Brosseau v. MNR, 86 DTC 1412, [1986] 1 CTC 2558 (TCC)

Taylor, T.C.J.:—This is an appeal heard in Montreal, Quebec, on February 27, 1986, against income tax assessments for the years 1977, 1978, 1979, 1980 and 1981 in which the Minister of National Revenue assessed Mr. Brosseau to tax based on the application of paragraph 12(1 )(g) of the Income Tax Act, which reads as follows:

12(1) ...

(g) — any amount received by the taxpayer in the year that was dependent upon the use of or production from property whether or not that amount was an instalment of the sale price of the property (except that an instalment of the sale price of agricultural land is not included by virtue of this paragraph);

The notice of appeal read in part:

— The assessment is allegedly based on section 12(1 )(g) of the Income Tax Act and arises from the mistaken notion that the entire proceeds of sale were dependent upon production from, or use of, a business.

— In fact, under the agreement between the appellant and the Transferee, the amount received by the Appellant during the taxable years in question constituted the guaranteed minimum amount payable to the Appellant under all circumstances and irrespective of any “production or use.”

In response, the Minister asserted:

— Prior to 1977 the Appellant had been carrying on his accounting practice in general partnership under the firm name “Viau, Rouleau, Brosseau & Associés”;

— In the course of the 1977 taxation year, the Appellant entered into an agreement with Mrs. Michel Viau, Robert Taillefer and Yves Lussier whereby he disposed of his practice;

— The agreement provided for the payment to the Appellant of 20% of the gross professional income received from his former “clientele” during the next five years;

— The Appellant treated the proceeds of the sale by adding $50,000.00 to his cumulative eligible capital account under section 14 of the Income Tax Act;

— The agreement further provided that the said payments had to total a minimum of $100,000.00;

— Pursuant to the agreement, the Appellant received the following amounts:

1977	$ 5,000.00
1978	$ 9,000.00
1979	$27,833.00
1980	$26,497.00
1981	$25,842.00

— The Respondent submits that an accounting practice is a property according to section 248 of the Income Tax Act;

— The respondent submits that the agreement for sale provides for payments based on production from property within the meaning of section 12(1 )(g) of the Income Tax Act;

Considerable documentation and testimony was produced by both parties in a much appreciated effort by counsel to enlighten the Court regarding the availability and/or utility of that referred to as Mr. Brosseau's “clientele”, or “accounting practice”, for “production or use” resulting in the payments at issue. Mr. Vineberg summarized his position as:

I would underline that word for purposes of my argument, “dependent upon use of or production from property.” What property is involved here that was being used or from which there was production? There was goodwill. There was a business. There was “ma clientele”. There was a real or imagined something, but “ma clientele” isn't used, and “ma clientele” doesn't produce any property. If Mr. Brosseau had sold to me his clientele, what could I have done? Would it have produced property? Would it have been usable for me to get income from it? Would it have been a source of income? To get the income out of it, you had to have a Mr. Taillefer* [1] do the work. You had to have brains and know-how and skill and experience. You had to have the confidence of the clientele. You had to be able to preserve — the production is not the production that comes from property. It’s the production that comes from qualities of ability, experience, goodwill, personal relationship, a lifetime of activity. These are not things where you use or produce. You cannot say that a man’s clientele is a source from which he produces or uses something.

For Mr. Lecours the situation rested as:

The Department, of course, took the position that what he did transfer was property, in order that they may apply Section 12(1)(g), and as Mr. Vineberg pointed out, the definition given in Section 248(1) of the Income Tax Act with regard to property is very wide, and, in particular, when the definition includes in the word “property”, “a right of any kind whatever, a share or a chose in action”, this is sub-paragraph (a) of the definition.

Our contention is that on the basis of the facts put before the Court, the Department of National Revenue was right in concluding that what was, in fact, transferred was property. The evidence is to the effect that Mr. Brosseau, in the agreement that was filed as Exhibit A-1, transferred what is worded here as being “his clientele”, but which, in fact, involved quite a bit more than simply his clientele. The appellant testified that what he transferred, in fact, was his list of clients, his files, his account receivables that were receivable at that time, and not simply goodwill. He transferred more than goodwill. He transferred property in the sense — this is indicated in Section 248(1) of the Act, with reference to the definition of property.

— what Mr. Brosseau received in the course of the years under appeal were, in fact, amounts that were dependent upon the use of or production of the property, whether or not the amounts were instalments on the sale price of the property.

One of the arguments put forward by the appellant is that the agreements, in fact, stipulated a minimum of ONE THOUSAND DOLLARS ($1,000.00), which, in any event — or ONE HUNDRED THOUSAND DOLLARS ($1,000,000.00), which amount, in any event, would have been payable at the term — according to the terms of the agreement.

I recognize that the agreement stipulated that a minimum amount was to be received by Mr. Brosseau. I agree with this. However, if we take a closer look at what, in fact, he did receive — in fact, I think it becomes clear that what Mr. Brosseau received during the years in question, were amounts which were derived from the use of what, in fact, he transferred. Mr. Taillefer explained to the Court that Mr. Brosseau was, in fact, paid more than a HUNDRED THOUSAND DOLLARS ($100,000.00). He was paid a HUNDRED AND TWENTY-FIVE THOUSAND DOLLARS ($125,000.00) and this amount was derived directly from the use of what Mr. Brosseau terms his clientele, but which I see to be more than that — that is accounts receivable, list of clients, business brought to the firm by the use of Mr. Brosseau’s files, which makes me conclude that what was important in the agreement, (A-1), is what was provided for in the second paragraph of the understanding.

— It might have been less to the point where what, in fact, would have been paid to him during the FIVE (5) years would be below the HUNDRED THOUSAND DOLLARS ($100,000.00). Then the Company would be in the obligation, in any event, of paying a HUNDRED THOUSAND DOLLARS ($100,000.00) to Mr. Brosseau, so, what, in fact, he received was directly dependent upon the volume of business coming from what he transferred to the Company.

Part of the complexity of this case, as I see it, arises out of some differentiation in terms and words applicable to the transaction between Mr. Brosseau and his former partners, regarding that which was sold — “clientele", “business", “practice", “list of clients”, “goodwill", “accounts receivable”, etc. There might have been some element of “accounts receivable", collection, and perhaps other minor items involved in the sale, and indeed the question of whether Mr. Brosseau actually owned anything to sell was also raised. But it is clear that between the parties, Mr. Brosseau had proprietary rights to something, and that his partners wanted to gain those rights. So whatever might have been the legal niceties, he did make the transfer (sale) at issue, and was paid for it. It has not been established to my satisfaction that the transfer involved "goodwill” of any great consequence — nor did either party raise in debate this particular point in detail. Accordingly, I am prepared to find that what Mr. Brosseau sold to his partners was his “list of clients” and I am prepared to determine the point in dispute based upon that perspective. The rest of the terminology used particularly "clientele”, "accounting practice” and “business” in the context of this appeal do not appear useful to me.

Then, I am of the view that the “list of clients” was indeed a "property”. I can think of no reason why it should not be so termed. So Mr. Brosseau sold to the partners his “list of clients” for a minimum of $100,000, but with the prospect of a greater return if certain circumstances obtained. The end result is that he received about $125,000. For the moment I shall leave aside consideration of the $25,000 excess received (supra), and look at the issue just as if he had sold for and received $100,000. Based on the case of Walter J. Burian et al. v. The Queen ([1976] C.T.C. 725; 76 D.T.C. 6444), and the recent case of R. Bruce Graham Limited v. M.N.R. from the Tax Court of Canada ([1986] 1 C.T.C. 2326; 86 D.T.C. 1256) it would be difficult to conceive of the property sold as anything other than a capital property — at least from the viewpoint of the purchasers. On that basis, the Minister is in effect saying by the Brosseau assessments that the purchase would result in a capital expenditure to the remaining partners, but an income receipt to Brosseau. While not beyond the realm of possibility, that is a result which income tax application normally avoids. Another way of putting that point, is that the Minister is saying (in the Brosseau assessments) that Brosseau merely received by virtue of the $100,000 that to which he would have been entitled in any event from the production of use "of the list of clients.” As I see it, that position could only be tenable if indeed the “list of clients” in some way "locked up in a drawer” could have provided Mr. Brosseau with the income in question. I believe that not to have been a reasonable prospect. Conversely, had the purchasers “locked up in a drawer” Mr. Bros- seau’s list of clients, the $100,000 still would have been payable. I am satisfied that this initial amount — $100,000 — falls outside the parameter of paragraph 12(1)(g) of the Act. In this regard I would make reference to Porta-Test Systems Ltd. ([1980] C.T.C. 71; 80 D.T.C. 6046). I do not regard the fact that annual payments to Brosseau were calculated as a percentage of gross revenue from his list of clients, as negating that position.

Turning to the excess amount of some $25,072 I believe it must be regarded as of a different nature. Once the minimum amount of $100,000 had been reached — no matter how calculated — then amounts received by Mr. Brosseau thereafter have a direct relationship to "use of or production from” the property involved. Mr. Brosseau’s deal essentially was a minimum plus an override, not unusual, and not unreasonable — but a distinction with a tax difference as I see it. I do not reach this conclusion on the excess $25,072 without some reservation — since I see some merit in the concise argument of counsel for the appellant on the point — that since the first $100,000 did not come from "use or production”, why the second $25,072? Nevertheless, that is the way I read the jurisprudence, and it probably indicates that caution should be exercised when such "override” clauses are entered in sales contracts, which skirt the edges of paragraph 12(1 )(g) of the Act.

The appeal is allowed in part, in order that the amount of $100,000 received by Mr. Brosseau from the sale of his list of clients, not be regarded as falling within the parameter of paragraph 12(1)(g) of the Act. In all other respects, the appeal is dismissed.

The appellant is entitled to party and party costs.

Appeal allowed in part.