 Supra note 32, at paragraph 119.

First published by the Canadian Tax Foundation in the Current Cases feature (2015) 63:1 Canadian Tax Journal 227-39.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2015

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions