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Last year I was contacted by a company that wanted me to take down an open-source software project I was working on. The generally tone was that they wanted to give me 10k CAD to take down the project and hand over my rights, otherwise they would sue me. I didn't have the resources for a drawn out lawsuit so I lawyer-ed up and accepted the offer.

After the lawyers were done hammering everything out, I owed about 12k CAD (lawyers are expensive). Does the 10k still need to be declared on my yearly taxes even though none of that money actually came to me? If so, does it get declared as income?

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In the US, one would net the proceeds. If you spent 10K and received 10K, it's net-zero. – JoeTaxpayer Mar 2 '13 at 18:58
Do you have a corporation, or was this personal income? – mhoran_psprep Mar 3 '13 at 22:17
up vote 0 down vote accepted

If this were a personal injury settlement, you would not have to pay tax (IT365R2 - Damages, settlements, and similar receipts). However, that is not the case here and so tax is most likely payable. You want to read IT-182, but unfortunately, I cannot find it on the CRA website.

You will likely want to consult an accountant or a tax lawyer. My understanding is that the $10,000 would be taxable, but as it cost you $12,000 to acquire this $10,000, you will not end up paying tax on it. It may be possible to claim the balance ($2000 in the red) against your taxable income, but I strongly advise against doing so until you have talked to an accountant.

Make sure you keep your receipts here.

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