The Queen v. Schubert, 80 DTC 6366, [1980] CTC 497 (FCTD)

Grant, DJ:—This is an appeal by the plaintiff from the judgment delivered from the Tax Review Board on December 20,1977 whereby it allowed an appeal by the defendant from the reassessment by the Minister of National Revenue in respect of his 1972 and 1973 taxation years and referred the assessment back to such Minister for reassessment.

While in the final result I agree with the decision of the Tax Review Board there are some considerations which I wish to add in support theoreof. In assessing the payments that were made by Magnaplate to Henry Lau on behalf of the taxpayer it should be remembered that Lau had sold his holding of one-half the issued shares in Magnaplate to Schubert on August 29, 1969. In that transaction it is not clear from the evidence the amount which Schubert was obliged to pay for such shares but there was still some balance owing in 1972 and 1973 which were satisfied by payments made from Magnaplate to Lau in those years. The taxpayers total indebtedness to Lau in the amount of $38,000 had been fully paid by Magnaplate in the year 1974.

When Schubert purchased the undertakings from Lau known as Henning Graphics, on March 1, 1969, the purchase price covered all the undertakings, goods, chattels, goodwills and names of the vendor’s firm. The description and values of the chattels which were conveyed thereby are set out in Schedules attached and valued at a total of $2,796 and goodwill according to the evidence was valued at $11,596. This was a sale at arms length and the purchaser who was an experienced business man must have considered the goodwill to be of that value at that time.

In the sale by Schubert to Magnaplate under the agreement of March 1, 1971, the purchase price was put at $26,000. This amount was to include not only the goodwill that was associated with the business but also the name, equipment, trade marks and rights thereto with all fixtures and furnishings of the business. The Exhibit #2 indicates that the items are listed in Schedule “A” attached thereto but in the copy filed there were no such schedules. One can assume that they were at least of the value set forth in the earlier agreement by which Schubert purchased the same because he stated that he had improved the designs and jigs in the interval. From this, it is clear that the total amount to be paid in the sum of $26,000 was not entirely for goodwill. The fact that Magnaplate entered in its books the sum of $37,596 as its value of goodwill does not establish that it paid that amount for the same. However, the defendant in paragraph 12 of the statement of defence admits that Magnaplate had so valued the goodwill.

George Reilly, a chartered accountant, who gave evidence for the defendant said that his examination of the books of Magnaplate indicated that the company gave a note for the $26,000 purchase price and the balance of $11,596 arose from an agreement whereby it took over certain assets and liabilities of Henning Graphics. The reason it so entered such sum as add itional goodwill may have been that that was the amount at which it had been previously valued in the books of the account. Such portion of the $26,000 paid for all or other tangible assets cannot be affected by subsection 15(1) of the Income Tax Act as it has not been appropriated to or for the benefit of the taxpayer nor has a benefit or advantage been confirmed on him thereby. Subsection 15(1) reads as follows:

APPROPRIATION OF PROPERTY TO SHAREHOLDER

15.(1) Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

otherwise than

(d) on the reduction of capital, the redemption, cancellation or acquisition by the corporation of shares of its capital stock or the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies,

(e) by the payment of a dividend or a stock dividend, or

(f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof,

the amount or value thereof shall, except to the extent that it is deemed to be a dividend by section 84, be included in computing the income of the shareholder for the year.

I do not agree that the goodwill that existed in the business on March 1, 1971 and which was conveyed to Magnaplate by the taxpayer was as minimal as the Board seems to assess it. Schubert had one mechanic who had been with him for many years and to whom he could safely leave the conduct of the business. He also had another mechanic but apparently no bookkeepers. The owner of a business has more knowledge as to the value of the goodwill associated with it than a stranger who attempts to calculate it by the relation of the number of employees, profits in a particular year and the extent of the equipment used. Schubert stated that his product was superior to what United States purchasers could buy in their own country. This was a business that did not require extensive costly machinery as the only product made was light printing tables. It did not require many employees. Sales were made direct to the printing companies across Canada who would purchase the same as they needed such product. One would not expect to find such buyers entering into long-term contracts to purchase certain amounts in following years. At the time of sale, the plaintiff did have a relationship with a Chroma Graphic, a United States dealer and purchaser but that was unusual for the company. At trade shows across the country the tables were known as “Henning Products” and it was a recognized trade name across Canada with a good reputation and had been advertised extensively. The financial statement as at February 28, 1971, (Exhibit 3) shows equipment of the business at a cost of $5,522.20 but reduced by accumulated depreciation to $3,590. Although there is testimony that it was a type of manufacture that another producer could readily enter into, there is no suggestion that there was any such other manufacturer of such products. Schubert, himself, had every considerable confidence in the business and intended to and did continue to manage the same. In his evidence he anticipated an extensive growth in sales and profits at the time of his sale.

The amount received from the sales of Henning products in 1971 and following were as follows:

The profits made from such business for the years following the sale were as follows:

In Her Majesty the Queen v National Systems of Baking of Alberta Limited, [1978] CTC 30; 78 DTC 6018, at 38 [6024], Mahoney, J referring to hindsights values stated:

I expressly rejected the validity of hindsight as probative of fair market value at a given date and took nothing that occurred after valuation day into account.

In that case the question was the value of shares on the stock market on December 31, 1971 in assessing the capital gain. In the present case the value placed by Schubert on goodwill was a matter within his own knowledge and it is my thought that the increase in sales and profits in years following can be looked at as some confirmation of his opinion. It is therefore my opinion that there was, at the date of the sale to Magnaplate a substantial value that could be attributed to the goodwill of the business and that the payments in respect thereof by Magnaplate on behalf of the taxpayer to Lau were not an appropriation for his benefit nor a benefit or ad- vantage conferred on a shareholder by the company within the meaning of said subsection 15(1).

I am also convinced that Magnaplate at the time of the sale to it did give a promissory note in the sum of $26,000 which cannot now be produced because it has been completely paid off. Magnaplate was a company that had been carrying on business for some time and became not only the owner of the tangible assets which it acquired in such purchase but it was also the owner of the building in which business was carried on. It had been valued at $45,000 and improvemens which had been made increased its value to $70,000. Schubert said that the banks readily loaned as high as $70,000 in connection with the business. I am therefore of the opinion that the purchase price represented by such note was secure within the meaning of the expression in James F Kennedy v MNR, [1972] CTC 429; 72 DTC 6357; Her Majesty the Queen v William G Phillips, [1975] CTC 250; 75 DTC 5188, [1976] CTC 126; 76 DTC 6093; and Her Majesty the Queen v Frank Leslie, [1975] CTC 155; 75 DTC 5086.

I would therefore agree with the Board that if any benefit had been received it was in the year in which the promissory note was given.

The appeal should therefore be dismissed with costs.