Cases
Darling v. Attorney General of Canada, 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 were not sold. Although 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, that deduction was prohibited by s. 18(1)(b) as the payment was on account of capital.
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".
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.
See Also
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.
Administrative Policy
14 September 2004 T.I. 2004-008091 -
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).
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.