A pharmaceutical corporation ("Weyth") had collection agreements with the taxpayers for their on-going collection of pregnant mare urine ("PMU") and its supply to Wyeth. In exchange for the release from its purchasing obligations, Weyth agreed to make substantial payments to the taxpayers, 80% of which was identified in the agreements as "payments for feed and herd health expenses." The taxpayers treated the payments as capital receipts for the disposition of capital assets (the collection agreements). The Minister reassessed them on the basis that they were business income.
Hogan J agreed with the taxpayers that the "payments for feed and herd health expenses" were capital receipts, given that:
- the payments were not meaningfully tied to actual feed and herd health expenses - for example, the taxpayers were entitled to the payments even if they immediately sold their entire herds;
- the motivation behind labeling the payments as "feed and herd health expenses" in the agreements appeared to relate to Weyth's difficulties with animal rights groups "and to counter a potential negative public backlash as a result of the destruction of the PMU herds" (para. 61); and
- Weyth's cancellation of the contracts effectively drove the taxpayers out of the PMU business, and it was reasonable to conclude that the taxpayers were really being compensated for the destruction of their businesses.
Hogan J found that the parol evidence rule did not prevent him from considering the surrounding facts (set out above) in order to interpret the agreements. He cited (at para. 35) Ventas for the proposition that a commercial contract is to be interpreted, inter alia, "with regard to objective evidence of the factual matrix underlying the negotiation of the contract."