Tax memo: TCC rules against Morguard Corporation

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Break fee was fully taxable as an income receipt

Memo No. 2012-11

On February 24, 2012, the Tax Court of Canada (TCC) released its decision in Morguard Corporation v. The Queen — the first Canadian case that addresses the tax treatment of a break fee from the perspective of the recipient.

In Morguard, the TCC found that the taxpayer had received the break fee as an integral part of, and in the ordinary course of, its regular business operations, which consisted of the acquisition of significant positions in public real estate companies. It also found that the receipt of the break fee had no linkage to a capital purpose.

For these reasons, the break fee was found to have been received by the taxpayer on account of income.

The TCC’s decision in Morguard turns heavily on the facts of the case. In particular, the TCC repeatedly noted that the taxpayer’s business strategy followed a pattern of bidding for and acquiring controlling interests in real estate companies, and that the receipt of break fees in different circumstances may result in a different characterization. In doing so, the TCC left the door open for taxpayers to distinguish Morguard on the facts and argue for capital treatment of break fees in circumstances when the acquisition of securities is not part of the ongoing business strategy of the recipient.


Very generally, a break fee is a payment made by a target corporation in the context of a takeover bid to extinguish its contractual relationship with a prospective purchaser and allow it to pursue an offer viewed as more advantageous to its shareholders. Although the characterization of a break fee, for both the payor and recipient, remains highly fact-specific, the case law in recent years has generally supported the deduction of break fees as a general business expense.

Read our Tax memo to learn more about the facts of the case and our comments on what the outcome of the case could mean for taxpayers.