An integrated nickel-mining public company (“Falconbridge”), entered into merger agreements with a more junior public company (“Diamond Fields”) which, through a 75%-owned subsidiary, held a valuable deposit at Voisey’s Bay in Newfoundland. The merger agreements provided for the immediate payment by Diamond Fields of a “Commitment Fee” of $28.2 million, and for the payment of a break fee of $73.3 million (calculated to bring the total of the two fees (the “Fees”) to 2.5% of the transaction value) on the completion by Diamond Fields of any competing offer. This occurred – the offer of another public company (“Inco” – the 25% minority shareholder) was accepted by the Diamond Fields shareholders, thereby triggering the payment by Diamond Fields of the break fee.
In reversing the Tax Court’s finding that the Fees were income from a source, namely, a business, and that they instead were capital receipts, Woods JA found (at paras. 33, 36) that the Fees were received on capital account because they were linked to a proposed acquisition of a capital asset (the shares of Diamond Fields). She went on to find that they were income pursuant to s. 12(1)(x).