Godcharles – Court of Quebec finds that a sale of goodwill occurred between parties acting in concert given the role of a dominant player
A retirement home was co-owned by eight individuals and operated by a corporation of which they were the shareholders. The home and operating business were jointly sold for a global purchase price to a limited partnership whose owners apparently were for the most part those individuals, with the allocation of the purchase price not yet determined. This was done at the time of filing their tax returns: all of the appreciation in the sold assets over their costs was treated as being goodwill (sold by the operator) rather than appreciation in the immovable.
The sale clearly would have been a non-arm’s length transaction but for the fact that a corporation (“9084”) owned by one of the individuals (“Godcharles”) purchased all the shares of the operator from the other shareholders two days before the retirement home business sale. Without attaching any apparent significance to the purchaser being a limited partnership rather than a co-ownership, Quenneville, J.C.Q found that the sale transaction of the retirement home and the related goodwill was one between persons who were acting in concert (and, thus, not dealing at arm’s length), given inter alia that the sale of the others’ shares to 9118 was agreed to by them without knowing the price that would be paid and, more generally, that the evidence showed “that Mr. Godcharles was the sole director of all aspects of the transaction, from the purchase of the land in 2002 to the sale in 2006, with all the other plaintiffs seemingly absent from the entire negotiation.”
As this (partial) roadblock to the ARQ applying the Quebec equivalent of s. 69(1)(b) to the sale was removed, Quenneville, J.C.Q largely confirmed the ARQ assessments of the individuals for missing capital gains and recapture of depreciation in their returns (and Godcharles for receiving an ordinary dividend rather than a capital dividend from the operator). In particular, she accepted the valuation of the three-year old home by the ARQ valuator using the cost method (i.e., the costs of construction, plus a promoter’s notional profit of 5%, plus net GST/QST of 9.495%, minus notional depreciation of 4% and plus the land appreciation), with that reducing the residual amount to be allocated to the goodwill.
Neal Armstrong. Summaries of Godcharles v. Agence du revenu du Québec, 2020 QCCQ 2219 under s. 251(1)(c) and General Concepts – fair market value – real estate.