Mahoney,
J:—This
action
results
from
the
plaintiff’s
disallowance
of
the
defendant’s
claim
of
$207,500
“goodwill”
as
property,
namely
a
leasehold
interest,
for
purposes
of
capital
cost
allowance
under
paragraph
11
(1)(a)
of
the
Income
Tax
Act
as
it
stood
in
1969
and
1970.
11.
(1)
Notwithstanding
paragraphs
(a),
(b)
and
(h)
of
subsection
(1)
of
section
12,
the
following
amounts
may
be
deducted
in
computing
the
income
of
a
taxpayer
for
a
taxation
year:
(a)
such
part
of
the
capital
cost
to
the
taxpayer
of
property,
or
such
amount
in
respect
of
the
capital
cost
to
the
taxpayer
of
property,
if
any,
as
is
allowed
by
regulation;
The
deduction
is
claimed
under
paragraph
1100(1)(b)
of
the
Income
Tax
Regulations.
1100.
(1)
Under
pragraph
(a)
of
subsection
(1)
of
section
11
of
the
Act,
there
is
hereby
allowed
to
a
taxpayer,
in
computing
his
income
from
a
business
or
property,
as
the
case
may
be,
deductions
for
each
taxation
year
equal
to
(b)
such
amount,
not
exceeding
the
amount
for
the
year
calculated
in
accordance
with
Schedule
H,
as
he
may
claim
in
respect
of
the
capital
cost
to
him
of
property
of
class
13
in
Schedule
B;
Class
13
property
is
“Property
that
is
a
leasehold
interest
except
.
.
.”
None
of
the
exceptions
are
in
play.
The
primary
issue
is
thus
whether
or
not
the
$207,500
ought
to
be
characterized
as
having
been
paid
for
a
leasehold
interest.
The
secondary
issue
is
whether
or
not
the
legal
and
other
expenses
incurred
by
the
defendant
in
the
transaction
in
question
were
properly
disallowed
as
deductions
from
income
as
having
been
incurred
on
account
of
capital
or
whether
their
deduction
ought
to
be
allowed
or,
alternatively,
whether
the
amount
thereof
ought
to
be
added
to
the
capital
cost
of
the
leasehold
interests.
During
1967,
the
defendant
entered
into
negotiations
with
a
group
of
individuals
and
companies,
which
will
be
collectively
referred
to
as
“McNeill”,
for
the
purchase
from
McNeill
of
three
retail
drugstores
in
Regina,
Saskatchewan,
one
in
premises
owned
by
McNeill,
the
Broad
Street
store,
and
two
in
premises
leased
by
McNeill,
the
Pharmaceutical
Centre
and
the
South
Albert
Street
store.
McNeill
operated
other
retail
drugstores,
as
well
as
wholesale
operations
serving
them,
in
Regina
and
Calgary,
which
the
defendant
was
not
interested
in
buying.
The
defendant
then
had
three
retail
stores
of
its
own
in
Regina
and
others
in
Saskatoon.
The
defendant
thought
it
had
a
deal
but
McNeill
refused
to
close
early
in
1968.
In
November,
1968,
Cunningham
Drug
Stores
Ltd
made
McNeill
an
offer
for
all
of
its
retail
stores
which
was
unacceptable.
McNeill
then
indicated
to
the
defendant
that
it
was
prepared
to
negotiate
the
sale
of
all
of
its
Regina
operations.
In
the
circumstances,
the
defendant
insisted
on
a
written
offer
from
McNeill
before
investing
time
and
money
in
further
negotiation.
The
original
draft
offer
to
sell,
apparently
prepared
by
the
defendant,
contemplated
the
payment
of
a
“premium”
in
addition
to
the
price
of
inventories
and
fixtures.
The
premium
was
to
be
divided
between
“Amount
for
purchase
of
leasehold
interest
to
be
.
.
.”
and
“Balance
of
premium
amounting
to
.
.
.
to
be
paid
in
form
of
Good
Will”.
The
next
draft
offer
to
sell
was
submitted
by
letter
of
December
2,
1968,
by
MeNeill
to
the
defendant.
It
proposed
“Goodwill
shall
be
.
.
.
$300,000
.
.
.”’
It
proposed
no
amount
for
purchase
of
leasehold
interests.
The
executed
offer
to
sell,
dated
December
6,
1968,
contemplated
the
sale
of
the
“A
Inventory
.
.
.”
at
a
variety
of
discounts
off
retail
prices,
“B
Fixed
Assets
.
.
.”
at
book
value
and
‘‘C
Goodwill.”
Payment
for
the
inventory
and
fixed
assets
was
to
be
within
three
days
of
the
contemplated
January
31,
1969,
closing
and
it
went
on:
(c)
The
sum
of
$290,000
on
account
of
good
will
repayable
over
a
period
of
5
years
at
the
rate
of
$58,000
per
year
.
.
.
with
interest.
It
then
went
on
to
provide:
3.
This
offer
shall
be
subject
to
further
conditions
and
provisions
as
follows:
(1)
That
the
purchaser
is
able
to
obtain
satisfactory
leases
to
the
premises
to
be
acquired
and
the
vendor
takes
the
necessary
steps
for
the
assigning
of
its
leases
now
held
by
the
vendor
to
the
purchaser.
(2)
That
leases
will
be
given
to
the
vendor
[sic]
of
property
owned
by
the
vendors
and
upon
which
certain
of
its
drug
store
businesses
are
located
and
such
leases
shall
be
in
like
terms
(excepting
for
rent,
options
for
renewals,
and
term
of
lease)
as
the
lease
existing
between
Humford
Realty
Ltd
and
McNeill’s
Drug
Stores
Ltd
dated
November
22,
1965.
It
is
further
understood
that
in
such
leases
if
due
to
operation
of
business,
the
purchaser’s
rent
due
falls
to
the
basic
rate
of
$2.50
per
square
foot,
then
in
that
event,
there
shall
be
added
to
the
basic
rent
of
the
premises
any
increase
in
taxes
over
the
1968
level
on
a
pro
rata
basis
to
the
area
occupied
by
the
purchaser
and
to
be
paid
on
a
monthly
basis.
There
are
additional
conditions
and
provisions
enumerated
but
(1)
and
(2)
are
the
only
ones
material
to
this
action.
The
Humford
lease
was
the
lease
of
the
South
Albert
store.
Considering
the
exceptions
of
rent,
term
and
renewal
options,
it
is
plain
that
at
this
stage
no
agreement
had
been
reached
as
to
the
leases
to
be
concluded
between
McNeill
and
the
Defendant
in
respect
of
the
three
premises
owned
by
McNeill.
By
January
8,
1969,
when
McNeill’s
solicitor
transmitted
a
draft
lease,
the
essential
terms
had
been
agreed
upon.
The
Broad
Street
store
was
to
be
subject
to
a
five-year
lease
with
five
successive
five-
year
renewal
options
and
the
other
two
were
to
be
five-year
leases
with
four
successive
five-year
renewal
options.
All
renewal
leases
were
to
be
on
the
same
terms
and
conditions
as
the
original
leases.
A
minimum
rent
of
$2.50
per
square
foot
per
annum
against
4%
of
annual
gross
sales
was
proposed
and,
as
contemplated
in
the
offer
to
sell,
the
tax
escalator
would
become
operative
only
when
gross
sales
were
so
low
that
no
percentage
rent
was
payable.
While
the
proposed
term
of
the
Broad
Street
lease
changed
during
negotiations,
the
proposed
rent
did
not.
By
letter
of
January
24,
1969,
the
defendant’s
solicitor
sent
it
a
draft
of
an
agreement
intended
to
reflect
the
entire
transaction.
It
provided,
in
its
material
parts,
as
follows:
1.
.the
vendor
agrees
to
sell
and
the
purchaser
agrees
to
purchase
all
the
undertakings,
property
and
assets
belonging
to
or
used
in
connection
with
the
said
businesses
of
the
vendor,
as
a
going
concern,
.
.
.
including
without
limiting
the
generality
of
the
foregoing:
(a)
The
goodwill
of
the
said
businesses,
together
with
the
exclusive
right
to
the
purchaser
to
represent
itself
as
carrying
on
the
said
businesses
in
continuation
of
and
in
succession
to
the
vendor
and
the
right
to
use
any
words
indicating
that
the
said
businesses
are
so
carried
on
including
the
right
to
use
the
name
“McNeill’s
Drugstores
Ltd”
or
any
variation
thereof
as
part
of
the
name
of
or
in
connection
with
the
said
businesses
or
any
part
thereof
carried
on
or
to
be
carried
on
by
the
purchaser;
(c)
The
full
benefit
of
all
unfilled
orders
received
by
the
vendor
in
connection
with
the
said
businesses
and
all
other
contracts,
engagements,
benefits
and
advantages
which
have
been
entered
into
by
the
vendor
or
to
which
it
is
or
can
be
entitled
on
account
or
in
respect
of
the
said
businesses.
3.
The
purchase
price
payable
for
the
assets
hereby
agreed
to
be
purchased
and
sold
shall
be
the
aggregate
of
the
values
of
all
classes
of
assets
as
hereinafter
set
forth.
(a)
The
assets
described
in
paragraph
1(a)
and
1(c)
hereof
for
the
sum
of
$290,000.
The
draft
also
reflects
an
apparent
agreement
postponing
the
closing
date.
A
memorandum
prepared
by
Mr
H
C
Pinder,
the
defendant’s
secretary-treasurer,
and
communicated
by
telephone
on
February
7,
1969,
to
its
solicitor
contains
the
following
material
comments.
(a)
Draft
Agreement
2.
have
inserted
in
price
section
page
2(a)
[‘‘and
leasehold
interest
in
leased
properties,
and
the
right
to
lease
in
owned
properties
at
a
rental
rate
not
to
exceed
4%
of
sales”]
(intangibles)
(b)
Lease—5th
&
Pasqua
6.
Page
14—FIRE,
if
lease
is
terminated
under
total
destruction—tenant
should
recover
pro
rata
portion
of
purchase
price
NB
over
full
lease
and
option
periods—(ie
cannot
insure
the
premium
paid
on
purchase
over
and
above
value
of
assets,
—or
new
lease
on
rebuilding
—or
option
to
buy
property.
On
January
30,
1969,
having
apparently
considered
the
draft
after
amendment
to
reflect
Mr
Pinder’s
instructions,
McNeill’s
solicitor
wrote
the
defendant’s
solicitor.
He
stated,
inter
alia,
5.
Page
4,
paragraph
3,
sub-paragraph
(a)
The
vendor
requires
that
the
sum
of
$290,000
be
referable
exclusively
to
the
term
good
will
and
nothing
else.
In
the
margin,
apparently
in
Mr
Pinder’s
handwriting
is
an
underlined
“no”.
On
February
28,
the
defendant’s
solicitor
reported
by
letter
on
a
series
of
meetings
with
McNeill’s
solicitor
including,
in
reference
to
the
January
30
letter,
the
following:
Paragraph
5—refused.
It
also
appears
that
McNeill
had
agreed
in
principle
to
Mr
Pinder’s
suggestion
as
to
the
fire
clause.
They
were
prepared
to
commit
themselves,
at
their
option,
to
rebuild
within
12
months
of
destruction
or
to
repay
a
pro
rata
portion
of
the
goodwill
payment.
At
this
point,
Mr
Pinder
wrote
himself
the
following
memorandum:
Inserting
“Leasehold
Interest’’
in
para
1
of
agreement
only,
before
(a)
of
that
paragraph.
Check
with
auditor.
The
auditor
was
consulted
and,
it
appears,
the
specific
inclusion
of
the
leasehold
interests
in
the
consideration
for
the
$290,000
payment
was
no
longer
pressed
by
the
defendant
but
the
idea
reflected
in
the
memorandum
was
accepted
by
McNeill.
Negotiations
did
continue
as
to
the
fire
clause.
This
defendant
wanted
the
provision
to
apply
for
ten
years;
McNeill
held
out
for
five.
The
basis
of
their
position
was
explained
by
their
solicitor
to
the
defendant’s,
as
reported
in
his
letter
of
March
3rd,
1969,
to
his
client:
Mr
Goetz
explained
this
to
me
on
the
grounds
that
after
five
years
you
would
have
recovered
the
total
amount
of
the
goodwill
out
of
profits;
and
that
the
formula
for
determining
the
goodwill
was
based
n
two
and
one-half
times
the
average
profits
for
the
immediate
proceeding
two
years.
In
the
result,
on
March
28,
1969,
the
agreement
was
executed
providing
for
the
sale
effective
April
1,
The
material
provisions
follow:
1.
.
.
the
vendor
agrees
to
sell
and
the
purchaser
agrees
to
purchase
all
the
undertakings.
(leasehold
interests
and
right
to
enter
into
leases
as
set
forth
on
page
7
hereof),
(emphasis
added)
and
assets
belonging
to
or
used
in
connection
wit
hthe
said
businesses
of
the
vendor,
aS
a
going
concern,
.
.
.
Including
without
limiting
the
generality
of
the
foregoing:
(a)
The
goodwill
of
the
said
businesses,
together
with
the
exclusive
right
to
the
purchaser
to
represent
itself
as
carrying
on
the
said
businesses
in
continuation
of
and
in
succession
to
the
vendor
and
the
right
to
use
any
words
indicating
that
the
said
businesses
are
so
carried
on
including
the
right
to
use
the
name
“McNeill’s
Drug
Stores”
or
any
variation
thereof
as
part
of
the
name
of
or
in
connection
with
the
said
businesses
or
any
part
thereof
carried
on
or
to
be
carried
by
the
purchaser;
3.
The
purchase
price
payable
for
the
assets
hereby
agreed
to
be
purchased
and
sold
shall
be
the
aggregate
of
all
classes
of
assets
as
hereinafter
set
forth.
(a)
The
assets
described
in
paragraph
1(a)
hereof
for
the
sum
of
$290,000.
6.
The
purchase
price
.
.
.
shall
be
paid
.
.
.
as
follows:
(a)
The
sum
of
$10,000
shall
be
paid
to
the
firm
of
Goetz
&
Murphy,
Regina,
Saskatchewan,
in
trust
to
be
retained
by
it
until
the
time
of
closing,
upon
the
Vendor
providing
the
purchaser
with
valid
and
binding
assignments
of
leases
in
favour
of
the
purchaser
with
proper
consents
of
the
lessors
to
such
assignments
covering
the
following
real
properties:
(i)
McNeill’s
North
Plaza
Drug
.
.
.
(ii)
McNeill’s
Pharmaceutical
Centre
.
.
.
(iii)
McNeill’s
South
Albert
Drug
.
.
.
(iv)
McNeill’s
Highland
Park
Drug
.
.
.
and
the
vendor
providing
the
purchaser
with
leases
of
the
following
real
property
owned
by
the
vendor
at:
(i)
McNeill’s
Rexall
Drug
.
.
.
(ii)
McNeill’s
Broad
Street
Drug
.
.
.
(iii)
McNeill’s
Lome
Drug
.
.
.
on
the
terms
and
subject
to
the
conditions
set
in
the
draft
leases
hereunto
attached
and
marked
as
schedules
“A”,
“B”
and
“C”.
The
foregoing
seven
locations,
and
I
have
omitted
only
municipal
addresses,
are
the
“leasehold
interests
and
right
to
enter
into
leases
as
set
forth
on
page’’
7
which
are
referred
to
in
the
bracketed
addition
to
clause
1.
That
addition
substituted
in
the
executed
agreement,
those
words
for
the
word
“property”,
which
appeared
in
the
earlier
drafts
of
clause
1.
In
addition
to
the
tangible
assets,
inventory
and
fixtures,
for
which
$353,980
was
paid,
the
defendant
acquired
a
number
of
rights
and
intangible
assets,
to
which
no
portion
of
the
$290,000
balance
of
the
purchase
price
was
specifically
attributed.
There
were,
of
course,
the
leases
assigned
or
granted
by
McNeill.
The
vendors
severally
agreed
not
to
compete
for
five
years.
There
was
a
right
of
first
refusal,
apparently
for
five
years,
to
buy
convenience
stores
known
as
“The
Happy
Shopper”
operated
in
Regina
by
McNeill.
There
were
non-
assignable
rights
of
first
refusal,
in
the
leases,
during
their
terms
including
renewals,
to
buy
the
real
property
leased,
in
whole
or
part,
as
the
Rexall,
Broad
Street
and
Lome
stores.
As
to
the
so-called
“fire
clause”,
the
agreement
stipulated
that,
in
the
event
of
termination
due
to
total
destruction
prior
to
April
1974,
provided
the
defendant
was
still
carrying
on
the
business
purchased
on
the
premises,
.
.
.
the
vendor
shall
pay
to
the
purchaser
by
way
of
liquidated
damages
in
respect
of
any
such
lease
the
following:
(a)
(i)
Lease
Covering
McNeill’s
Rexall
Drug
.
.
.
(ii)
Damages
to
be
Paid
The
proportionate
share
of
$30,000
.
.
.
(b)
(i)
Lease
Covering
McNeill’s
Broad
Street
Drug
.
.
.
(ii)
Damages
to
be
Paid
The
proportionate
share
oî
$120,000
.
.
.
(c)
(i)
Lease
Covering
McNeill’s
Lorne
Drug
.
.
.
(ii)
Damages
to
be
Paid
The
proportionate
share
of
$35,000
.
.
.
The
“proportionate
share’’
was
the
number
of
whole
months
remaining
in
the
term
at
the
date
of
total
destruction
divided
by
60.
Immediately
upon
closing,
the
defendant
sold
the
inventories
and
fixed
assets
of
the
Lome,
Rexall
and
Highland
Park
stores
for
the
price
paid
and,
in
addition,
for
goodwill
an
aggregate
of
$82,500,
thus
reducing
its
outlay
for
goodwill
from
$290,000
to
the
$207,500
in
issue.
It
got
$40,000
in
respect
of
the
Lome
store
rather
than
the
$35,000
assigned
to
it
in
the
fire
clause;
$30,000
in
respect
of
Rexall,
the
same
as
the
assigned
amount
and
$12,500
in
respect
of
Highland
Park.
As
the
end
of
1969,
the
defendant
sold
the
North
Plaza
store
which
was
leased
on
a
month
to
month
basis
and,
in
respect
of
which,
no
goodwill
was
recovered.
In
addition
to
the
seven
retail
stores,
two
wholesale
operations,
one
for
pharmaceuticals
and
the
other
for
other
merchandise,
were
bought.
These
operated
in
the
premises
of
the
Lome
store.
The
defendant
had
no
use
for
the
operations
per
se
and
Simply.
absorbed
the
inventories
into
its
own
wholesale
operations.
There
was
no
leasehold
interest
attached
to
them.
Thus,
by
the
end
of
1969,
the
defendant
retained
only
the
three
retail
stores
it
had
originally
wanted.
The
Pharmaceutical
Centre
had
opened
during
1967.
The
annual
rental
(there
was
no
percentage
rent)
was
well
over
$10
per
square
foot.
It
is
not
argued
that
any
part
of
the
$207.500
was
paid
for
a
leasehold
interest
in
respect
of
it.
The
Broad
Street
and
South
Albert
stores
remain.
Before
dealing
with
them,
I
should
note
that
the
defendant,
which
Operates
its
own
drug
stores
under
the
name
“Pinder”,
did
not
really
want
to
use
the
McNeill
name
although
ii
clearly
wanted
it
removed
from
the
Regina
marketplace.
It
continued
to
use
the
McNeill
name
only
until
the
next
telephone
directory
was
issued,
apparently
about
a
year
after
the
purchase.
In
the
interval,
it
advertised
its
own
Regina
stores
and
those
retained
from
the
McNeill
purchase,
under
the
joint
name
“Pinder-McNeill”.
With
the
new
telephone
directory,
signs
were
changed
and
the
McNeill
name
disappeared
completely.
The
plaintiff
called,
as
an
expert
witness,
James
P
Catty,
and
the
defendant
called
Clifford
W
Worden.
Both
are
chartered
accountants
and
Catty
is
an
experienced
business
valuer.
Their
conclusions
are
totally
contradictory.
Worden
concluded
that
the
earnings
of
the
McNeill
operations
sold
would
not
justify
payment
of
any
part
of
the
$290,000
while
Catty
concluded
that
the
earnings
did
justify
a
payment
for
goodwill
he
calculates
at
$283,000.
While
an
earnings
based
valuation
was
Worden’s
only
approach,
Catty
took
other
approaches
to
the
valuation
of
the
goodwill
attaching
to
the
subject
matter
of
the
sale,
all
of
which
led
him
to
conclude
that
$290,000
was
a
fair
figure
for
goodwill.
Neither
report
is
of
assistance
in
resolving
the
initial
question
of
whether
or
not
any
part
of
$290,000
was
paid,
not
for
goodwill,
but
for
the
Broad
Street
and/or
South
Albert
leases.
Worden’s
report
is
of
no
assistance
in
answering
any
of
the
other
questions
that
appear
pertinent
to
me.
$290,000
was
paid
for
something
and
I
am
satisfied,
after
hearing
Mr
Pinder,
that
the
defendant
wouid
not
have
paid
it
for
something
not
approaching
$290,000
in
value.
The
South
Albert
store,
of
approximately
2500
square
feet,
is
located
in
a
shopping
centre,
the
anchor
tenant
of
which
is
a
national
chain
supermarket,
on
the
main
north-south
artery
through
Regina.
The
term
of
the
lease
assigned
was
for
ten
years
from
January
1,
1966.
The
minimum
annual
rent
was
$6,000
($2.40
per
square
foot)
against
5%
of
gross
sales.
Sales
of
tobacco
products,
soft
drinks,
magazines,
utility
collections
and
sub
post-office
transaction
are
excluded.
Sales
in
1967
and
1968
had
been
sufficient
to
bring
the
percentage
rent
provision
into
operation.
A
single
five-year
renewal
option
required
renegotiation
of
the
rent.
The
document
is
a
standard
shopping
centre
lease
calling
for
the
tenant
to
pay,
in
addition
to
rent,
for
such
things
as
utility
charges,
common
area
maintenance
and
municipal
tax
increases
over
1966.
Mr
Pinder
testified
that
he
considered
the
South
Albert
lease
to
be
a
favourable
one,
from
the
tenant's
point
of
view,
in
the
market
at
the
time.
The
only
solid
evidence
before
the
Court
in
support
of
that
conclusion
is
that,
in
a
very
similar
shopping
centre
directly
across
Albert
Street,
the
drugstore
lease
of
approximately
4280
square
feet
stipulated
a
percentage
rent
of
6%
of
gross
saies
without
exclusions.
It
was
for
a
twenty-year
term
from
March
1,
1961
and
provided
for
two
successive
five-year
renewal
leases
at
rents
to
be
negotiated.
On
the
other
hand,
there
is
evidence
in
the
report
of
Howard
P
Hamilton,
one
of
the
plaintiff’s
expert
witnesses,
of
shopping
centre
drugstore
leases
entered
into
in
Regina
in
the
latter
half
of
the
1960’s
calling
for
percentage
rents
of
both
5%
and
6%
of
gross
sales.
These
leases
are
not
themselves
in
evidence
and,
without
them,
one
cannot
really
compare
the
respective
deals.
I
might
also
observe
that
even
a
comparison
of
shipping
centre
leases
without
knowledge
of
the
antecedent
building
agreements
can
be
misleading
since
the
rent
is
bound
to
be
influenced
by
such
factors
as
who
paid
for
what
by
way
of
finishing
the
premises.
In
the
result,
while
I
accept
Mr
Pinder’s
judgment
that
the
South
Albert.
lease
was
a
relatively
favourable
lease
from
a
tenant’s
point
of
view,
the
evidence
does
not
establish
that
it
was
so
favourable,
in
relation
to
the
market,
that
a
prospective
tenant
would
pay
anything
for
it
over
and
above
the
assumption
of
the
tenant’s
obligations
under
it.
In
the
result
of
the
negotiations,
the
lease
of
the
Broad
Street
store
was
for
a
term
of
ten
years
from
April
1,
1969
with
options
in
favour
of
the
defendant
to
renew
for
three
successive
five-year
terms
on
the
same
conditions
including
rent
and
a
non-assignable
right
of
first
refusal
to
buy
the
building.
The
annual
rent,
as
originally
proposed,
was
$2.50
per
square
foot
against
4%
of
gross
sales,
subpost-office
transactions
and
utility
collections
being
excluded.
The
tax
escalator
was
operative
only
if
no
percentage
rent
was
payable,
a
situation
not
anticipated
in
view
of
the
store’s
sales
record
and
not,
in
fact,
encountered.
Indeed,
the
first
year’s
monthly
rental
instalments
were
fixed
on
an
annual
rental
forecast
well
above
the
$2.50
figure.
The
defendant
was
responsible
only
for
telephone,
electricity
and
water
Supplied
the
premises.
I
accept
the
evidence
cf
Jack
M
Warren,
an
expert
witness
called
by
the
plaintiff,
as
to
the
character
of
the
Broad
Street
store
and
its
neighbourhood.
It
occupies
the
entire
ground
floor
and,
for
storage,
part
of
the
basement
of
a
free-standing
building
on
the
east
side
of
Broad
Street.
The
ground
floor
area
is
approximately
3,462
square
feet
and
the
basement
1044
square
feet.
There
are
apartments
in
the
upper
floors.
The
front,
three
storey,
portion
was
built
in
1912;
a
two
storey
addition
at
the
rear
was
built
in
1938.
It
has
been
well
maintained
and
extensively
renovated
from
time
to
time.
Its
condition
is
average
for
its
age.
There
is
parking
on
the
lot.
That
portion
of
Broad
Street
is
a
four
lane
north-south
traffic
artery
on
the
easterly
fringe
of
Regina’s
downtown
business
area.
Development
fronting
on
it
is
mainly
commercial
while
neighbouring
streets
are
high
density
residential.
The
Regina
General
Hospital
is
two
blocks
east
of
the
Broad
Street
store.
It
is
the
closest
drugstore
to
the
hospital
and
the
closest
public
transit
stops
to
the
hospital
are
directly
in
front
of
and
across
Broad
Street
from
the
store.
This
appears
to
be
a
particular
advantage
in
terms
of
sale
of
gift
items,
rather
than
prescriptions.
Sales
at
the
Broad
Street
store,
during
McNeill’s
fiscal
years
ended
January
31,
1966,
1967
and
1968,
of
the
sort
that
would
be
subject
to
percentage
rent,
had
been
$364,612,
$427,251
and
$477,483
respectively,
in
the
order
of
one
quarter
of
McNeill’s
total
sales
each
year
and,
obviously,
growing
at
a
very
satisfactory
rate.
Sales
for
the
year
ended
January
31,
1969
were
not
ascertained
when
the
agreement
was
concluded
and
are
not
in
evidence;
however,
the
defendant’s
sales
from
the
store
for
the
nine
months
April
1
to
December
31,
1969,
were
$373,459.
Howard
P
Hamilton,
a
Calgary
real
estate
appraiser
called
as
an
expert
by
the
plaintiff,
concluded
that
the
base
rate
of
$2.50
was
about
typical
for
the
type
of
property,
that
the
potential
25
year
term
was
longer
than
typical,
and
that
the
4%
rate
of
percentage
rental
would
not
have
produced
any
premium
on
an
assignment
of
the
lease
in
1969.
In
conclusion,
he
was
of
the
opinion
that
no
measurable
premium
should
be
attributed
to
the
Broad
Street
lease.
Mr
Hamilton
considered
only
shopping
centre
outlets
in
comparing
Broad
Street
to
other
drugstores.
While
it
is
likely
that
Hamilton
had
to
turn
to
shopping
centres
in
order
to
find
any
number
of
drugstore
leases
with
percentage
rent
provisions
there
are
obvious
costs
and,
no
doubt
compensating,
benefits
to
a
business
in
a
shopping
centre
that
do
not
pertain
to
a
business
like
the
Broad
Street
store.
In
the
circumstances,
it
seems
to
me
that
the
approach
of
the
plaintiff’s
other
expert,
Jack
M
Warren,
who
included
other
free-standing
buildings
in
his
comparables,
is
to
be
preferred.
Warren
is
a
real
estate
appraiser
employed
by
Revenue
Canada,
formerly
resident
at
Saskatoon,
now
of
Ottawa.
Warren
also
compared,
as
best
he
could,
tenant’s
occupancy
costs
in
the
Broad
Street
store
with
those
of
his
other
comparables.
I
will
refer
only
to
the
free
standing
locations,
all
in
Regina.
1.
McGregor’s
Drugs,
2100
square
feet,
leased
November
29,
1971,
for
five
years
with
one
five-year
renewal
at
a
renegotiated
rent.
Initial
rent
$400
per
month
for
first
thirty
months,
$450
thereafter,
average
annual
rental
$2.43
per
square
foot.
Gross
sales
in
1972—
$169,090:
in
1973—$174,522.
Average
annual
rent
is
2.84%
of
average
gross
sales.
Tax
escalator
over
1971
base.
After
taking
into
account
taxes,
insurance,
licenses,
cleaning,
repairs
and
maintenance,
heat
and
utilities,
Warren
calculated
the
tenant’s
average
occupancy
cost,
including
rent,
at
$9,278
or
5.48%
of
gross
sales
for
those
years.
2.
Harris’
Drugs,
1606
square
feet,
leased
September
1,
1965,
for
ten
years
with
one
five-year
renewal
at
a
renegotiated
rent.
Rent
is
$4,134
or
$2.57
per
square
foot
annually.
Gross
sales
in
1970—
$125,795;
in
1971—$130,731
and
in
1972—$137,439.
Tax
escalator
over
1965
base.
Warren
calculated
the
total
tenant’s
average
occupancy
cost,
including
rent,
at
$6,731
at
5.35%
of
gross
sales
for
those
years.
3.
Duncan’s
Drugs,
1211
square
feet,
leased
on
a
month
to
month
tenancy
for
$3,100
per
year,
or
$2.56
per
square
foot,
with
the
tenant
paying
all
expenses
except
taxes.
Gross
sales
in
1969
were
$89,496
and
the
estimated
total
tenant’s
occupancy
costs,
including
rent,
were
$5,657
or
6.32%
of
gross
sales
that
year.
For
the
Broad
Street
store,
taking
into
account
nine
months
operation
in
1969,
Warren’s
calculation
of
the
defendant’s
total
annual
occupancy
costs,
including
rent,
was
5.32%
of
gross
sales
for
1969
and
5.63%
for
1970.
None
of
Warren’s
comparables
were
subject
to
payment
of
percentage
rent
and
all
were
obviously
much
smaller
stores.
It
is
also
true,
as
was
brought
out
in
cross
examination,
that
expenditures
characterized
under
the
accounting
titles
Warren
adopted
as
reflecting
occupancy
costs
may
properly
vary
significantly
in
both
amount
and
content
from
one
business
operation
to
another.
That
said,
Warren’s
approach
does
seem
to
me
the
only
practical
basis
for
comparing
the
costs
to
the
tenant
of
the
Broad
Street
lease,
with
those
of
other
drugstores
not
in
shopping
centres.
As
in
the
case
of
the
South
Albert
lease,
the
evidence
does
not
establish
that
the
Broad
Street
lease
was
so
favourable
to
the
tenant,
relative
to
the
market,
that
a
prospective
sub-lessee
would
pay
anything
for
it
beyond
assumption
of
the
tenant’s
obligations
under
it.
Halsbury
is
sufficient
authority
for
the
proposition
that
the
law
has
long
recognized
the
distinction
between
personal
and
local
goodwill.*
A
distinction
has
been
drawn
between
personal
goodwill,
which
is
merely
the
advantage
of
the
recommendation
of
the
owner
of
a
business
and
of
the
use
of
his
name,
and
local
goodwill
which
is
attached
to
premises,
and
must
be
taken
into
account
in
calculating
the
value
of
such
premises.
The
only
evidence
I
have
as
to
the
local
goodwill
attaching
to
the
south
Albert
store
is
the
opinion
of
the
plaintiff’s
expert,
Catty,
that
it
was
$67,500.
That
figure
was
arrived
at
by
a
calculation
that
accepted
$120,000
as
the
proper
amount
for
the
Broad
Street
store’s
local
goodwill
and
took
account
of
relative
sales.
In
the
circumstances,
I
accept
$67,500
as
the
correct
figure.
I
should
note
that,
in
his
report,
Catty
referred
to
“‘Goodwill
of
location
and
continuity”.
The
emphasis
is
mine.
Nowhere
did
he
elaborate
on
the
particular
significance
of
“continuity”
as
distinct
from
location.
At
page
6
he
wrote:
5.
Location
and
Continuity
Goodwill
of
location,
in
particular
for
retailers,
is
often
confused
with
lease
value.
They
are
not
the
same.
Goodwill
of
location
relates
to
traffic
patterns
about
an
outlet.
This
traffic
and
the
related
business
can
be
enhanced
or
diminished
by
many
external
factors
such
as
residential
development
in
the
area,
the
opening
of
a
competitor
across
the
street,
and
so
on.
Continuity
is,
I
take
it,
the
aspect
of
location
involving
the
carrying
on
by
a
new
owner
of
a
going
concern
in
its
established
place
of
business.
As
to
the
Broad
Street
store,
the
evidence
establishes
clearly
that
there
was,
in
fact,
a
particular
advantage
to
its
location.
That
advantage
had
a
value.
While
McNeill
and
the
defendant
did
not
expressly
quantify
that
value
it
seems
to
me
they
did
so
implicitly.
If
the
store
had
been
totally
destroyed
a
moment
after
closing
and,
in
consequence
the
lease
had
terminated,
the
defendant
would
have
been
entitled
to
recover
$120,000
of
the
$290,000
paid
for
goodwill.
That
$120,000
was
intended
to
compensate
the
defendant
for
something
intangible
it
had
bought
from
McNeill
and
would
lose
as
a
result
of
the
lease’s
termination.
It
would
not
have
lost
its
exclusive
right
to
trade
under
the
McNeill
name
nor
its
right
to
enforce
the
restrictive
covenant.
It
would
not
have
lost
the
Happy
Shopper
first
refusal.
It
would
have
lost
only
two
intangible
assets:
its
right
of
first
refusal
on
the
sale
of
the
Broad
Street
property
and
its
right
to
operate
its
drugstore
at
that
location
for
the
next
25
years.
The
$120,000
figure
had
been
arrived
at
in
a
process
of
hard
bargaining
between
parties
dealing
at
arm’s
length,
both
professionally
advised
and
both
knowledgeable
of
the
location
and
of
the
business
conducted
and
to
be
conducted
thereon.
The
agreement
is
conclusive
that
$120,000
was
the
value
of
those
two
intangible
assets.
That
the
value
of
the
right
of
first
refusal
was,
at
best,
nominal
is
confirmed
by
the
fact
that,
again
in
arm’s
length
transactions
between
knowledgeable
parties,
the
defendant
sold
the
goodwill
attaching
to
the
Lome
and
Rexall
stores
for
as
much
or
more
as
it
paid
for
it
without
being
able
to
assign
the
right
of
first
refusal.
I
accept,
as
did
Catty,
that
the
$120,000
paid
for
goodwill
in
respect
of
the
Broad
Street
store
was
paid
entirely
for
local
goodwill
or
goodwill
of
location.
The
essence
of
the
question
is,
as
stated
by
Kearney,
J,
in
Plouff
v
MNR,
[1965]
1
Ex
CR
781
at
797;
[1964]
CTC
580
at
596;
64
DTC
5351
at
5359.
To
what
extent,
if
any,
does
goodwill
which
is
attached
to
the
premises,
as
opposed
to
personal
goodwill,
form
part
and
parcel
of
a
leasehold
interest?
Regrettably,
it
was
found
unnecessary
to
answer
the
question
then
because,
it
was
found
as
a
fact,
there
was
no
goodwill
of
value
involved
in
the
transaction
and,
it
followed,
the
amount
in
issue
was
indeed
the
capital
cost
of
the
leasehold
interest.
The
question
has
not
been
posed
since.
A
number
of
English
cases,
applying
the
provisions
of
the
Landlord
and
Tenant
Act,
1927*
were
cited
to
me.
They
are
not
particularly
helpful
but
do
call
attention,
for
what
it
is
worth,
to
a
determination
by
the
Parliament
at
Westminster
that
local
goodwill
created
by
a
tenant
enhances
the
value
of
the
realty,
as
do
physical
improvements.
It
is
something
for
which
the
tenant
may
be
entitled
to
compensation
by
the
landlord
upon
termination
of
the
tenancy.
The
Australian
cases
are
somewhat
more
apt.
There,
the
federal
income
tax
statute!
provided
that
premiums
or
like
consideration
“demanded
and
given
in
connection
with
leasehold
estates”
should,
as
the
case
may
be,
either
be
included
in
or
deductible
from
taxable
income,
to
adopt
Canadian
terminology.
The
High
Court
of
Australia
has
held
that
consideration
for
local
goodwill
was
paid
and
received
“in
connection
with
leasehold
estates”
in
sales
of
going
concerns
where
the
vendor
granted
a
lease
of
the
subject
premises.!
In
the
first
case,
the
vendor-landlord
who
sold
the
goodwill
of
location
was
the
unsuccessful
appellant;
in
the
second,
the
purchaser-lessee
who
bought
was
the
successful
respondent.
An
anology,
which
was
not
drawn
in
argument
but
seems
pertinent
to
me,
is
to
be
found
in
the
expropriation
of
interests
in
real
estate.
Whether
that
interest
be
fee
simple
or
leasehold,
the
value
of
the
goodwill
of
location,
if
a
business
is
conducted
upon
it,
is
accepted
as
one
of
the
elements
making
up
the
value
of
the
expropriated
interest.
Referring
specifically
to
the
present
federal
legislation^,
the
only
thing
authorized
to
be
expropriated
is
an
interest
in
land
and
the
only
compensation
authorized
to
be
paid
is
the
value
of
the
expropriated
interest.
It
expressly
recognizes
that
where
the
owner
of
the
expropriated
interest
is
dispossessed,
its
value
includes
“the
value
to
the
owner
of
any
element
of
special
economic
advantage
to
him
arising
out
of
or
incidental
to
his
occupation
of
the
land”’.
An
owner
dispossessed
might
well
be
entirely
compensated
for
local
goodwill
in
being
paid
the
market
value
of
the
property.
However,
a
tenant
dispossessed
is
equally
entitled
to
such
compensation.
Since,
under
the
Act,
the
only
thing
that
can
be
taken
and
paid
for
is
an
interest
in
land
and
since
the
tenant’s
only
interest
is
leasehold,
it
must
be
concluded
that,
in
the
scheme
of
the
Expropriation
Act,
local
goodwill
is
part
and
parcel
of
the
leasehold
interest.
In
tax
cases,
it
is
the
substance
of
a
transaction
that
is
to
be
regarded.*
The
issue
raised
in
this
action
is,
so
far
as
counsel
and
the
Court
were
aware,
novel
in
the
context
of
Canadian
income
tax
law.
While
the
question
has
been
asked
before,
it
appears
not
to
have
been
answered.
I
doubt
that
this
will
be
the
last
word
on
it.
Chissum
v
Dewes
(1828),
38
ER
938,
was
decided
well
before
the
form
of
commercial
transactions
came
to
be
dictated
by
the
provisions
of
modern
taxing
statutes
and
before
goodwill
had
been
sliced
into
as
many
subdivisions
as,
it
appears
from
the
evidence,
is
the
case
today.
The
goodwill
referred
to
in
the
decision
is
obviously
what
would
today
be
called
goodwill
of
location
or
local
goodwill.
In
that
case,
the
unexpired
term
of
a
lease,
subject
to
an
equitable
mortgage,
was
sold
as
a
package
with
the
goodwill
of
the
business
carried
on
in
the
premises
in
the
realization
of
the
estate
of
the
deceased
tenant.
The
aggregate
sum
realized
was
insufficient
to
satisfy
the
debt
secured
and
it
was
sought
to
apportion
the
consideration
and
to
pay
the
mortgagee
only
that
part
attributable
to
the
unexpired
term.
The
Master
of
the
Rolls,
Sir
John
Leach,
held:
The
good-will
of
the
business
is
nothing
more
than
an
advantage
attached
to
the
possession
of
the
house;
and
the
mortgagee,
being
entitled
to
the
possession
of
the
house,
is
entitled
to
the
whole
of
that
advantage.
I
cannot
separate
the
good-will
from
the
lease.
Like
the
learned
Master
of
the
Rolls,
I
am
unable
to
divorce
the
goodwill
of
a
location
from
the
other
advantages
accruing
to
the
person
entitled
to
possession
of
that
location.
When
it
accrues
under
a
lease,
it
is
part
of
the
leasehold
interest
and
the
price
paid
for
it
is
part
of
the
capital
cost
of
that
leasehold
interest.
There
is
no
basis
for
disturbing
the
assessment
disallowing
the
claimed
deduction
of
the
expenses
incurred
in
negotiating
the
McNeill
transaction.
While
raised
in
the
pleadings
this
matter
was
not
dealt
with
in
argument.
The
defendant’s
1969
and
1970
income
tax
returns
will
be
referred
back
to
the
Minister
for
reassessment
on
the
basis
that
$187,500
was
the
capital
cost
of
the
leasehold
interests
in
the
Broad
and
South
Albert
Street
stores
in
respect
of
which
the
defendant
is
entitled
to
claim
capital
cost
allowance.
The
remaining
$20,000
in
issue
was
not
proved
to
have
been
paid
for
any
leasehold
interest.
The
decision
of
the
Tax
Review
Board,
[1975]
CTC
2108;
75
DTC
103,
apparently
rendered
without
the
benefit
of
much
of
the
evidence
before
the
Court,
was
that
50%
of
the
$207,500
be
assumed
to
have
been
paid
for
leasehold
interests.
In
the
result,
therefor,
the
defendant
has
been
entirely
successful
in
its
defense
and
largely
successful
in
its
counterclaim
and
is
entitled
to
its
costs
of
both
to
be
taxed
on
the
basis
of
having
been
a
Class
III
action.
Counsel
for
the
plaintiff
argued
for
a
disposition
of
costs,
in
the
event
of
the
defendant’s
success,
as
was
done
in
Herb
Payne
Transport
Ltd
v
MNR,
[1964]
Ex
CR
1
at
16;
[1963]
CTC
116
at
129;
63
DTC
1075
at
1082,
where
the
taxpayer.
while
successful
in
the
action,
was
found
to
have
been
the
principal
author
of
a
largely
unnecessary
dispute.
I
have
considered
that
representation
but
do
not
think
the
circumstances
are
more
than
superficially
comparable
and,
accordingly,
reject
it.