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1.“No doubt many will consider the result of this case to be unsatisfactory in terms of fiscal policy.  I am sympathetic to the view that it seems unfair that the shareholder of a corporation who bargains for a non-competition payment in the context of a sale of the shares is not taxed on the payment, even though in economic terms it may represent the realization of a substantial part of the commercial value of the business of the corporation.

However, it is one thing to recognize an unsatisfactory state of affairs, and quite another to repair it.”

2.The payments received under the non-competition agreements were not proceeds of disposition of property and, are not capital gains, they are tax-free.

Editor’s Comment

This case may cause the Department of Finance to amend the Income Tax Act to deal with non-competition receipts.  Therefore, it may be wise to take advantage of this decision prior to any legislative amendment.


In a November 26, 2002 Tax Court of Canada case, Mr. Gajos was a sales employee of Future Shop Ltd. paid on commission.  He was required to sell in the main store as well as do comparison shopping at other stores and attend training sessions.  He incurred expenses such as the acquisition of supplies, business cards, day timers, trade publications, as well as vehicle expenses, as confirmed in the Form T2200 signed by the employer.

The Court permitted most of the travel expenses and expenses such as advertising, meals, supplies and long distance telephones.




In a January 10, 2003 Technical Interpretation, CCRA notes that an employer may pay a reasonable automobile allowance to an employee and deduct up to 41 cents per kilometre for the first 5,000 kilometres and 35 cents for each additional kilometre (45 cents/39 cents for the Yukon Territory, Northwest Territories and Nunavut).

Also, these per kilometre amounts will be considered reasonable, and therefore not taxable as employment income.  However, CCRA also notes that where the payment exceeds the prescribed amounts, it may still be considered reasonable, and not taxable, given the proper circumstances.

An amount will be deemed not to be reasonable unless it is based solely on the number of employment kilometres driven.


The February 18, 2003 Federal Budget notes that the Department of Finance is not pleased with recent Supreme Court decisions which permit interest expense deductions when personal debt is reorganized into investment debt or, where the interest expense is significantly higher than the income generated.  Therefore, the Department of Finance proposes to introduce interest deductibility legislation shortly with a period of public consultation to follow.

Editor’s Comment

It may be important to restructure debt prior to the Department of Finance introducing new legislation.


Mutual funds may earn interest income, dividends, foreign interest and capital gains.  These types of income

retain their character when they are distributed to the investors.  Investors holding units of a fund on distribution day must include that amount in income.  Trusts distribute income to avoid having the income taxed in the Trust at top tax rates.  Therefore, if an investor purchases units of a fund just before it pays a distribution, that person will be required to report all of the income.


In a 2002 Tax Court of Canada case, IPSCO sued a supplier for additional costs of $7.6 million which they incurred because of the acquisition of a faulty pipe treatment system.  IPSCO received an out-of-court settlement of $4.8 million.  For accounting purposes, IPSCO reduced the cost of the asset but, for tax purposes they showed the $4.8 million as a tax-free receipt.  CCRA reassessed on the basis that the asset cost should also be reduced for capital cost allowance purposes.

Good News!

The $4.8 million was found to be a tax-free receipt with no reduction in the cost of assets acquired.

Also, in a November 28, 2002 Federal Court of Appeal case, the taxpayer received $12 million from the City of Toronto on a quasi expropriation of their building - $2.9 million for the land, $.1 million for the building, and $9 million “in respect of damages occasioned as a result of the inability of the appellant to relocate its business”.  CCRA argued that the $9 million should be shown as a disposition of eligible capital property with three-quarters, or $6.5 million, shown as taxable income.

Good News!

The Court found that the $9 million was a non-taxable capital receipt.


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