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Published: March 17, 2020

Last Updated: April 16, 2020

Canada’s income tax system is premised on the “source doctrine”. This means that for income to be taxable it generally has to be traceable to one of the named sources under the Income Tax Act:

  • Office
  • Employment
  • Business
  • Property
  • Capital gains

When funds received by a taxpayer are not traceable to one of the above-mentioned identifiable sources, they are, generally speaking, not considered “income” and therefore not taxable. In such cases, the funds received are treated as a non-taxable “windfall”. For instance, lottery winnings in Canada are treated as windfalls and are not subject to Canadian income tax. This is also true for gambling winnings, as long as the taxpayer is not in the business of gambling, because the income is not considered to be income from a business. However, the determination of whether or not an individual is in the business of gambling is complex. You should consult a tax lawyer to assist you with making this determination.

In determining whether or not funds received are a windfall and therefore not taxable the usual starting point is the decision in The Queen v. Cranswick, 82 DTC 6073 (FCA). In Cranswick the court considered eight factors that lead to the determination of whether or not income is a windfall:

  • Whether the taxpayer had an enforceable claim to the payment;
  • Whether the taxpayer made an organized effort to receive the payment;
  • Whether the taxpayer had a customary or specific expectation to receive the payment;
  • Whether the taxpayer had a reason to expect that the payment would recur;
  • Whether the payment was from a source that is not a customary source of income for the taxpayer;
  • Whether the payment was in consideration for or in recognition of property, services or anything else provided or to be provided by the taxpayer;
  • Whether the payment was earned by the taxpayer as a result of any activity or pursuit of gain carried on by the taxpayer and was not earned in any other manner.

If the answer is “yes” to any of these factors, there may be an argument that the funds received were not a windfall.

As set out above, there are several factors that must be considered before a taxpayer can conclude that they have received a windfall. If you have received funds that you think might not be taxable we recommend that you consult a tax lawyer to go through the analysis for you.

There have been several interesting Court cases regarding whether a payment received by a taxpayer by virtue of a settlement is taxable. In some cases, taxpayers optimistically question whether or not a payment to settle a legal claim is or is not a windfall. Unfortunately, in most situations it is not easy to convince a Court that the settlement amount is a windfall and therefore non-taxable.

First, the courts take into account the “surrogatum principle”. This principle stands for the proposition that a settlement amount received is treated for tax purposes in the same manner as that which it replaces (income from business, employment income, income from property, capital etc.). However, if an amount cannot be traced as a payment in lieu of another, then the court may look to the Cranswick factors above when coming to a determination of the tax treatment.

So, if a taxpayer receives a settlement from a lawsuit and CRA challenges the tax treatment of the settlement, the taxpayer will have to convince CRA or the Tax Court of Canada that the amount received passes the Cranswick test. For example, in the case of Frank Beban Logging Ltd. v. The Queen, 1998 CanLII 389 (TCC), the corporate taxpayer received an amount as compensation for the government’s expropriation of its logging lands. Legislation was passed to provide compensation to some landowners and not others, and Frank Beban Logging Ltd. was excluded from the compensatory scheme. However, after consistent lobbying the company was compensated, even though the government was not legally obligated to do so.

The Court found that the company did not possess an enforceable legal claim to the compensation because the legislation blocked them from pursuing one. Ultimately, after applying the Cranswick factors the Court ruled that the compensation was a windfall and non-taxable.

Another example of a non-taxable windfall is to be found in the recent case of Johnson v. The Queen, 2011 TCC 540, in which the Appellant was the victim of a ponzi scheme who invested money under the presumption that the scheme’s perpetrator was properly investing her money. However he was simply shifting the funds from some investors to others in a classic ponzi scheme. In this case, the Appellant actually received funds from the ponzi scheme, which unbeknownst to her was money taken from other investors.

In making a determination as to whether the funds received from the ponzi scheme victims was income from a source (and therefore taxable), the Court noted that the funds received did “have some characteristics of income from a source.” For instance, the victim provided money to the schemer and received “something in return.” However, “nothing was earned with the capital”, the money was simply shifted around between investors and the income was not from income-earning investments.

When applying the Cranswick factors the Court also noted that the victim did not have a legal enforceable claim to the income she received. Furthermore, there was no organized effort to receive the income because she invested with the purpose of receiving investment income, not income from fraud. Accordingly, the payments were not sought after or expected. The Court concluded that the funds received were a windfall and non-taxable.

If you think you have received a windfall that is not taxable, contact our experienced tax lawyers for a determination.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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