The surrogatum principle is a judge-made law which operates in the following manner as described by Charron J. in Tsiaprailis v. R., 2005 SCC 8 (CanLII), [2005] 1 S.C.R. 113, at paragraph 7. Commenting on the principle that awards and settlement payments are inherently neutral for tax purposes, she wrote: … in assessing whether the monies will be taxable, we must look to the nature and purpose of the payment to determine what it is intended [page118] to replace. The inquiry is a factual one. The tax consequences of the damage or settlement payment is then determined according to this characterization. In other words, the tax treatment of the item will depend on what the amount is intended to replace. This approach is known as the surrogatum principle….
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