TCC Rules On Taxation Of Break Fees

In the recent decision Morguard Corp. v R., 2012 TCC 55, the Tax Court of Canada ("TCC") considered the proper tax treatment of a break fee in the hands of a recipient as a result of a failed takeover bid. Generally, a break fee is a fee that is paid by a potential target corporation in the context of a takeover bid to extinguish a relationship with a prospective acquirer where the acquirer's bid to purchase the target is not successful. The fee is paid to compensate the acquirer for its time and effort in making the bid. In Morguard, the TCC found that the break fee received by the taxpayer was taxable as income and not as a capital receipt.

Facts

The facts of Morguard are straightforward. The taxpayer was a Canadian public corporation in the business of acquiring controlling ownership positions in various real estate companies that owned and managed residential and commercial rental properties. For several years prior to the taxation year in question, the