The taxpayer, which was a Canadian natural gas producer, received a lump sum as compensation for the losses it was considered to have suffered as a result of the cancellation of long-term natural gas supply contracts it had entered into with one purchaser ("A&S"), with the result that it thereafter was to sell its natural gas under short-term gas supply contracts and under a continuation of modified versions of existing sales arrangements.
These lump sums were found to be proceeds of disposition of capital assets, namely, the long-term supply contract. The contracts formed a significant part of the structure of the taxpayer's business (representing over 13% of its sales) and their capital nature was fortified by the dedication under some of the contracts of the lands containing the gas reserves to be sold under such contracts. Furthermore, even if the payments received by it were measured by the present value of the profits it might be reasonably be expected to earn under such contracts, which was not the case (as it instead received an arbitrarily negotiated lump sum) this would not have deprived the payments of their quality of capital.
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