Murphy’s Law is, as everyone knows, the proposition that “Anything that can possibly go wrong, does.” There are many variants of this. Among tax practitioners, a well known one is the proposition “There is no equity in a tax statute.” Roughly translated, this means that as a taxpayer, you may not rely on the fairness of your position when contesting a tax assessment – fairness has nothing whatever to do with the correctness of the assessment, and Tax Court judges will be quick to remind you of this. Almost always this version of Murphy’s Law is applied against the taxpayer, so it is refreshing to be reminded that from time to time it will be applied against the tax department, too. The recent Tax Court Decision in Henco Industries Limited is a very recent example of this. (See the July 2 blog post “Tax Court finds settlement payment was a non-taxable capital receipt” by my colleague Ian Gamble for a discussion of some of the technical issues in the case.)
The Henco case evolved out of a very difficult set of circumstances at the Town of Caledonia in Ontario. Henco was in the course of building a residential subdivision on lands to which it held legal title, but which a local Aboriginal Band claimed as sacred territory. Certain Band members embarked on a course of conduct designed to halt the development. Initially, this involved acts of civil disobediance, but these quickly escalated into acts of violence against individuals and serious property damage. Acting on orders from the provincial government of the day, the provincial police force declined to take action against the lawbreakers. This was done in full recognition of the consequences for the developer and other property owners in the community. Rightly or wrongly, they were regarded as collateral damage in the larger issue involved, namely, the government’s desire to avoid an all out confrontation with the Band. (The sad circumstances are outlined in detail in a book on the subject by Christie Blatchford, titled Helpless: Caledonia’s Nightmare of Fear and Anarchy, and How the Law Failed All of Us).
The government decided to buy out Henco’s interest in the development and made the company a payment of some $15.8 million. In a short agreement evidencing the settlement, it was stated that the payment was compensation for Henco’s interest in the land and for its release of all its claims of whatever kind in respect of the circumstances leading up to the settlement. Not surprisingly, I suppose, the CRA took the position that the payment should be taxed as net profit from the real estate development. This is what tax departments do when business taxpayers receive substantial sums of money. However, the Tax Court disagreed and decided that not only was the payment of a capital nature (notwithstanding that it was paid to a developer in respect of an interest in its land), but it was not taxable at all under the tax provisions in force at the time. (Those provisions have since been amended.) The decision is of interest to tax practitioners for the judge’s extensive analysis of the distinction between income and capital receipts, and for why he decided that the payment was not subject to tax on any basis. But I like the decision for a different reason.
The circumstances in Caledonia at the time were, to put it mildly, egregious. The government’s decision not to enforce the law in favour of Henco and the citizens of Caledonia was questionable – see the Blatchford book noted above. A direct fallout from the decision as far as Henco was concerned was that it was out of business. The $15.8 million was far less than what it expected to earn from the subdivision. Certainly when looked at from Henco’s perspective, the result was grossly unfair. One level of government chooses not to enforce the law and decides to buy peace by paying off the developer. Then another level of government tries to tax away a significant portion of the payment as if it were income from doing business as usual when whatever business there was had been destroyed as a direct consequence of the first government’s non-action! There’s nothing fair about that, but from the CRA’s perspective I suppose that fairness had nothing to do with the case. While the judge didn’t frame his decision in the context of what’s fair, I can’t help wondering if Murphy, wherever he is, is smiling at this twist on Murphy’s Law of Tax. I know I am.