Teskey,
T.C.J.:—The
appellant
appeals
from
its
reassessments
for
the
taxation
years
1983,
1984
and
1985,
wherein
the
Minister
disallowed
the
deduction
of
commission
payments
as
an
ongoing
expense
on
the
basis
that
the
amounts
were
capital
outlays
within
the
meaning
of
paragraph
18(1)(b)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act")
and
were
eligible
capital
expenditures
within
the
meaning
of
paragraph
14(5)(b)
of
the
Act.
Therefore,
only
reduced
amounts
were
allowed
as
deductions
in
accordance
with
paragraph
20(1)(b)
of
the
Act.
The
Issue
The
issue
is
whether
the
commission
payments
were
an
income
expense
or
a
capital
outlay.
Facts
The
Court
besides
receiving
a
statement
of
agreed
facts
signed
by
counsel
for
both
parties
received
evidence
from
several
witnesses
called
on
behalf
of
the
appellant.
The
relevant
facts
based
upon
the
statement
of
agreed
facts
and
the
testimony
adduced
are
as
follows:
The
appellant
was
incorporated
by
articles
of
incorporation
dated
October
5,
1972
and
continues
under
articles
of
amalgamation
dated
September
30,
1986.
On
July
13,
1983,
the
appellant
entered
into
an
agreement
of
purchase
and
sale
(the
’
purchase
agreement")
with
Willson
Office
Specialty
Ltd.
and
122061
Canada
Ltd.
f
Willson")
both
being
corporations
owned
by
Molson
International
Ltd.
('Molson").
The
purchase
agreement
was
for
the
purchase
by
the
appellant
of
the
Ontario
commercial
division
of
Willson
for
the
sale
of
office
and
stationery
products,
specifically
excluding
the
sale
of
such
products
in
retail
stores.
Willson
owned
and
operated
a
commercial
stationery
business
and
retail
stores
across
the
country.
The
purchase
agreement
incorporated
a
commission
agreement
as
Schedule
10
which
provided
for
payments
to
Willson
on
sales
to
Willson
customers,
calculated
on
a
percentage
basis.
It
provided
for
one
commission
rate
for
customers
formerly
served
only
by
Willson
and
for
a
different
commission
rate
for
customers
served
previously
by
both
Willson
and
the
appellant.
The
purchase
agreement
is
a
very
formal
agreement
consisting
of
some
25
pages
with
12
schedules.
The
important
portions
of
this
agreement
are
as
follows:
3.
Property
and
Assets
to
be
Purchased
and
Sold
3.1
Subject
to
the
terms
and
conditions
hereof,
the
Vendors
agree
to
sell,
assign
and
transfer
to
the
Purchaser
and
the
Purchaser
agrees
to
purchase
from
the
Vendors
as
a
going
concern
the
undertaking
of
the
hereinafter
described
property
and
assets
of
the
Purchased
Business,
as
at
and
from
the
close
of
business
on
the
Effective
Date,
consisting
of
the
following:
(a)
all
the
Purchased
Inventories;
(b)
all
the
Purchased
Feed
Assets;
(c)
the
full
benefit
of
all
unfilled
orders
received
by
the
Vendors
in
connection
with
the
Purchased
Business
and
all
other
contracts,
engagements
or
commitments
(except
as
hereinafter
provided)
to
which
the
Vendors
are
entitled
in
connection
with
the
Purchased
Business,
whether
written
or
oral,
including
(i)
the
full
benefit
and
advantage,
where
assignable,
of
all
forward
commitments
by
the
Vendors
for
supplies,
materials
or
inventories
entered
into
in
the
ordinary
course
of
the
Purchased
Business
for
use
in
the
Purchased
Business
whether
or
not
there
are
any
contracts
with
respect
thereto;
and
(ii)
all
the
right,
title
and
interest
of
the
Vendors
in,
to
and
under
the
vehicle
and
equipment
leases
described
in
Schedule
3
hereto;
(d)
prepaid
expenses
relating
to
the
Purchased
Business,
including
catalogues
and
flyers;
(e)
the
goodwill
of
the
Purchased
Business,
together
with
the
right
for
the
Purchaser
to
represent
itself
as
carrying
on
the
Purchased
Business
in
continua-
tion
of
and
in
succession
to
the
Vendors
and
the
right
to
use
any
words
indicating
that
the
Purchased
Business
is
so
carried
on,
including,
for
a
period
of
one
(1)
year
following
the
Closing
Date,
the
right
to
use
the
trade
mark
“Willson”,
in
accordance
with
the
Registered
User
Agreement
attached
hereto
as
Schedule
12,
as
part
of
the
name
of
or
in
connection
with
the
Purchased
Business
or
any
part
thereof
carried
on
or
to
be
carried
on
by
the
Purchaser;
and
(f)
all
other
property,
assets
and
rights,
real
or
personal,
tangible
or
intangible,
owned
by
the
Vendors
or
to
which
they
are
entitled
in
connection
with
the
Purchased
Business,
including
all
customer
lists
and
telephone
listings,
used
in
connection
with
the
Purchased
Business.
3.2
There
shall
be
specifically
excluded
from
the
purchase
and
sale
of
assets
herein
provided
for
the
assets
referred
to
on
Schedule
4
attached
hereto,
which
shall
remain
the
property
of
the
Vendors.
3.3
The
undertaking,
property
and
assets
described
in
clause
3.1
hereof
are
herein
sometimes
collectively
referred
to
as
the
"Purchased
Assets".
4.
Purchase
Price
and
Allocation
Thereof
4.1
The
purchase
price
payable
to
the
Vendors
for
the
Purchase
Assets
(the"Purchase
Price")
shall
be,
subject
to
adjustments
herein
provided
for,
a
sum
equal
to
the
aggregate
of
the
following
amounts;
(a)
as
to
the
Purchased
Inventories
referred
to
in
clause
3.1(a),
the
sum
of
$1,095,781.83;
(b)
as
to
the
Purchased
Fixed
Assets
referred
to
in
clause
3.1(b),
the
sum
of
$142,990;
(c)
as
to
the
assets
referred
to
in
clause
3.1(c),
the
sum
of
one
($1)
dollar
plus
the
assumption
of
liabilities
referred
to
in
clause
5.2;
(d)
as
to
the
prepaid
expenses
referred
to
in
clause
3.1(d),
the
sum
of
$69,119.16;
(e)
as
to
the
assets
referred
to
in
clauses
3.1(e)
and
(f)
the
sum
of
one
($1)
dollar
for
each
of
such
categories
of
assets.
Paragraph
5
under
the
heading
“Assumption
of
Liabilities"
states
that
the
purchaser
does
not
assume
any
liabilities
of
the
vendor
and
the
vendor
indemnifies
the
purchaser
from
all
liabilities.
Paragraph
8
under
the
heading
"Employees
of
the
Purchased
Business"
provides
as
follows
under
the
following
four
subparagraphs:
8.1
With
respect
to
the
employees
of
the
Purchased
Business
who
will
be
employed
by
the
Purchaser
(a
list
of
such
employees
being
attached
hereto
as
Schedule
9),
the
Vendors
shall
pay
to
the
Purchase
on
the
Closing
Date
an
amount
equal
to
$57,451,
representing
twenty-five
(25%)
percent
of
the
aggregate
amount
which
the
Vendors
would
have
paid
to
terminate
all
such
employees
with
over
seven
(7)
years
of
service
with
the
Vendors
as
at
the
Closing
Date,
and
certain
other
employees
jointly
selected
by
the
parties,
in
accordance
with
the
standards
set
out
in
the
Vendors,
normal
severance
policy,
a
copy
of
which
will
be
delivered
to
the
Purchaser
at
or
prior
to
the
Time
of
Closing.
8.2
The
Purchaser
covenants
and
agrees
that
any
of
the
Employees
referred
to
in
Schedule
9
who
are
dismissed
by
the
Purchaser
for
whatever
reason
within
one
(1)
year
from
the
Closing
Date
shall
be
dealt
with
according
to
the
Vendors'
severance
policy
as
delivered
to
the
Purchaser.
8.3
The
Vendors
shall
indemnify
and
hold
harmless
the
Purchaser
in
respect
of
all
termination
or
severance
costs,
liabilities,
damages
and
expenses
whatsoever
which
are
applicable
to
the
employees
of
the
Purchased
Business
who
are
not
employed
by
the
Purchaser.
8.4
Willson
shall
maintain
all
employee
benefit
plans
(other
than
pension
funds)
after
the
Closing
Date
for
the
benefit
of
the
employees
shown
on
Schedule
9
for
a
period
of
up
to
six
(6)
months
after
the
Closing
Date,
subject
to
thirty
(30)
days
written
notice
of
cancellation
by
the
Purchaser.
During
such
period
of
time
as
the
benefits
are
maintained
by
Willson,
the
Purchaser
shall
pay
the
direct
premium
cost
thereof
plus
the
cost
of
any
negative
adjustment
in
the
experience
rating
applicable
to
such
benefit
plans.
Paragraph
10
under
the
heading
“Commission
Payable
to
the
Vendors"
brings
Schedule
10
into
the
agreement
which
is
the
commission
agreement
whereby
the
purchaser
agreed
to
pay
to
the
vendors
a
percentage
of
all
sales
to
previous
customers
of
Willson’s
made
over
the
next
five
years
after
closing.
Paragraph
14.8
deals
with
the
use
of
the
trademark"
Willson".
The
paragraph
reads
as
follows:
14.8
The
Vendors
shall
execute
and
deliver
to
the
Purchaser
a
non-exclusive
Registered
User
Agreement
in
the
form
of
the
agreement
attached
hereto
as
Schedule
12,
whereby
the
Purchaser
shall
be
entitled
to
use
the
trademark
“
ill-
son"
in
respect
of
the
Purchased
Business
subject
to
the
terms
and
conditions
set
out
therein
for
a
period
of
one
(1)
year
following
the
Closing
Date.
The
application
for
registration
of
a
registered
user
is
Schedule
12,
paragraph
3,
subparagraphs
(1)
to
(5)
inclusive
are
the
pertinent
parts
and
read
as
follows:
3)
The
conditions
or
restrictions
with
respect
to
the
permitted
use
are
as
follows:
(1)
The
proposed
registered
user
will
use
and
show
the
trade
mark
only
to
indicate
that
it
is
engaged
in
carrying
on
the
business
formerly
carried
on
by
the
commercial
division
of
the
Toronto
Branch
of
Willson
Office
Specialty
Ltd.,
and
for
no
other
purpose,
and
will,
whenever
using
the
trade
mark
clearly
and
unmistakenly
set
out
or
represent
in
every
case
that
the
said
trade
mark
is
only
being
used
by
it
to
represent
that
it
is
engaged
in
carrying
on
such
business.
(2)
Notwithstanding
the
provisions
of
paragraph
3(1)
above
the
proposed
registered
user
shall
not
use
the
trade
mark
in
any
manner
in
connection
with
the
sale
of
goods
to
the
general
public
at
retail
or
in
retail
stores
and
shall
not
show
the
trade
mark
in
the
typeface
currently
used
by
Willson.
(3)
The
proposed
registered
user
shall
use
the
trade
mark
only
in
such
manner
as
is
approved
by
the
owner,
which
approval
will
not
be
unreasonably
withheld,
and
shall
permit
the
owner's
representative
to
enter
the
premises
of
the
proposed
registered
user
at
any
time
during
business
hours
to
inspect
the
manner
in
which
the
trade
marks
are
being
used
and
to
take
samples
of
any
matter
showing
any
of
the
trade
marks.
(4)
The
proposed
registered
user
may
only
use
the
trade
mark
in
the
Province
of
Ontario.
(5)
The
proposed
permitted
use
is
for
a
period
of
one
(1)
year
commencing
July
12,
1983
and
expiring
July
11,1984.
Paragraph
14.9,
although
being
a
standard
worded
paragraph
and
normally
found
in
purchase
and
sales
agreements
such
as
this,
reads
as
follows:
14.9
The
Vendors
shall
use
their
best
efforts
to
preserve
intact
the
Purchased
Business
and
will
use
their
best
efforts
to
preserve
for
the
Purchaser
the
goodwill
of
suppliers,
customers
and
others
having
business
relations
with
the
Vendors.
Paragraph
16
under
the
heading
"National
Advertising
and
Promotional
Programs"
gives
the
purchaser
the
right
to
enter
into
a
national
program
with
the
vendor
on
a
cost
sharing
basis.
This
apparently
was
done
once.
Paragraph
17
deals
with
the
accounting
system
known
as
"WIPS"
(which
stands
for
Willson
Information
Processing
System)
which
was
designed
by
Willson
and
subparagraph
17.1
provided
for
its
use
by
the
appellant
and
that
Willson
would
maintain
this
system
for
a
period
of
up
to
six
months
and
that
the
only
cost
to
the
purchaser
was
the
actual
computer
cost
which
was
owned
and
maintained
by
Data
Crown,
an
arm's
length
third
party.
Paragraph
19
deals
with
expenses
and
reads
as
follows:
19.1
Each
party
hereto
shall
pay
its
own
expenses
incurred
in
respect
of
this
agreement
and
the
transactions
contemplated
hereby,
including
without
limitation
all
legal
and
accounting
fees
and
disbursements.
Paragraph
24
under
the
heading
”
Entire
Agreement"
states
that
the
written
agreement
is
the
only
agreement
and
that
it
could
only
be
amended
or
varied
or
altered
in
writing.
There
was
no
such
amendment,
variation
or
alteration.
The
only
assets
relating
to
the
portion
of
the
Willson
business
being
purchased
which
were
not
purchased
or
taken
over
by
the
purchaser
were
contained
in
Schedule
4.
These
assets
were
five
data
entry
terminals,
one
printer,
one
forklift
(although
several
other
forklifts
were
included
in
the
purchase
price)
and
the
leasehold
improvements
in
Mississauga,
Kitchener
and
London.
Schedule
9
contains
a
list
of
the
93
employees
that
the
purchaser
agreed
to
hire
or
take
on.
These
employees
were
warehouse
workers,
office
staff,
credit
and
collection,
administration
and
sales
personnel.
Some
of
the
sales
people
went
out
to
customers
and
others
worked
in
the
office
and
solicited
and/or
received
orders
by
telephone.
The
purchase
was
completed
in
July
of
1983.
The
appellant
paid
commissions
to
Willson,
for
the
period
from
closing
to
the
fiscal
year
ending
September
1983,
$79,654;
in
the
fiscal
year
ending
September
1984,
$322,296.92
and
for
the
fiscal
year
ending
September
1985,
$325,305.
From
the
evidence
adduced
by
the
appellant's
witnesses,
the
Court
is
satisfied
that
at
the
time
the
appellant
entered
into
the
agreement
with
Will-
son,
it
had
approximately
3,000
active
customers
and
Willson
had
approximately6,000
active
customers.
The
largest
portion
of
the
appellant's
business
was
Office
furniture,
primarily
non-stock
office
furniture
that
is,
office
furniture
systems
made
to
order.
This
totalled
between
60
per
cent
and
65
per
cent
of
the
business
and
office
supplies
and
stationery
amounted
to
some
30
or
35
per
cent.
Willson’s
supplies
and
stationery
business
was
90
per
cent
of
their
business,
the
remaining
10
per
cent
being
made
up
of
stock
furniture.
The
appellant's
sales
were
approximately
$10,000,000
a
year
and
Willson's
were
approximately
$13,000,000.
Therefore,
the
appellant's
stationery
sales
were
approximately
$3,300,000
a
year
and
Willson's
were
$11,700,000,
being
approximately
3.5
times
that
of
the
appellant.
The
prepaid
expenses
dealt
with
in
the
agreement
were
expenses
relating
to
catalogues
and
flyers
which
the
purchaser
took
over.
The
appellant
took
over
all
of
Willson’s
employees
except
the
four
most
senior
management.
The
four
not
taken
over
were
what
you
would
call
the
key
personnel
of
Willson
and
those
taken
over
would
not
be,
and
cannot
be,
described
as
key
personnel.
The
four
people
not
taken
on
by
the
appellant
were
Neil
Fenton,
the
general
manager;
Ron
Canata,
the
comptroller;
Brian
Bridges,
the
sales
manager
and
Jack
Marshall,
the
furniture
warehouse
manager.
From
the
wording
of
the
agreement,
the
appellant
did
not
have
to
take
on
any
of
the
employees
and
the
appellant
was
not
responsible
for
severance
payments
to
employees
not
taken
on
by
them.
The
WIPS
accounting
system
function
was
driven
by
an
off-site
computer
owned
and
operated
by
Data
Crown
and
operated
through
linked
terminals
at
Willson’s
Mississauga
location.
This
system
provided
reports
that
Willson's
customers
relied
upon
for
the
purpose
of
controlling
purchases
and
for
budgeting
purposes.
Although
the
appellant
had
the
right
to
use
this
system
for
a
six-month
period,
it
actually
used
the
system
for
12
to
13
months.
The
use
of
this
system
was
vital
to
the
ongoing
relationship
between
the
appellant
and
Willson's
former
customers.
At
the
time
of
purchase,
the
appellant's
own
computer
was
at
capacity.
By
having
the
use
of
the
WIPS
system,
the
appellant
was
able
to
carry
on
and
deal
with
the
Willson's
customers
without
any
delay
or
break
in
contact.
During
the
period
of
usage,
the
appellant
was
able
to
order
its
own
new
computer
equipment
from
California
and
customize
its
own
programs.
The
end
result
was
that
all
required
information
was
loaded
into
its
own
system
automatically
from
Willson’s
system.
This
was
a
very
substantial
saving
to
the
appellant.
Without
the
use
of
the
WIPS
system
any
advantage
to
the
appellant
over
its
competitors
would
probably
have
been
lost.
The
value
to
the
appellant
of
its
access
to
the
WIPS
system
was
much
more
than
the
estimated
reimbursement
cost
of
$160,000.
The
appellant
also
had
the
use
of
Willson’s
programmer
for
six
months
without
cost.
Alter
the
six-month
period,
the
programmer
went
on
his
own
and
Willson
retained
him
and
utilized
his
services
for
the
next
seven
months.
His
services
were
absolutely
necessary
for
the
continued
working
of
the
old
WIPS
system
and
the
design
of
the
new
system
to
take
over
the
WIPS
system.
The
saving
to
the
appellant
was
approximately
another
$50,000.
The
appellant
knew
at
the
time
it
entered
into
the
agreement
with
Willson
that
the
latter
had
been
losing
large
amounts
of
money.
Although
the
purchaser
paid
the
premiums
on
the
employee
benefit
plan,
Willson,
in
the
purchase
agreement,
agreed
to
maintain
the
plan
up
to
six
months
after
closing
at
a
saving
to
the
appellant
of
some
$5,000.
At
the
time
of
negotiating
the
purchase,
the
appellant
did
not
want
to
take
over
the
key
management
since
Willson
was
losing
money
and
it
felt
that
with
its
management
it
could
turn
the
business
around.
The
appellant
used
the
Willson
name
for
approximately
a
three-month
period
and
came
to
the
conclusion
that
it
was
a
liability
to
continue
its
use.
The
purchase
agreement
did
not
contain
a
non-competition
clause
and
the
appellant
knew
when
it
entered
into
the
agreement
that
the
vendor
could
immediately
go
into
competition
with
it.
This
in
fact
did
happen
almost
immediately
after
closing
by
the
company
that
purchased
the
Ontario
retail
end
of
the
business.
Two
of
the
management
employees
not
hired
by
the
appellant
went
into
their
own
stationery
business
almost
immediately.
In
spite
of
inflation
and
the
adding
of
new
customers,
the
gross
sales
of
the
Willson
portion
of
the
appellant's
business
slightly
decreased.
The
Willson
customers
were
a
finite
number.
Over
the
five
years
the
gross
sales
to
Willson
customers
declined
notwithstanding
that
inflation
was
between
five
per
cent
and
ten
per
cent.
The
appellant
knew
at
the
time
it
entered
into
the
purchase
agreement
that
in
regards
to
Willson’s
customers,
a
new
price
list
in
the
form
of
a
tender
would
have
to
be
made
immediately.
At
the
time
of
entering
into
the
purchase
agreement,
the
business
was
very
competitive
and
price
driven.
The
existing
customers
did
not
have
to
continue
to
buy
their
stationery
supplies
from
the
appellant.
There
was
very
little
client
loyalty
and
if
there
was
any
loyalty
in
the
stationery
business
at
the
time,
it
was
more
to
the
individual
salesman
than
to
the
actual
supplier.
The
sales
staff
were
not
under
non-competition
agreements
and
those
who
left
could
be
in
competition.
The
appellant
had
already
been
approached
by
several
Willson
sales
people
for
jobs
prior
to
the
purchase
agreement
being
entered
into.
The
purchase
gave
the
appellant
the
opportunity
to
take
over
Willson's
market
share.
The
entering
into
the
agreement
and
the
taking
over
of
the
Willson
business
was
highly
speculative
and
a
gamble
on
behalf
of
the
appellant,
a
gamble
which
if
failed,
would
have
financially
ruined
the
appellant.
The
gamble
was
successful
and
the
appellant
increased
its
business
substantially
as
a
result
of
the
purchase.
The
appellant's
president,
Frank
Shortreed,
gave
the
following
answers
under
cross-examination:
Q.
You
understand
the
concept
of
goodwill?
A.
Yes.
Q.
You
would
agree
with
me
that
it
is
a
difficult
thing
to
place
a
value
on.
You
have
already
given
us
testimony
about
trying
to
establish
values
of
certain
tangible
things
that
are
provided.
With
this
particular
item
though,
goodwill,
being
intangible,
you
would
agree
with
me
it
is
very
hard
to
put
a
figure
on
it?
A.
Definitely.
Q.
In
this
particular
case,
you
were
purchasing
more
than
just
identifiable
assets.
You
were
purchasing
a
company
that
is
operating
and
it
was
a
going
concern.
A.
Yes.
I
would
just
like
to
add
one
thing
though.
Our
knowledge
was
that
it
had
been
losing
money
for
some
time.
Q.
That
knowledge
was
from
the
newspaper,
you
indicated,
and
it
was
from
the
marketplace.
A.
Yes.
Q.
The
dollar
value
though,
would
you
agree
with
me,
that
that
was
nominal
in
the
sense
that
the
goodwill
was
worth
something
more
even
if
you
could
not
put
a
value
on
it?
A.
Something,
more
or
less.
We
realized
that
one
dollar
was
not
the
value.
Q.
Was
an
evaluation
done
at
the
time
of
purchase
in
terms
of
the
goodwill
in
the
portion
of
the
company
purchased?
A.
No,
it
wasn't
possible
to
do
so
because
the
lack
of
financial
information
for
that
portion
of
the
business.
Q.
You
had
no
financial
statements,
is
that
what
you
are
saying,
that
could
substantiate
that?
A.
No
segmented
financial
statements
that
identified
the
division
that
we
purchased,
nor
did
we
have
the
consolidated
statement
of
the
Willson
organization.
Q.
So
you
were
not
able
to
get
the
financial
statements
from
Molson's
or
Will-
son's?
A.
That's
correct.
During
the
first
year
of
operation,
the
appellant
paid
out
in
severance
costs
some
$9,000
to
$10,000
in
excess
of
the
amount
allowed
in
the
purchase
agreement.
The
information
on
all
new
customers
that
the
Willson
sales
force
attracted
after
closing
was
processed
through
the
Willson
WIPS
computer
system
for
the
13-month
period
that
it
was
being
used.
At
the
time
of
entering
into
the
agreement,
the
appellant
felt
that
the
management
of
the
Willson
organization
was
not
effective
at
running
the
business
and
that
it
was
an
opportunity
for
its
management
to
turn
the
business
around
pursuant
to
the
agreement.
No
payments
were
made
to
Willson
which
were
designated
for
the
use
of
the
WIPS
system.
In
regards
to
the
computer
terminals
that
were
not
included
in
the
purchase
price,
Willson
did
make
a
nominal
charge
for
the
use
of
these
terminals
up
until
January
of
1984.
After
that,
there
was
no
charge
for
the
terminals
and
the
appellant
retained
the
terminals
and
Willson
never
did
ask
for
them
to
be
returned.
Until
the
appellant's
new
system
was
purchased
and
the
information
electronically
converted
to
its
new
purchased
system,
denial
of
access
to
the
WIPS
system
would
have
had
severe
adverse
effects
on
the
appellant.
John
Fermino,
the
computer
programmer,
whose
services
were
provided
to
the
appellant
without
charge
for
the
first
six
months
was
the
key
to
maintaining
and
operating
the
WIPS
system.
Without
him,
the
WIPS
system
would
not
nave
been
operational
on
a
continuous
basis
as
he
solved
the
daily
problems
and
was
literally
working
full-time
for
that
period
for
the
appellant
keeping
the
WIPS
system
operational.
The
estimated
saving
was
a
further
$50,000.
The
only
assistance
given
by
the
vendor,
or
its
non-retained
staff
members
to
the
transfer
of
the
business
to
the
appellant,
was
in
the
Toronto
area
as
Brian
Bridges
with
Michael
James
Whitmarsh,
a
vice-president
of
the
appellant
visited
two
accounts
and
Neil
Fenton
again
with
Michael
James
Whitmarsh
visited
with
him
one
account
in
Toronto.
At
the
time
of
negotiating
the
purchase,
the
only
customer
information
available
to
the
appellant
was
a
list
of
the
names
of
the
ten
largest
accounts
in
each
of
the
four
areas
of
Ottawa,
London,
Kitchener
and
Toronto.
The
appellant
lost
nine
of
the
top
15
accounts
in
the
Toronto
area.
In
the
London
area
it
was
able
to
keep
six
of
the
ten
top
accounts;
in
Kitchener,
it
was
able
to
keep
seven
of
the
ten
top
accounts
and
in
Ottawa
eight
of
the
ten
top
accounts.
One
of
the
advantages
that
the
appellant
had
of
buying
the
Willson
commercial
business
was
that
Willson
purchased
the
stationery
and
office
supplies
at
a
better
price
because
of
its
volume.
The
ability
to
purchase
at
a
better
price
would
increase
the
margin
of
profit
for
the
appellant.
Willson
prepared
the
purchase
agreement
and
basically
took
a
"take
it
or
leave
it"
attitude,
except
that
the
appellant
was
able
to
negotiate
the
percentage
payable
to
Willson
on
the
future
sales
down
from
4
per
cent
to
3
per
cent.
The
retention
of
the
sales
staff
at
the
various
centres
assisted
in
the
appellant's
ability
to
carry
on
the
business
and
to
make
it
grow.
None
of
the
retained
staff
were
required
to
stay
or
were
essential
to
the
business.
They
all
could
have
been
replaced.
The
appellant
could
assume
that
the
majority
would
stay
on
after
the
purchase.
Having
93
working
employees
in
place
allowed
the
appellant's
management
to
step
in
and
carry
on
the
business
without
delay.
There
obviously
was
some
value
to
this
even
though
individuals
could
be
replaced
with
relative
ease.
The
value
to
the
appellant
of
the
WIPS
system
and
the
other
services
provided
by
Willson
after
closing
was
much
greater
than
what
it
would
have
cost
the
appellant
to
try
and
replicate
them.
The
amount
paid
in
commissions
over
the
five-year
period
after
July
1983
amounts
to
about
only
12
per
cent
of
the
gross
sales
of
Willson
for
a
one-year
period
at
the
time
the
purchase
agreement
was
entered
into.
Analysis
The
issue
of
whether
a
particular
expenditure
is
an
income
expense
or
a
capital
outlay
has
been
considered
on
numerous
occasions
by
the
courts.
Mr.
Justice
Estey
on
behalf
of
the
Supreme
Court
of
Canada
surveyed
the
leading
Canadian,
British,
Australian
and
American
authorities
as
well
as
some
text
writers
in
his
decision
in
Johns-Manville
Canada
Inc.
v.
The
Queen,
[1985]
2
S.C.R.
46;
[1985]
2
C.T.C.
111;
85
D.T.C.
5373.
One
of
the
principles
derived
from
this
case
is
that
there
is
no
single
test
or
no
rigid
test
to
determine
whether
or
not
an
expense
is
on
account
of
income
or
on
account
of
capital.
“It
is
a
common
sense
appreciation
of
all
the
guiding
features
which
must
provide
the
ultimate
answer."
Mr.
Justice
Estey
referred
to
the
Privy
Council
decision
of
B.P.
Australia
Ltd.
v.
Commissioner
of
Taxation
(Australia),
[1965]
3
All
E.R.
209;
[1966]
A.C.
224
wherein
they
determined
(at
page
117
(D.T.C.
5377)):
.
.
that
a
payment
made
by
the
taxpayer
as
an
inducement
to
a
service
station
operator
to
sign
an
exclusive
agency
contract
was
an
income
expenditure
and
not
a
capital
outlay.
The
contract
had
a
life
of
five
years
and
thus
was
an
asset
of
sort
which
amounted
to
an
opportunity
by
the
taxpayer
to
market
its
gasoline
exclusive
through
the
operator's
outlet.
He
then
goes
on
and
quotes
from
Lord
Pearce
who
said
at
page
260:
BP’s
ultimate
object
was
to
sell
petroleum
and
to
maintain
or
increase
its
turnover.
There
can
be
no
doubt
that
the
only
ultimate
reason
for
any
lump
sum
payment
was
to
maintain
or
increase
gallonage.
The
solution
to
the
problem
was
not
to
be
found
by
any
rigid
test
or
description.
It
has
to
be
derived
from
many
aspects
of
the
whole
set
of
circumstances
some
of
which
might
point
in
one
direction,
some
in
the
other:
one
consideration
may
point
so
clearly
that
it
dominates
other
and
vaguer
indications
in
the
contrary
direction
.
.
.
a
common
sense
appreciation
of
all
the
guiding
features
which
must
provide
the
ultimate
answer.
Although
the
categories
of
capital
income
expenditure
are
distinct
and
easily
ascertainable
in
obvious
cases
that
lie
far
from
the
boundary,
the
line
of
distinction
is
often
hard
to
draw
in
border
line
cases;
and
conflicting
consideration
may
produce
a
situation
where
the
answer
turns
in
questions
of
emphasis
and
degree.
That
answer:
"
depends
on
what
the
expenditure
is
calculated
to
effect
from
a
practical
and
business
point
of
view
rather
than
upon
the
juristic
classification
of
the
legal
rights,
if
any,
secured,
employed
or
exhausted
in
the
process":
per
Dixon,
J
in
Hallstroms
Pty
Ltd
v
Federal
Commissioner
of
Taxation
(1946),
72
CLR
634,
648.
Estey,
J.
also
states
that
the
Privy
Council
in
the
B.P.
case,
supra,
also
applied
another
test
in
the
course
of
characterizing
the
expenditure
which
is
found
at
page
118
(D.T.C.
5378)
wherein
it
says:
“
Finally,
were
these
sums
expended
on
the
structure
within
which
the
profits
were
to
be
earned
or
were
they
part
of
the
money-earning
process?"'
Lord
Pearce
also
said
at
page
273
in
the
B.P.
case
when
considering
the
manner
in
which
the
benefit
procured
by
the
expender
was
tc
be
reinstated
that
such
benefit
was
to
be
used
“in
the
continuous
and
recurrent
struggle
to
get
orders
and
sell
petrol”.
Estey,
J.
also
at
page
118
(D.T.C.
5378)
quoted
Dickson,
J.
as
he
then
was
in
the
Hallstroms
case
where
he
said
at
page
647
of
that
case:
.
.
.
that
the
difference
lay:
between
the
acquisition
of
the
means
of
production
and
the
use
of
them;
between
establishing
or
extending
a
business
organisation
and
carrying
on
the
business;
between
the
implements
employed
in
work
and
the
regular
performance
of
the
work
.
.
.;
between
an
enterprise
itself
and
the
sustained
effort
of
those
engaged
in
it.
Estey,
J.
also
quoted
from
Dickson,
J.'s
reasons
for
judgment
in
Sun
Newspapers
Ltd.
v.
Federal
Commissioner
of
Taxation
[1938],
61
C.L.R.
337
at
363
wherein
he
said
at
page
118
(D.T.C.
5378):
There
are,
I
think,
three
matters
to
be
considered,
(a)
the
character
of
the
advantage
sought,
and
in
this
its
lasting
qualities
may
play
a
part,
(b)
the
manner
in
which
it
is
to
be
used,
relied
upon
or
enjoyed,
and
in
this
and
under
the
former
head
recurrence
may
play
its
part,
and
(c)
the
means
adopted
to
obtainit;
that
is,
by
providing
a
periodical
reward
or
outlay
to
cover
its
use
or
enjoyment
for
periods
commensurate
with
the
payment
or
by
making
a
final
provision
or
payment
so
as
to
secure
future
use
or
enjoyment.
Estey,
J.
also
quoted
Viscount
Radcliffe
at
page
119
(D.T.C.
5379)
wherein
he
said
in
Commissioner
of
Taxes
v.
Nchanga
Consolidated
Copper
Mines
Ltd.,
[1964]
A.C.
948
at
959:
Nevertheless,
it
has
to
be
remembered
that
all
these
phrases,
as,
for
instance,
“enduring
benefit”
or
"capital
structure”
are
essentially
descriptive
rather
than
definitive,
and,
as
each
new
case
arises
for
adjudication
and
it
is
sought
to
reason
by
analogy
from
its
facts
to
those
of
one
previously
decided,
a
court's
primary
duty
is
to
inquire
how
far
a
description
that
was
both
relevant
and
significant
in
one
set
of
circumstances
is
either
significant
or
relevant
in
those
which
are
presently
before
it.
Estey,
J.
also
refers
to
Viscount
Cave
in
British
Insulated
and
Helsby
Cables,
Ltd.
v.
Atherton,
[1926]
A.C.
205
at
213
where
he
said
at
page
119
(D.T.C.
5379):
[W]hen
an
expenditure
is
made,
not
only
once
and
for
all,
but
with
a
view
to
bringing
into
existence
an
asset
or
an
advantage
for
the
enduring
benefit
of
a
trade,
I
think
that
there
is
very
good
reason
(in
the
absence
of
special
circumstances
leading
to
an
opposite
conclusion)
for
treating
such
an
expenditure
as
properly
attributable
not
to
revenue
but
to
capital.
Estey,
J.
also
quotes
(at
page
120
(D.T.C.
5379))
from
Lord
Reid
in
Regent
Oil
Co.
v.
C.I.R.,
[1966]
A.C.
295
at
313:
So
it
is
not
surprising
that
no
one
test
or
principle
or
rule
of
thumb
is
paramount.
The
question
is
ultimately
a
question
of
law
for
the
court,
but
it
is
a
question
which
must
be
answered
in
light
of
all
the
circumstances
which
it
is
reasonable
to
take
into
account,
and
the
weight
which
must
be
given
to
a
particular
circumstance
in
a
particular
case
must
depend
rather
on
common
sense
than
on
strict
application
of
any
single
legal
principle.
Estey,
J.
also
says
at
page
126
(D.T.C.
5384):
The
characterization
in
taxation
law
of
an
expenditure
is,
in
the
final
analysis
(unless
the
statute
is
explicit
which
this
one
is
not),
one
of
policy.
Such
a
determination
is,
[referring
to
the
determination
whether
an
expenditure
is
on
revenue
account
or
on
capital]
furthermore,
consistent
with
another
basic
concept
in
tax
law
that
where
the
taxing
statute
is
not
explicit
reasonable
uncertainty
or
factual
ambiguity
resulting
from
lack
of
explicitness
in
the
statute
should
be
resolved
in
favour
of
the
taxpayer.
[Words
in
square
brackets
added.]
In
1986
the
same
issue
came
before
the
Federal
Court-Trial
Division
in
the
case
Tomenson
Inc.
v.
The
Queen,
[1986]
1
C.T.C.
525;
86
D.T.C.
6267.
Tomen-
son
was
an
insurance
broker
with
its
head
office
in
the
city
of
Toronto
with
subsidiaries
across
Canada.
It
acquired
lists
of
clients
from
the
trustee
in
bankruptcy
for
the
O’Bryan
Group
of
insurance
agencies.
Tomenson
took
over
these
lists
of
insurance
customers,
their
files,
copies
of
issued
insurance
policies,
expiration
slips
as
well
as
other
documents
relating
to
the
customers.
Tomenson
was
to
collect
the
outstanding
receivables
and
was
to
pay
to
the
trustee
30
per
cent
of
net
commission
income
for
the
years
1975,
1976,
1977
and
1978
derived
from
new
and
renewable
insurance
premiums
received
from
the
O'Bryan
Group
of
customers
who
continued
to
do
business
with
Tomenson.
Tomenson
did
not
acquire
exclusive
rights
to
deal
with
the
customers
because
competitors
were
also
seeking
them
out.
Rouleau,
J.
found
as
a
fact
that
Tomenson
considered
it
crucial
to
the
acquisition
of
the
customer
list
that
former
partners
of
the
O’Bryan
Group
joined
Tomenson
because
the
retention
of
several
millions
of
dollars
of
insurance
commissions
over
the
four-year
period
could
only
be
accomplished
and
assured
by
the
co-operation
of
those
former
partners.
It
placed
a
high
priority
on
securing
these
key
personnel.
It
was
a
crucial
factor
in
the
completion
of
the
transaction.
Only
two
small
offices
of
the
O’Bryan
Group
were
retained
which
were
rented
and
Tomenson
renegotiated
directly
with
the
landlord.
Accepted
as
fact
was
that
success
in
the
general
insurance
business
was
derived
from
personal
contact
and
acquisition
of
lists
of
customers
and
that
knowledge
of
an
expiry
date
of
an
existing
coverage
was
most
crucial
in
determining
if
one
was
to
retain
an
insured.
Rouleau,
J.
noted
at
page
529
(D.T.C.
6270)
in
the
Tax
Review
Board
decision
of
Partykan
v.
M.N.R.,
[1980]
C.T.C.
2540;
80
D.T.C.
1475
wherein
the
Board
noted
that
Partykan
the
"taxpayer"
purchased
a
client
list
only.
Of
significance
is
the
distinguishing
factor
being
that
both
the
taxpayer
and
vendor
were
free
to
compete
for
the
clients
on
that
list
and
on
the
same
basis:
both
the
taxpayer
and
vendor
possessed
the
same
information
in
relation
to
the
clients
on
the
purchased
list.
He
also
reviewed
(at
page
529
(D.T.C.
6270))
Mr.
Justice
Thurlow's
decision
of
Cumberland
Investments
Ltd.
v.
The
Queen,
[1975]
C.T.C.
439;
75
D.T.C.
5309
where
Thurlow,
J.
stated:
“that
the
effective
elimination
of
a
competitor
was
one
of
the
critical
factors
in
deciding
whether
the
acquisition
of
a
customer
list
was
a
capital
outlay
(i.e.,
having
eliminated
the
competitor
through
the
absorption
of
the
business
as
a
going
concern)."
Rouleau,
J.
makes
the
comment
that
"nevertheless
[that
Thurlow,
J.
had]
not
stipulated
that
eliminating
competition
was
the
sole
condition
to
the
characterization
of
a
purchase
being
on
account
of
capital.”
Rouleau,
J.
indicated
in
his
opinion
that
both
Thurlow
and
Justice
Urie
in
the
Cumberland
case
seem
"to
consider
that
the
elimination
of
the
Vendor
as
a
competitor
and
acquiring
a
going
concern,
which
would
include
goodwill,
were
both
essential
to
their
characterization
of
the
outlay
as
being
on
account
of
capital"
(page
530
(D.T.C.
6271)).
He
then
quoted
from
Lord
Lindley
in:
C.I.R.
v.
Muller
&
Co.'s
Margarine
Ltd.,
[1900-3]
All
E.R.
413;
[1901]
A.C.
217
[wherein]
he
noted:
Goodwill
regarded
as
property
has
no
meaning
except
in
connection
with
some
trade,
business,
or
calling.
In
that
connection
I
understand
the
word
to
include
whatever
adds
value
to
a
business
by
reason
of
situation,
name
and
reputation,
connection,
introduction
to
old
customers,
and
agreed
absence
from
competition,
or
any
of
these
things,
and
there
may
be
others
which
do
not
occur
to
me.
In
this
wide
sense,
goodwill
is
inseparable
from
the
business
to
which
it
adds
value,
and,
in
my
opinion
exists
where
the
business
is
carried
on.
In
Tomenson,
Rouleau,
J.
states
at
pages
530-31
(D.T.C.
6271-72):
Goodwill
appears
to
be
dependent
upon
a
going
concern.
Therefore,
it
is
difficult
to
accept
the
proposition
that
the
acquisition
of
some
assets
of
a
business,
in
the
process
of
liquidation,
imports
the
acquisition
of
goodwill.
It
becomes
relevant
to
examine
those
general
principles
enunciated
in
several
cases
where
the
courts
have
established
guidelines
to
distinguish
expenditures
on
revenue
account
as
opposed
to
the
capital
account.
.
.
.
it
appears
that
the
courts
have
adopted
either
an
"accretion
to
the
income
earning
structure
of
the
business”
test
or
an
"enduring
benefit”
test.
The
concept
that
a
capital
outlay
is
that
which
is
expended
to
acquire
a
substance
(tangible
or
intangible)
inherently
productive
of
income,
i.e.,
a
substance
from
which
income
arises,
has
its
origin
in
the
classic
dictum
of
Mr.
Justice
Dixon
in
Sun
Newspapers
Ltd.
et
al.
v.
Federal
Commissioner
of
Taxation
(1938),
61
C.L.R.
337
(at
pp.
359-60)
wherein
he
noted:
The
distinction
between
expenditure
and
outgoings
on
revenue
account
and
on
capital
account
corresponds
with
the
distinction
between
the
business
entity,
structure,
or
organization
set
up
or
established
for
the
earning
of
profit
and
the
process
by
which
such
an
organization
operates
to
obtain
regular
returns
by
means
of
regular
outlay,
the
difference
between
the
outlay
and
returns
representing
profit
or
loss.
The
business
structure
or
entity
or
organization
may
assume
any
of
an
almost
infinite
variety
of
shapes
and
it
may
be
difficult
to
comprehend
under
one
description
all
the
forms
in
which
it
may
be
manifested.
[.
.
.]
But
in
spite
of
the
entirely
different
forms,
material
and
immaterial,
in
which
it
may
be
expressed,
such
sources
of
income
contain
or
consist
in
what
has
been
called
a"profit-yielding
subject",
the
phrase
of
Lord
Blackburn
in
United
Collieries
Ltd,
v.
Inland
Revenue
Commissioners
(1930),
S.C.
215,
at
p.
220.
.
.
.
the
Privy
Council
in
Commissioner
of
Taxes
v.
Nchanga
Consolidated
Copper
Mines
Ltd.,
[1964]
A.C.
948
.
.
.
indicated
his
approval
of
the
test
enunciated
by
Dixon,
J.
in
Sun
Newspapers
(supra)
and
Hallstroms
(supra)
when
he
stated
(at
960
[W.L.R.
346]):
Again,
courts
have
stressed
the
importance
of
observing
a
demarcation
between
the
cost
of
creating,
acquiring
or
enlarging
the
permanent
(which
does
not
mean
perpetual)
structure
of
which
the
income
is
to
be
the
produce
or
fruit
and
the
cost
of
earning
that
income
itself
or
performing
the
income-earning
operations.
Probably
this
is
as
illuminating
a
line
of
distinction
as
the
law
by
itself
is
likely
to
achieve,.
.
.
Rouleau,
J.
goes
on
to
say
(at
pages
531-32
(D.T.C.
6272))
that
there
is
a
second
test
of
characterization
that
has
been
adopted
by
the
courts;
namely,
”
enduring
benefit”
test
and
quotes
from
the
same
passage
as
Estey,
J.
in
Johns-
Manville
quoted
from
Viscount
Cave's
decision
of
British
Insulated
and
Helsby
Cables
Ltd.
v.
Atherton,
supra,
as
follows:
But
when
an
expenditure
is
made,
not
only
once
and
for
all,
but
with
a
view
to
bringing
into
existence
an
asset
or
an
advantage
for
the
enduring
benefit
of
a
trade,
I
think
that
there
is
a
very
good
reason
(in
the
absence
of
special
circumstances
leading
to
an
opposite
conclusion)
for
treating
such
an
expenditure
as
properly
attributable
not
to
revenue
but
to
capital.
He
then
went
on
to
say
at
page
532
(D.T.C.
6272)):
One
can
infer
from
Viscount
Cave's
dictum
that
if
the
benefit
or
value
derived
from
the
acquisition
of
an
asset
is
consumed
in
the
year
in
which
it
was
acquired,
or
over
at
least
a
two-year
period,
the
cost
of
the
acquisition
of
the
asset
or
advantage
might
reasonably
be
considered
as
a
revenue
expenditure.
Rouleau,
J.
also
at
page
533
(D.T.C.
6273)
quoted
from
The
Queen
v.
Baine,
Johnstone
&
Co.,
[1977]
C.T.C.
556;
77
D.T.C.
5394
wherein
Addy,
J.
said
at
page
558
(D.T.C.
5396):
“In
considering
the
issue
one
must
look
at
the
true
nature
and
substance
of
the
transaction,
not
merely
at
the
words
used
by
the
parties
in
describing
it.”
He
also
quotes
(at
page
533
(D.T.C.
6273))
from
Tucker
v.
Granada
Motorway
Services,
[1979]
2
All
E.R.
801
at
804
wherein
Lord
Wilberforce
said:
“It
is
common
in
cases
which
raise
the
question
whether
a
payment
is
to
be
treated
as
a
revenue
or
as
a
capital
payment
for
indicia
to
point
different
ways.
In
the
end
the
courts
can
do
little
better
than
form
an
opinion
which
way
the
balance
lies."
When
Rouleau,
J.
examined
the
substance
of
the
transaction
between
Tomenson
and
the
trustee,
he
noted
several
indicia
that
pointed
to
the
determination
of
the
transaction
as
being
of
a
capital
nature
within
the
meaning
of
the
“
enduring
benefit”
or
“
profit-yielding
subject”
test.
He
quoted
that
the
customer
lists
had
an
agreed
upon
valuation
of
30
per
cent
of
the
net
commission
earned
over
a
four-year
period.
He
states
that
the
method
of
payment
chosen
was
a
reflection
Tomenson's
inability
to
anticipate
whether
in
fact
the
customer
lists
were
a
source
of
future
earning
capability.
He
also
went
on
and
said
the
agreed
method
of
payment
provided
an
indicator,
or
at
least
an
inference
that
the
purchased
customer
lists
were
considered
in
the
nature
of
a
profit
yielding
asset
capable
of
projected
earning
capacity.
At
page
534
(D.T.C.
6274),
he
notes
that
the
procedure
employed
effectively
amortizes
the
cost
of
the
list
over
their
estimated
four
year
useful
life.
Rouleau,
J.
considered
the
taking
over
of
key
personnel
a
significant
feature
of
the
agreement
since
it
was
an
effective
mechanism
to
eliminate
the
competi-
tion
of
former
O’Bryan
Group
partners
and
a
means
of
absorbing
the
personnel
for
the
advantage
of
the
Tomenson
group.
Rouleau,
J.
dismissed
the
appeal
because
the
amount
in
issue
constituted
a
payment
on
account
of
capital.
The
taxpayer's
appeal
to
the
Federal
Court
of
Appeal
is
reported
at
[1988]
1
C.T.C.
173;
88
D.T.C.
6095.
The
Federal
Court
of
Appeal
simply
said
at
page
174
(D.T.C.
6095):
We
are
satisfied,
that
in
determining
whether
the
subject
expenditure
was
on
capital
or
revenue
account,
he
properly
entered
into
an
analysis
of
the
entire
circumstances
surrounding
the
transaction,
which
he
examined
from
the
perspective
of
exactly
what
the
expenditure
was
calculated
to
accomplish,
from
a
practical
and
business
point
of
view.
In
short,
we
think
that
he
carefully
considered
the
nature
and
substance
of
the
transaction
which
the
applicable
jurisprudence
requires
him
to
do.
For
these
reasons,
we
would
dismiss
the
appeal
with
costs.
In
coming
to
the
termination
in
this
matter,
the
Court
must
consider
the
many
facts
and
look
at
the
true
nature
and
substance
of
the
transaction.
The
facts
applicable
to
this
case
can
be
summarized
as:
(1)
The
key
executives
were
not
acquired.
The
general
manager,
sales
manager,
comptroller
and
warehouse
manager
were
not
taken
on
by
the
appellant.
(2)
The
appellant
did
not
acquire
the
corporate
Willson
name
or
the
Will-
son
logo.
The
appellant
did
acquire
restricted
rights
to
use
the
word
“Willson”
for
one
year.
The
appellant
did
purchase
for
all
intents
and
purposes
as
a
going
concern
a
17
per
cent
portion
of
the
Willson
business;
namely,
the
Ontario
Commercial
Division
operating
out
of
the
cities
of
Ottawa,
Kitchener,
London
and
Toronto.
It
must
be
kept
in
mind
that
it
did
not
purchase
leasehold
improvements
at
three
locations,
a
forklift
truck
and
some
computer
terminals
and
the
accounts
receivable.
(3)
The
purchase
terms
were
basically
a
take
it
or
leave
it
situation.
Willson
prepared
the
contract
and
in
essence
said
to
the
purchaser:
“this
is
the
terms
in
which
we
will
sell
you
this
division”.
The
only
negotiation
between
the
parties
was
on
the
percentage
of
the
commissions
to
be
paid
to
Willson
over
the
five-year
period.
(4)
There
was
not
a
non-competition
clause
in
the
agreement
and
Willson
did
not
have
non-competition
clauses
with
its
sales
personnel.
At
the
time
of
entering
into
the
contract,
the
appellant
knew
that
its
vendors
could,
with
full
knowledge
of
the
customer
list,
go
into
competition
with
the
purchaser
and
in
fact
this
did
happen
by
the
company
that
purchased
the
Ontario
retail
store
division
of
Willson
and
by
a
couple
of
Willson
key
employees
not
hired
by
the
appellant.
(5)
The
appellant
knew
that
Willson
was
purchasing
stationery
and
stationery
goods
at
a
lower
price
than
it
was
purchasing
the
same
goods.
(6)
The
appellant
also
knew
that
if
it
purchased
the
business
and
their
management
was
unable
to
turn
around
the
losing
Willson
business
it
would
be
bankrupt.
(7)
The
purchase
was
a
gamble
and
highly
speculative
although
the
appellant
hoped
to
retain
80
per
cent
of
the
business.
It
turned
out
that
it
was
only
able
to
retain
80
per
cent
in
Ottawa,
70
per
cent
in
Kitchener,
60
per
cent
in
London
and
40
per
cent
in
Toronto,
the
largest
market
and
it
lost
one
major
account
as
a
result
of
one
of
the
key
employees
that
it
did
not
take
on,
an
account
valued
at
more
than
$1,000,000
annually.
(8)
In
the
stationery
business
when
a
supplier
is
sold
or
in
financial
trouble,
all
the
competitors
move
in
and
purchases
are
tendered.
For
all
intents
and
purposes,
there
is
"no"
customer
loyalty.
The
sale
of
office
supplies
at
this
level
is
price
driven.
(9)
At
the
time
of
purchase,
the
appellant
knew
that
it
would
have
to
retender
price
lists
to
all
of
the
Willson
accounts
competitively
against
other
suppliers
and
the
company
with
lowest
price
would
get
the
business.
(10)
The
purchase
did
not
result
in
the
elimination
of
a
competitor
in
the
classic
sense.
(11)
The
purchaser
treated
the
commission
payments
as
an
expense.
(12)
The
business
flourished
because
of
the
appellant's
ability
and
management.
The
Court
herein
took
into
consideration
the
facts
and
the
decisions
in
the
following
cases:
Southam
Business
Publications
Ltd.
v.
M.N.R.,
[1966]
Ex.
C.R.
1055;
[1966]
C.T.C.
265;
66
D.T.C.
5215
(Ex.
Ct.);
affd
67
D.T.C.
5150
(S.C.C.)
In
this
case
the
appellant
paid
$50,000
for
the
subscription
list,
circulation
records
and
the
vendors
membership
in
the
audit
bureau
of
circulation
and
$25,000
for
other
assets
including
the
right
to
use
the
name
of
the
publication,
goodwill,
advertising
contracts,
accounts
receivable
and
the
vendors
covenant
not
to
compete.
Under
those
circumstances,
the
Court
held
that
the
appellant
purchased
the
business
as
a
going
concern
and
that
the
$50,000
was
goodwill
and
therefore
was
regarded
as
an
intangible
capital
asset.
Cumberland
Investments
Ltd.
v.
The
Queen,
[1975]
C.T.C.
439;
75
D.T.C.
5309
(F.C.A)
The
appellant
in
this
case
carried
on
the
business
of
a
supervising
general
insurance
agent.
The
appellant
purchased
from
one
of
its
smaller
competitors
for
$150,000
a
list
of
its
competitors
sub-agents,
a
card
index
system
showing
the
names
of
all
its
policy
holders
and
a
covenant
not
to
compete
against
the
appellant.
The
Federal
Court-Trial
Division
held
the
expense
was
a
capital
outlay,
deduction
which
was
prohibited.
The
Federal
Court
of
Appeal
held
the
acquisition
was
a
capital
asset
capable
of
increasing
the
taxpayer's
company
income.
The
expenditure
was
incurred
to
work
an
immediate
and
substantial
expansion
of
the
company's
business.
The
Queen
v.
Farquhar
Bethune
Insurance
Ltd.,
[1982]
C.T.C.
282;
82
D.T.C.
6239
(F.C.A.)
The
appellant
purchased
the
customer
list
and
file
information
of
another
insurance
company
for
the
purposes
of
assuming
that
company's
fire
and
casualty
insurance
business.
There
was
a
non-competition
clause
in
the
agreement
and
the
payment
was
a
lump
sum.
The
vendor
wrote
to
all
of
his
clients
advising
them
of
the
transaction
and
recommending
that
they
continue
their
fire
and
casualty
policy
with
the
appellant.
The
Federal
Court
of
Appeal
stated
that
in
its
opinion
“the
reality
of
[w]hat
transpired”
and
the
follow-up
procedure
carried
out
to
insure
the
continuity
of
the
customer
relationship
when
scrutinized
the
proper
conclusion
was
that
the
appellant
acquired
a
capital
asset
capable
of
increasing
its
income
and
therefore
found
that
the
outlay
was
an
outlay
on
capital.
The
Queen
v.
James
Sunstrum,
[1978]
C.T.C.
421;
78
D.T.C.
6300
(F.C.T.D.)
The
taxpayer
in
this
case
purchased
the
client's
list
of
an
insurance
and
tax
consulting
business.
It
did
not
purchase
the
vendor's
name
and
the
agreement
did
not
include
a
non-competition
clause
although
the
vendor
gave
a
verbal
undertaking
in
that
regard.
On
closing,
the
vendor
wrote
over
800
letters
to
his
clientele
advising
them
that
the
taxpayer
had
purchased
their
files
and
would
be
servicing
them
in
the
future.
The
vendor
also
assisted
the
taxpayer
in
obtaining
agency
licences
from
five
or
six
insurance
companies.
The
Court
held
that
even
if
the
outlay
was
not
strictly
for
goodwill,
it
would
still
be
attributed
to
capital
since:
(1)
the
purchase
was
a
single
once
and
for
all
expenditure;
(2)
it
enlarged
the
income
earning
structure
of
the
taxpayer
and
his
partnership;
(3)
the
vendor's
verbal
agreement
not
to
compete
and
his
actions
after
sale
indicate
the
taxpayer
had
eliminated
a
competitor
and
(4)
the
purchase
of
the
list
confirmed
a
lasting
business
advantage
upon
the
partnership.
R.
Bruce
Graham
Ltd.
v.
M.N.R.,
[1986]
1
C.T.C.
2326;
86
D.T.C.
1256
(T.C.C.)
The
taxpayer
purchased
from
Shell
an
old
customer
list.
Shell
retained
the
right
of
first
refusal
in
the
event
the
taxpayer
wished
to
sell
the
list
and
the
right
to
re-purchase
the
list
upon
the
happening
of
various
events,
including
the
failure
of
the
taxpayer
to
achieve
and
maintain
a
certain
minimum
sales
volume.
The
taxpayer
was
appointed
as
a
non-exclusive
distributor
for
the
same
period.
The
taxpayer's
appeal
was
dismissed.
Kempo,
J.
found
that
the
business
in
commercial
reality
was
that
the
taxpayer
was
continuing
Shell’s
business
in
the
territory
where
the
customers
were
located
and
that
by
purchasing
the
customer
list,
it
was
obtaining
a
substantial
advantage
in
being
in
a
position
to
obtain
the
right
to
service
those
customers.
The
taxpayer
required
an
endurable
right
notwithstanding
its
non-exclusivity
and
therefore,
the
expenditure
was
on
account
of
capital.
The
Court
compares
the
referred
to
cases,
supra,
that
were
all
decided
against
the
taxpayer
with
the
following
cases
that
were
decided
in
favour
of
the
taxpayer.
Commerce
Holdings
Ltd.
v.
M.N.R.,
[1981]
C.T.C.
2169;
81
D.T.C.
195
(T.R.B.)
The
taxpayer
purchased
a
list
of
property
management
accounts
from
another
company.
The
vendor
did
not
bind
itself
to
refrain
from
operating
competition
with
the
taxpayer
and
did
continue
in
the
property
management
business.
Management
business
was
described
as
being
very
competitive
and
highly
precarious.
Purchasing
lists
was
a
precarious
venture
and
was
purely
a
gamble.
The
Court
found
that
the
purchase
was
a
speculative
and
precarious
purchase,
not
one
of
a
nature
of
long
enduring
benefit
and
under
the
circumstances
the
purchaser
acquired
no
goodwill.
The
property
management
business
was
known
as
insecure,
competitive
and
volatile
as
oppose[d]
to
insurance
list
of
clients.
The
appellant
treated
the
purchase
as
a
mere
list
of
potential
customers.
The
Court
found
it
was
an
expense
for
the
purpose
of
gaining,
producing
income
by
the
taxpayer
in
the
conduct
of
the
property
management
portion
of
the
business
and
the
taxpayer's
appeal
was
allowed
and
the
expense
was
deductible.
Halliday
Fuels
Ltd.
v.
M.N.R.
(1960),
25
Tax
A.B.C.
186;
60
D.T.C.
541
(T.A.B.)
The
appellant
purchased
from
three
other
coal
companies
who
were
going
out
of
business
the
list
of
all
their
customers
with
information
regarding
their
fuel
requirement.
Accounts
receivable
and
all
inventories
of
coal
on
hand
were
also
purchased,
some
assets
were
not
purchased.
The
appellant
was
able
under
the
circumstances
to
carry
on
the
business
of
the
three
vendor
companies.
It
was
necessary
to
renew
orders
at
least
annually.
The
Court
said
that
when
taking
into
consideration
the
highly
competitive
nature
of
the
appellant's
business,
the
changing
picture
of
fuel
requirements,
the
fact
that
contracts
for
the
sale
of
coal
must
be
renegotiated
yearly
and
the
additional
fact
that
only
a
portion
of
the
former
customers,
the
vendors
became
customers
of
the
appellant.
It
concluded
that
the
appellant
company
had
successfully
prosecuted
its
appeal
and
that
the
said
appeal
should
be
allowed.
Simon,
Voyer
&
Castelli
Inc.
v.
M.N.R.,
[1979]
C.T.C.
2503;
79
D.T.C.
41
(T.R.B.)
,.
Reading
from
the
headnote,
the
taxpayer
acquired
a
client's
list
covering
automobile
insurance
clients.
The
sum
represented
approximately
one
year's
gross
revenue
for
that
competitor.
The
Minister
disallowed
the
deduction.
The
appeal
was
allowed
and
the
headnote
reads
as
follows:
the
taxpayer
merely
acquired
a
list
of
clients
without
more
and
the
expense
thereof
was
accordingly
a
deductible
expense
laid
out
to
earn
income.
In
the
absence
of
a
covenant
by
the
taxpayer
not
to
compete
and
in
view
of
the
fact
that
the
vendor
had
retained
its
accounts
receivable
and
all
its
life
and
accident
insurance
clients,
it
was
difficult
to
see
how
such
a
list
by
itself
could
constitute
a
capital
asset
of
an
enduring
nature,
particularly
since
the
automobile
insurance
clients
involved
were
required
to
renew
their
insurance
annually.
These
factors
outweighed
others
such
as
the
facts
that:
(1)
the
price
paid
for
the
list
was
fixed
with
reference
to
the
vendor's
revenues
much
like
goodwill;
(2)
taxpayer's
premium
income
was
certainly
increased
for
the
1976
tax
year
following
its
acquisition
of
the
list
and
would
like[ly]
remain
higher
in
subsequent
years
as
the
result
of
such
acquisition;
(3)
taxpayer's
modus
operandi
in
the
past
had
been
to
achieve
growth
through
buying
out
its
competitors.
The
appellant's
commission
payments
were
for
some
benefit
received
or
expected
to
be
received
by
the
appellant.
When
looking
at
all
of
the
circumstances
of
the
transaction
as
a
whole,
the
Court
is
driven
to
the
conclusion
that
these
payments
represent
payment
for
both
goodwill
and
for
services
rendered
after
closing.
Bearing
in
mind
the
answer
given
by
Frank
Gordon
Shortreed
quoted
above,
the
$1
for
goodwill
and
the
other
items
in
paragraph
3.1(e)
are
not
reasonable.
Therefore,
setting
a
value
greater
than
$1
will
not
contravene
the
ratio
set
forth
in
The
Queen
v.
Golden,
[1986]
1
C.T.C.
274;
86
D.T.C.
6138
(S.C.C.).
Having
already
decided
that
the
value
to
the
appellant
of
the
services
rendered
by
Willson
to
the
appellant
after
closing
were
worth
more
than
the
actual
cost
of
providing
these
services,
the
Court
must
put
a
value
on
these
services.
An
example
of
this
value
would
be
that
even
if
the
appellant
had
hired
on
a
part-time
basis
many
computer
operators
to
load
the
Willson
client
information
into
its
own
system,
there
would
have
been
a
significant
delay.
The
appellant
would
have
been
out
of
touch
with
the
Willson
clients
for
as
long
as
two
months.
This
undoubtedly
would
have
scattered
the
Willson
clients.
Those
services
were
directly
used
to
earn
income
and
therefore
were
a
deductible
expense.
At
the
time
the
purchase
was
negotiated,
neither
party
could
determine
with
any
accuracy
the
value
of
the
goodwill
or
the
value
of
these
services.
This
is
the
reason
for
the
commissions
being
based
on
gross
sales
to
previous
Willson
customers
for
five
years.
It
would
not
be
fair
to
the
appellant
to
just
add
up
the
costs
of
the
services
and
designate
that
as
allowable
deductible
expenses
and
to
say
the
balance
is
goodwill.
Under
the
circumstances,
the
Court
prefers
to
designate
by
percentage.
Taking
into
consideration
all
of
the
estimated
values
placed
by
the
appellant
on
these
services
and
adding
thereto
something
for
the
intangible
benefits,
the
Court
finds
that
40
per
cent
of
the
commissions
are
payment
on
income
expense
and
60
per
cent
are
payments
for
goodwill
and
therefore
are
eligible
capital
expenditures.
Judgment
For
the
reasons
set
out
above,
the
appeal
is
allowed
and
the
reassessments
sent
back
to
the
Minister
for
reconsideration
and
reassessment
on
the
basis
that
40
per
cent
of
the
commission
paid
to
Willson
are
expenses
incurred
for
the
purpose
of
earning
income
and
the
balance
are
eligible
capital
expenditures
within
the
meaning
of
paragraph
14(5)(b)
of
the
Act.
As
the
results
are
divided/
there
should
be
no
order
as
to
costs.
Appeal
allowed
in
part.
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