Robert Verrier & Fils Ltée v. Minister of National Revenue, [1992] 2 CTC 2464, 92 DTC 2354

Tremblay, T.C.C.J.:—This appeal was heard on March 2, 1988 in the city of Sherbrooke, Quebec.

1. The point at issue

The point at issue is whether the appellant, a company which carries on the business of a general insurance broker, is correct in the computation of its income for 1981, 1982 and 1983 to deduct the sums of $58,000, $32,250 and $32,250 as revenue expenditure. These sums relate to the purchase of customer lists acquired by the appellant from the insurance brokers, Michaud, Gagné & Vallée Inc. (hereinafter referred to as M. G. & V.) and Heppell & Bouchard Inc. (hereinafter referred to as H. & B.).

The respondent, who. refuses the deduction, argues that these are not running expenses but capital expenses: the appellant acquired not only the customer list but also the goodwill, whereby it secured a durable benefit.

2. The burden of proof

2.01 The burden of proof is on the appellant to show that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including the judgment by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 In the same judgment, the Court held that the facts assumed by the respondent in support of the assessments or reassessments are also presumed to be true until proved otherwise. In the present case, the facts presumed by the respondent are described in subparagraphs (a) to (o) of paragraph 7 of the respondent's reply to the notice of appeal. That paragraph reads as follows:

7. In reassessing and in confirming the appellant’s 1981, 1982 and 1983 taxation years, the Minister of National Revenue relied on the following facts, inter alia:

(a) during the years under appeal, the appellant was a company duly incorporated under the Statutes of Quebec, carrying on business as a general insurance broker, primarily but not exclusively in the region of Drummondville [admitted by the appellant];

(b) the appellant's fiscal year runs from January 1 to December 31 of each year [admitted by the appellant];

(c) on July 30, 1981, Michel Verrier, acting on behalf of the appellant, entered into a contract with “ Michaud, Gagné & Vallée Inc.", insurance brokers, operating an insurance business in Plessisville, for the acquisition of the entire insurance portfolio of the company Michaud, Gagné & Vallée Inc.” [admitted by the appellant];

(d) the total consideration for the contract with “ Michaud, Gagnée & Vallée Inc. was $150,000, which was allocated in the contract as follows:

Goodwill	$80,000
Customer list and files	70,000
TOTAL	$150,000
[admitted by the appellant];

(e) on December 17, 1981, the appellant acquired the entire insurance portfolio of "Heppel & Bouchard Inc.”, insurance brokers, operating an insurance business in Drummondville [admitted by the appellant];

(f) the total consideration for the contract with “ Heppel & Bouchard Inc.” was $161,000, which was allocated in the contract as follows:

Goodwill	$30,000
Customer list and files	131,000
TOTAL	$161,000
[admitted by the appellant];

(g) during the final twelve months before these transactions, the approximate sales figure done by the businesses sold were as follows:

	MICHAUD, GAGNÉ, VALLÉE
Sales figure	$115,000
No. of customers	1,500
Type	General insurance;
	HEPPEL 8: BOUCHARD
Sales figure	$310,000
No. of customers	3,600
Type	General insurance

[not admitted by the appellant];

(h) the total price of $150,000 for the “ Michaud, Gagné & Vallée Inc.” transaction was paid or is to be paid as follows:

(i) $80,000 was paid in cash on July 30 or August 1,1981 and was allocated by the appellant to goodwill acquisition;

(ii) the balance of $70,000 was paid or will be paid by equal instalments of $14,000 per year [admitted by the appellant];

(i) the total price of $161,000 under the ~ Heppet & Bouchard Inc.” transaction was or will be paid as follows:

(i) a cash payment of $88,000 on or about December 17, 1981, $30,000 of which was allocated to goodwill acquisition and the balance, $58,000, was deducted by the appellant as running expenses;

(ii) the balance of $73,000 was payable in four equal instalments of $18,250 [admitted by the appellant];

(j) the appellant also paid $14,000 to” Michaud, Gagné & Vallée Inc.” in 1982 and in 1983, and $18,250 to “ Heppel 8: Bouchard Inc.” in 1982 and 1983 [admitted by the appellant];

(k) the contracts made both with “ Michaud, Gagné & Vallée Inc.” and with

"Heppel & Bouchard Inc.” contained the following clauses, inter alia:

(i) the appellant acquired the exclusive right to solicit renewals of each of the insurance policies and the exclusive right to issue riders to existing policies;

(ii) the appellant acquired the right to use all means it deemed necessary to make the public aware of the transaction [this is a clause in the contract];

(iii) the appellant acquired the right to send a letter written by it to all the vendors' insurance companies to advise them of the transaction [this is a clause in the contract];

(iv) the appellant acquired the right to require that the vendors send a letter written by it to all the vendors' clients to inform them of the transaction [this is a clause in the contract];

(v) the transfer and use of the current telephone number of the vendor to the appellant [not admitted by the appellant];

(l) the various clauses, briefly described in the preceding subparagraph in items (i) to (v), constitute a form of covenant not to compete provided in the contract [not admitted by the appellant];

(m) moreover, in the case of the" Heppel & Bouchard Inc. ‘’contract, two of the largest insurance companies were parties to the sale [admitted but not relevant, according to the appellant];

(n) more specifically in the contract with “Michaud, Gagné & Vallée Inc. ", some of the vendor's shareholders have remained in the employ of the appellant, which also occupied the same premises previously occupied by "Michaud, Gagné & Vallée Inc.” [not admitted by the appellant];

(o) the transactions, and particularly the moneys paid to “ Michaud, Gagné & Vallée Inc.” and to” Heppel & Bouchard Inc.”, are not a running expense to the appellant, but a non-deductible capital expense, in that:

(i) the appellant acquired more than just the customer list of the two companies referred to above, reserving to itself the use of the telephone numbers [not admitted by the appellant];

(ii) the appellant introduced itself as the successor to the companies referred to above [not admitted by the appellant];

(iii) by this acquisition, the appellant was able to prevent its other competitors from being able to get their hands on the business of these two companies [not admitted by the appellant];

(iv) it acquired a durable benefit, particularly in that the acquisition of the business of” Michaud, Gagné & Vallée Inc.” and“ Heppel & Bouchard Inc.” contributed to a significant increase in the appellants asset capacity, the appellant’s sales figure having grown as follows [not admitted by the appellant]:

YEAR	SALES FIGURE
At 31-12-81	$1,419,760
31-12-82	$1,900,156
31-12-83	$1,817,850
31-12-84	$1,941,000

[admitted by the appellant].

[Translation.]

3. The facts

The only witness heard was Michel Verrier, the president of the appellant.

A. Examination in chief of Mr. Verrier

3.01 On examination in chief, Mr. Verrier testified as follows:

(a) The appellant was incorporated in 1967. Robert Verrier, Michel Verrier's father, had operated the business for a number of years.

(b) In 1964, Michel Verrier started to work with his father. When the business was incorporated, he became a shareholder. In 1973 or 1974, he became the president.

(c) From 1980 to 1984, the appellants principal business was insurance brokerage. It dealt in general insurance: individual insurance, such as car and home insurance (60 per cent), and commercial insurance (40 per cent). Occasionally, to accommodate a customer, the appellant also did life insurance, about 1 per cent of its business (transcript, page 18).

(d) The appellant operated primarily in the region of Drummondville, including the city and about 15 to 20 miles around it.

(e) The business done by a firm like the appellant, located in Drummondville, is different from that of a general insurance brokerage agency located in Montreal. In Drummondville, business is much more closely tied to personal relationships and acquaintance with the individual. They see the people regularly and socialize with them. About 70 to 75 per cent of the appellants income results from personal contact (transcript, page 20).

(f) Out of 15 employees in the firm, about six or seven are customer service staff. They make appointments, visit customers and provide explanations. Renewals of existing contracts comprise about 60 per cent of their work. The rest, 40 per cent, consists in soliciting new customers (transcript, page 21).

(g) From 1980 to 1983, the appellant conducted advertising campaigns to recruit customers. However, no advertising was done on the radio or television or in the newspapers. Rather, a target market of customers was established and this sector was actively solicited through telephone calls and visits. These target markets were ordinarily established using very competitive rates granted by insurers in various fields, such as insurance for homes having a value of $100,000 or more, cars for professionals, construction contractors. The people concerned were listed, contacted and visited (transcript, pages 22-23).

(h) The target markets may also be established by buying customer lists, as happened as a result of the transactions with the Plessisville firm M. G. & V. on July 31, 1981 (Exhibit A-1) and with H. & B. on December 17, 1981 (Exhibit A-2).

3.02 Transaction with Michaud, Gagné et Vallée Inc.

3.02.1 According to the witness, at the time of the transaction, of the three shareholders in the company, Mr. Michaud, Mrs. Gagné and Mr. Vallée, only Mr. Michaud was still employed by the company. Mr. Vallée and Mrs. Gagné had both left, respectively about six months and six weeks earlier. Both were still practising as insurance brokers and soliciting their customers. The separation had resulted from personality conflicts (transcript, page 27).

3.02.2 After the transaction, Mr. Michaud, the oldest of the three shareholders (55 years), worked for the appellant part-time as an insurance broker for three years. His health was delicate. A secretary from the former firm of M. G. & V. was also hired by the appellant, but none of the customer service employees were hired.

3.02.3 The contract, Exhibit A-1, headed with the names of the purchaser and vendor, reads as follows:

WHEREAS Michaud, Gagné & Vallée Inc. wish to sell their agency's insurance portfolio, customer files and business goodwill.

WHEREAS Michel Verrier, Director of a company to be formed, wishes to purchase this insurance portfolio, customer files and business goodwill.

[Emphasis added.]

THE PARTIES AGREE AS FOLLOWS:

1. Michaud, Gagné & Vallée Inc. sells to [sic]

(a) the entire insurance portfolio, including but not limited to all customer files in its records, a list of which is provided to the PURCHASER by means of the VENDOR'S card index. Each of these files contains a copy of each of the policies in force, the expiry date of each such policy and the address of each of the customers, as well as the telephone number;

(b) the exclusive right to solicit renewal of each of the policies commencing on August 1, 1981, and the exclusive right to issue riders to these policies;

(c) the right to use all means which the purchaser may deem necessary to make the public aware of this sale;

(d) a letter to be written by the vendor and composed by the purchaser [sic] to all insurance companies which have issued insurance policies to customers of the VENDOR, by which such companies will be advised of this transaction, at the request of the PURCHASER;

(e) a letter to be written by the VENDOR and composed by the PURCHASER [sic] to all customers of the vendor to inform them of this transaction, at the request of the purchaser;

(f) transfer of the lease for the premises currently in use, St-Louis Ave. in Plessisville, to the PURCHASER;

(g) transfer and use of the current telephone number to the PURCHASER.

2. This contract is to take effect on August 1, 1981.

3. SALE PRICE

The sale price is $150,000.

4. COMPOSITION OF THE SALE PRICE:

It is agreed between the parties that the sale price is allocated as follows:

(a) $70,000 for the copies of customer policies and the right to renew such policies exclusively, i.e. customer files.

(b) $80,000 applicable to the vendor's business goodwill.

5. METHOD OF PAYMENT

The sale price shall be paid as follows:

(a) $80,000 payable on August 1, 1981.

(b) The balance owing payable at the rate of $14,000 per year starting on August 1, 1982 and on August 1 of each year. The balance owing shall bear interest at the rate of 12 per cent per annum.

6. SPECIAL RESERVATION:

(a) This agreement does not constitute a bulk sale. It is agreed that the vendor shall itself pay all its accounts payable for documents effective before August 1, 1981, whether its accounts have been billed or not, and that it will retain full ownership of all the accounts receivable for documents effective until August 1, 1981. The VENDOR shall make payment to the purchaser when the money collected has been compiled (if necessary) for documents effective on or after August 1, 1981.

(b) The vendor shall retain the right to collect its accounts, it being however agreed that it shall not have the right to cancel insurance policies issued in order to facilitate collection of its accounts without first obtaining the written authorization of the purchaser, which authorization may be granted only in exceptional circumstances. If such permission were granted, the VENDOR would be penalized according to the same scale used in determining the sale price.

(c) The vendor shall retain full liability for all personal undertakings it may have made before August 1, 1981 and full liability for its actions and the actions of its employees up to August 1, 1981, the purchaser assuming no liability in this respect.

(d) The vendor states that there are no debts, liens or mortgages relating to the customer files and goodwill.

[Translation.]

3.02.4 The expression” insurance portfolio" used in the contract, Exhibit A-1, is described by Mr. Verrier as follows:

. . . it is what is called the brain . . . it is the customer list, the expiry date for each policy of each customer; it is the entire index, called the master file, of the insurance agency, which takes in the customer list, address, telephone number, list of insurance companies, insurance contracts in force, expiry date of contracts, it is everything that. . . (transcript, pages 28-29).

[Translation.]

3.02.5 Following the transaction, the appellant hired a young man 23 or 24 years of age (a Mr. Verville) to visit customers to counteract the soliciting being done by Mrs. Gagné and Mr. Vallée. Three months later, a second person was hired: a Mr. Paré (40 years of age), but exclusively for the purpose of recovering M. G. & V. customers.

3.02.6"The exclusive right to solicit renewal“ set out in clause 1(b) of Exhibit A-1 was in fact binding only on Mr. Michaud and not on Mrs. Gagné and Mr. Vallée, or on any other insurance broker.

3.02.7 The $150,000 price has been established on the basis of an estimate of potential. It was hard to apply the M. G. & V. sales figure for the preceding years, given that two of the shareholders had left. Thus, the formula that would ordinarily apply to the purchase of an insurance agency, the last year's profit multiplied by 1.2 to 1.5, could not be used (transcript, pages 36-37).

3.02.8 The word “ goodwill” used in the introduction and in clause 4(b) of Exhibit A-1 means the reputation of M. G. & V., even if that firm no longer projected the image it had once had. The price of the goodwill was determined, rather, on the basis of the customer list. On this point, Mr. Verrier states:

. . . We Said about half and half, we will divide it half and half; part of the potential customers we will have to work hard to go and recruit, solicit, and so on. And the other part, they will be a little more automatic, you might say, there will be less difficulty. Sincerely, it was purely a sort of picture that we were trying to put together (transcript, page 40).

[Translation.]

In fact, 75 per cent to 80 per cent of the customers on the list purchased were recovered by the appellant, thanks to the work of Messrs Verville and Paré. If, instead of hiring those two people, they had simply mailed out renewal notices, the renewal percentage would have been [translation] “ definitely less than half. . . l would tend to say 40 per cent" (transcript, page 44).

3.03 Transaction with Heppel & Bouchard Inc.

With respect to this transaction, Mr. Verrier's testimony was as follows:

3.03.1 The H. & B. agency, insurance brokers, operated in Drummondville.

3.03.2 The appellant was approached in mid-November, 1981 by an insurance company, La Royale du Canada, to know whether it would agree to participate with them in a transaction involving the agency that represented them in Drummondville, H. & B., which was in financial difficulty. It had not been issuing policy renewals since October 1.

Mr. Heppell, the founding president of H. & B., who was 52 years old, had entered hospital in February 1981. He had remained completely disabled. For several weeks, H. & B. had been paying back insurance premiums to the insurance company using NSF cheques. In practice, the insurance company could not contact either of the two shareholders of H. & B. At the first meeting, La Royale du Canada offered the appellant its co-operation in attempting to retain and renew the policies that H. & B. had previously signed with customers (transcript, pages 46-52).

3.03.3 At the second meeting, in December, 1981, the appellant had succeeded in getting two other insurers involved: Groupe Commerce and Provinces Unies. On the whole, the transaction was more worthwhile.

3.03.4 At that point, the five agents who were working for H. & B. on the sales team had left the company to go to work for competitors. Moreover, one employee with 12 years' experience in commercial insurance with H. & B. had joined the Arthur Désilets insurance agency. She was actively soliciting the former customers of H. & B. The chief accountant with H. & B. had also left the company. This left only two girls in billing and document filing (transcript, pages 53-54).

3.03.5 On December 17, 1981, after considerable difficulty, the contract, Exhibit A-2, was signed.

The eight parties to the contract were as follows:

— Heppel & Bouchard Inc.;

— Robert Verrier & Fils Ltée;

— La Royale du Canada, Cie d'assurance;

— La Compagnie d'assurance du Québec;

— Gestions H. & B. Ltée;

— Les Placements Claude Bouchard;

— Claude Bouchard;

— Michel Verrier.

Clauses 1(a) to (f), 3 and 4 read as follows:

The vendor hereby SELLS and the purchaser PURCHASES:

1. (a) the entire insurance portfolio including but not limited to all customer files in its records, a list of which is provided to the PURCHASER by means of the VENDOR'S card index. Each of these files contains a copy of each of the policies in force, the expiry date of each such policy and the address of each of the customers, as well as the telephone number.

(b) the exclusive right to solicit renewal of each of the policies commencing on

December 1, 1981, and the exclusive right to issue riders to these policies.

(c) the right to use all means which the PURCHASER may deem necessary to make the public aware of this sale.

(d) a letter to be written by the VENDOR and composed by the PURCHASER [sic] to all insurance companies which have issued insurance policies to customers of the VENDOR, by which such companies will be advised of this transaction, at the request of the PURCHASER. All the parties hereto acknowledge that they have knowledge of and consent to this letter, which is attached hereto as Schedule A.

(e) a letter to be written by the VENDOR and composed by the PURCHASER [sic] to all customers of the VENDOR to inform them of this transaction, at the request of the PURCHASER. All the parties hereto acknowledge that they have knowledge of and consent to this letter, which is attached hereto as Schedule B.

(f) transfer and use of the current telephone number of the VENDOR to the PURCHASER, if the PURCHASER deems this advisable.

3. [sic] SALE PRICE:

The sale price is ONE HUNDRED SIXTY-ONE THOUSAND DOLLARS ($161,000);

4. METHOD OF PAYMENT

The sale price shall be paid as follows:

EIGHTY-EIGHT THOUSAND DOLLARS ($88,000) cash upon signing and the balance of SEVENTY-THREE THOUSAND DOLLARS ($73,000) shall be payable in four

(4) equal consecutive yearly instalments starting on December 1,1982. The balance owing shall bear interest at the rate of 14 per cent per annum and interest shall be paid at the same time as payments of principal are made.

[Translation.]

On the final page of the contract, the following details respecting the sale price read as follows:

For tax purposes, the parties specify that the sale price of ONE HUNDRED SIXTY- ONE THOUSAND DOLLARS ($161,000) set out in the contract of sale between HEPPEL & BOUCHARD INC. and ROBERT VERRIER & FILS Ltée consists of ONE HUNDRED THIRTY-ONE THOUSAND DOLLARS ($131,000) for copies of the VENDOR'S customer policies and the right to renew such policies exclusively and THIRTY THOUSAND DOLLARS ($30,000) for the VENDOR'S business goodwill.

[Translation.]

3.03.6 The price was negotiated between the insurance companies and the appellant. Claude Bouchard confirmed it when the agreement was signed.

The first cheque was made out to H. & B. and La Royale du Canada. Thereafter, proceedings were brought by La Royale du Canada against H. & B.

A court order was sent to the appellant enjoining it in future to make payments to La Royale du Canada (transcript, page 58).

3.03.7 The $161,000 price was not established on the basis of the H. & B. financial statements, which were not seen by the parties.

It did not take into account the Val d'Or branch, which was managed by Mrs. Claude Bouchard. The appellant did not want it. That branch mostly insured forestry equipment.

In the territory which was the subject of the contract there were about 2,800 to 3,000 files. After making several efforts to solicit them, the appellant recovered 40 to 45 per cent of the customers. If renewal notices had been sent without soliciting, only 20 per cent of the customers would have renewed their insurance contracts (transcript, page 67).

3.03.8 The approach made to customers was not to be made in the name of

H. & B.; this was to be avoided particularly since that company had gone bankrupt in early 1982. Several people had lost money.

B. Cross-examination of Michel Verrier

3.04 On cross-examination, Michel Verrier confirmed the facts asserted on examination in chief. He further specified the following points:

(a) With respect to the purchase of M. G. & V., when he says that 60 per cent of the sales figure came from car and home insurance and 40 per cent from commercial insurance, he was talking in terms of income and not number of customers. Where individual policies brings in an average premium of $400, a business brings in $1,500. The fact that the commission on a car insurance premium is only 12.5 per cent also has to be considered.

(b) In 1980, the appellant was representing seven to eight insurance companies. As well, there were three or four others with whom it had an open contract in the commercial field, that is, it had to submit contracts for approval in order for the insurance company to be liable (transcript, page 73).

(c) In 1980, the appellant was doing business, that is, had an agent's contract with La Royale du Canada.

(d) When an insurance company has several brokers in one region, a broker cannot get the names of its competitors customers from the insurance company. Moreover, the insurance company so undertakes to the broker in the agent's contract.

(e) The $500,000 increase in additional income between 1981 and 1982, after the two transactions were concluded, is difficult to break down. Part comes as a result of the two transactions, and the other part comes from normal growth in the appellant's business, but it is impossible to know in what proportion. Moreover, other elements may come into play: inter alia, sometimes consumer premiums rise, as sometimes they fall. Insurance brokers' gross income rises or falls accordingly.

(f) Each broker always has an annual customer loss of two to three per cent: death, leaving the region, dissatisfaction. Furthermore, there is always a natural increase of three to four per cent from family and friends of an insured, in other words, from word of mouth.

(g) In 1980, in the Drummondville region, there were four major insurance brokerage firms: the appellant, Pépin Assurances, Désilets Assurances and

H. & B. M. G. & V. was in Plessisville.

3.05 Also on cross-examination, the witness states that during the transaction with H. & B. the representatives of La Royale du Canada said that they were doing business with the two largest brokerage firms in the region of Drummondville, the appellant's and Pépin Assurances, and that the latter had made an offer but no more. It was also official that the representative of La Royale du Canada had had dinner with a representative of Pépin Assurances.

Does that influence the transaction? La Royale du Canada wanted to resolve the problem as soon as possible, before Christmas. It was December 15, 1981 and, because of the Christmas holidays, everything would have been delayed until the following January 15. For La Royale du Canada, “the problem had been on the table for eight weeks already” [Translation].

The appellant made an offer. . ."to maintain good relations with them [La Royale du Canada] and to try to preserve things’ (transcript, pages 90-91-92) [Translation].

3.06 With respect to the transaction with M. G. & V., the witness recounts the following:

3.06.1 Mr. Michaud had approached him to explain his problem. That agency had been operating for seven or eight years in Plessisville. He was looking for a solution, because his two partners had left him, and so on.

3.06.2 In 1981, the appellant had no representative, agent or anyone else in Drummondville [sic]. During the two or three years before the transaction, however, there had been a professional relationship between the appellant and

M. G. & V., which had been having some difficulties in obtaining insurance for customers and so had approached the appellant to meet those customers' needs. When the appellant was successful, the customer was transferred to it, undoubtedly for a share of the commission (transcript, page 94).

3.06.3 A very large majority of the 800 customers of M. G. & V. who had been recovered by the appellant were individuals, as opposed to businesses. As well, a majority of the crop insurance was held by a Montreal broker. There was no possibility of renewing those cases (transcript, page 95). The former partners, Gagné and Vallée, had the comer on the commercial insurance (transcript, page 99).

3.06.4 Mr. Michaud continued to work for the appellant part-time, three days per week, in the Plessisville office, the premises previously used by M. G. & V., but which the appellant had rented from the owner. The rest of the time, Mr. Michaud had an office in his home in Plessisville and he sold life insurance. That work brought him in three times as much income as his work for the appellant.

3.06.5 Following the transaction, Mr. Verville, an employee of M. G. & V. was hired by the appellant. An explanatory letter was even sent to customers with a photograph of Mr. Verville.

3.06.6 At the time of the transaction with M. G. & V., the appellant was counting heavily on the crop insurance: at that time, higher commissions were starting to be negotiated as volume increased. In short, the higher the volume of sales, the higher the commission rate.

If the appellant had been able to get part of the market in agricultural risks and so add to the volume already acquired in Drummondville, it would have been quite a financial success, right from the first year (transcript, pages 101-03).

3.06.7 Two to three weeks were needed to negotiate the transaction with Mr. Michaud. But in negotiating it, Mr. Verrier had another plan in mind: to complete a transaction with Mr. Lemieux's brokerage firm in Plessisville as well. Mr. Lemieux, who was 65 years old, had been established in insurance for more than 20 years, and had promised Mr. Verrier six months earlier, in relation to the sale of his business, "You can count on me, I won't do anything without talking to you. . .” [Translation].

Mr. Lemieux did not talk to Mr. Verrier, but subsequently merged his business with another competitor in Plessisville.

However, at the time of the transaction with M. G. & V., the Lemieux matter was still being discussed. The appellant's idea (Mr. Verrier's) was that once the

M. G. & V. transaction was completed, he would merge it with the Lemieux firm.” It was to use the Lemieux office, the Lemieux office image, and say: 'The Michaud files, we are merging them with the Lemieux office’. And so that became an operation which was profitable and worthwhile” (transcript, page 107) [Translation].

3.06.8 The figure of $150,000 paid to complete the M. G. & V. transaction was computed, broadly, on the basis of a sales figure of $600,000, with the resulting commissions being 9 per cent to 12.5 per cent, and by multiplying the ratio 1.2 to 1.5 of the value of these commissions. Obviously, there was considerable discussion before arriving at $150,000 (transcript, pages 108-109).

3.06.9 The figure of $161,000 to complete the H. & B. transaction was computed in the same manner, using a sales figure of $350,000 to $400,000. Before arriving at $161,000, other discussions took place (transcript, pages 112-114).

3.07 With respect to the price for the goodwill in the M. G. & V. transaction, it was considered that a greater portion of customers would easily agree to renew their contracts. This portion was due to the name of M. G. & V., in short, to goodwill, particularly because Mr. Michaud would be continuing with them. It was set at about 55 per cent, or $80,000 (transcript, pages 114-116).

3.08 In the case of H. & B., there was no goodwill, but because the transaction had to be settled quickly, the amount was set in an arbitrary manner—there was no examination of the portfolio (transcript, pages 117-118).

3.09 Moreover, at the time of the transaction with H. & B., the appellant was convinced that La Royale du Canada would protect it from customers changing brokers within 24 months. According to the insurance company's representative, this was possible. The following January, the appellant was warned that the higher authorities were opposed to this agreement (transcript, pages 118-121).

3.10 Following the H. & B. transaction, no letter was sent to customers, despite clause 1(e) of the contract, Exhibit A-2. However, a letter had been prepared (Exhibit 1-1), but because H. & B. did not want to pay for the postage, it was not sent. A copy of that letter was, however, in the hands of the appellant's representatives. They used the substance of the letter to provide explanations to customers when they met with them. It was more on the line of a working tool. Although the letter was to have been paid for by H. 8: B., it was nonetheless signed by the appellant. This letter reads as follows:

We welcome Robert Verrier & Fils Ltée into the centralized insurance services of Heppell & Bouchard Inc.

The goal of this merger is to improve the quality of our services and to provide you with broader coverage at a competitive price.

Your insurance protection is being maintained in effect with an insurance company selected on the basis of the quality of its services and price.

Before making a decision not to renew your insurance, let us know what you intend to do, so that we can show you the benefits and advantages. We are available, and the people in charge of your file are qualified and ready to assist you; think about the help we can give you in the event of a loss.

We hope that you will continue to give us your trust and our gratitude will be reflected in the quality of our service.

Yours truly,

MICHEL VERRIER, President

Chartered Insurance Broker

[Translation.]

It should be noted that the H. & B. customers were in a panic. They believed that they were not insured. H. 8: B. was no longer answering the telephone, and so on. As soon as the transaction was concluded, one weekend was spent on cataloguing the files into the appellants computer system.

3.11 On re-examination, the witness says that in 1987 the appellant had carried out an advertising campaign directed at construction contractors, using a list of such contractors purchased from Dunn & Bradstreet. This campaign cost $60,000.

4. Law—cases at law—analysis

4.01 Law

The main provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") involved in the instant case are paragraphs 18(1)(a) and 18(1)(b), which read as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

(b) an outlay, loss or replacement of capital, a payment on account of capital or an allowance in respect of depreciation, obsolescence or depletion except as expressly permitted by this Part;

4.02 Cases at law

The Court considered the following cases at law:

1. Harbord Investments Ltd. v. M.N.R., [1970] Tax A.B.C. 717, 70 D.T.C. 1488;

2. Cumberland Investments Ltd. v. The Queen, [1975] C.T.C. 439, 75 D.T.C. 5309 (F.C.A.);

3. Burian v. The Queen, [1976] C.T.C. 725, 76 D.T.C. 6444 (F.C.T.D.);

4. Rooke v. M.N.R., [1976] C.T.C. 2412, 76 D.T.C. 1307 (T.R.B.);

5. The Queen v. Baine, Johnstone & Co., [1977] C.T.C. 556, 77 D.T.C. 5394 (F.C.T.D.);

6. The Queen v. Sunstrum, [1978] C.T.C. 421, 78 D.T.C. 6300 (F.C.T.D.);

7. Lester v. M.N.R., [1981] C.T.C. 2410, 81 D.T.C. 353 (T.R.B.);

8. Hugh & McKinnon Ltd. v. M.N.R., [1982] C.T.C. 2419,82 D.T.C. 1425 (T.R.B.);

9. The Queen v. Farquhar Bethune Insurance Ltd., [1982] C.T.C. 282, 82 D.T.C. 6239 (F.C.A.);

10. Lillico v. M.N.R., [1984] C.T.C. 2062, 84 D.T.C. 1048 (T.C.C.);

11. Tomenson Inc. v. The Queen, [1986] 1 C.T.C. 525, 86 D.T.C. 6267 (F.C.T.D.); aff'd [1988] 1 C.T.C. 173, 88 D.T.C. 6095 (F.C.A.);

12. Partykan v. M.N.R., [1980] C.T.C. 2540, 80 D.T.C. 1475 (T.R.B.);

13. C.I.R. v. Muller & Co.'s Margarine Ltd., [1901] A.C. 217 (H.L.);

14. B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224 (P.C.).

4.03 Analysis

4.03.1 The classic test in respect of the income expense by a business is that it is repeated regularly.

To distinguish between an income expense and a capital outlay, Dixon, J. in Hallstroms Pty. Ltd. v. The Federal Commissioner of Taxation (1946), 72 C.L.R. 634 at 646-48, cited frequently in Burian (para. 4.02(3)), noted the following differences, which are applicable to the instant case:

Once more, however, I shall endeavour to apply what I conceive to be the principles that determine whether an outgoing is on account of capital or of revenue. As a prefatory remark it may be useful to recall the general consideration that the contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in [sic] work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.

What is an outgoing of capital and what is an outgoing on account of revenue 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.

[Emphasis added.]

4.03.2 In applying these general tests to a transaction between insurance brokers involving a customer list, as in the case at bar, the courts have established the following fundamental test: if the taxpayer acquires the business of the vendor, it is a capital outlay, but if it acquires only a list of customers having only temporary value to the purchaser, it is an income expense.

The courts have established a number of specific guidelines for applying this general principle. The list of these guidelines, tests or indicators is not exhaustive. Moreover, each of them is not necessarily of the same weight. A single test may be of greater significance in one case and lesser in another. Each case must be considered on its merits. In one case, a guideline may be very significant, but in another, because of different circumstances, its probative force may be negligible or it may have weight only because of the existence of other guidelines or indicators.

4.03.3 Indicators or guidelines which support the position that the expense is deductible

1. When the sole subject matter of the sale is a list of persons or customers (Harbord Investments Ltd., para. 4.02(1)).

2. When the purchaser is prohibited from using the vendor's name.

3. When the purchaser and the vendor were free to try to acquire customers from the list (Partykan, para. 4.02(11)).

4.03.4 Indicators or guidelines which support the position that it was a capital outlay

1. When the subject matter of the sale, in addition to a list of customers, also consists in goodwill (Baine para. 4.02(5)), Rooke, para. 4.02(4)), Muller & Co.'s Margarine Ltd., para. 4.02(13)).

2. When the aim of the transaction is to eliminate a competitor (Sunstrum, para. 4.02(6)), B.P. Australia Ltd., para. 4.02(14)).

With respect to such an acquisition Lord Pearce, in B.P. Australia Ltd. v. Commissioner of Taxation of the Commonwealth of Australia, [1966] A.C. 224, observed at page 262:

Where a trader buys out a rival in order to secure his goodwill or to suppress it and so provide or maintain a clear field for his own enterprise over a substantial period, there is a definite prima facie pointer towards a capital payment.

3. When the transaction includes a covenant not to compete on the part of the vendor (Harbord Investments Ltd., para. 4.02(1)), Cumberland Investments Ltd., para. 4.02(2)).

4. When the payments are based on income in the years to come (Tomenson Inc., para. 4.02(11)).

5. When the price is payable over several years (Tomenson Inc., para. 4.02(H));

6. When key employees of the vendor go to work in the purchaser's business (Hugh & McKinnon Ltd., para. 4.02(8), Tomenson Inc., para. 4.02(11)).

7. When the benefit received is spread over a number of years (Burian, para. 4.02.6)).

8. When the transaction expands the income structure of the purchaser's business (Sunstrum, para. 4.02(6)).

4.03.5 Because in this appeal there were two transactions concluded by the appellant and there is no connection between the two, they should be examined separately.

4.03.6 Transaction with Michaud, Gagné & Vallée Inc.

4.03.6 (1) In this transaction, the concurrent existence of certain elements such as the significant goodwill purchased, the transfer of the $80,000 insurance portfolio and the expansion of the income structure were key elements which incline the Court toward the respondent's position.

4.03.6(2) In Muller & Co.'s Margarine Ltd., (para. 4.02(13)), Lord Lindley made the following comments on the property [sic] between the concept of "goodwill" and that of "a going concern”, at page 235:

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 its adds value, and, in my opinion exists where the business is carried on.

[Emphasis added.]

In Mr. Verrier's mind, and thus in that of the appellant, the reputation of M. G. & V. still had a certain value, even though its image had been diminished. The choice of $80,000 for goodwill was the outcome of discussions (para. 3.02.8, 3.04(a) and (b)).

4.03.6(3) The transfer of the "insurance portfolio” which is the “brain” of an insurance brokerage firm, as it is so well described by Mr. Verrier (para. 3.02.4), cannot, to my mind, be effected by treating it as a simple list, even if Mr. Michaud's former partners had the corner on the commercial insurance (para. 3.06.3).

The total sale price of $150,000 was the result of discussions which took into account, inter alia, the sales figure of $600,000 (para. 3.06.8).

4.03.6(4) In establishing itself in Plessisville with the acquisition of M. G. & V., the appellant, to my mind, expanded its income structure, independently of its intent also to merge with Mr. Lemieux's brokerage firm (para. 3.06.7), through the acquisition of M. G. & V., thereby eliminating a competitor.

4.03.6(5) We must add to these indicators the fact that the payment for the transaction was spread over a period of six years, $80,000 in 1981 and $14,000 in the following five years (contract, Exhibit A-1, clause 5, para. 3.02.3), and that two employees of the vendor firm, Messrs. Michaud and Verville, worked for the appellant (paras. 3.06.4 and 3.06.5).

The balance of evidence is in favour of the respondent's position, that this was not simply a transaction designed to transfer a mere customer list, but a transfer of a going concern.

4.03.7 Transaction with Heppell & Bouchard Inc.

4.03.7(1) The real cause of this transaction was the extremely precarious financial situation of H. & B.: the insurance company dealing with H. & B., La Royale du Canada, approached the appellant to try to salvage the situation. The aim was to try to retain and renew the policies which that firm had signed with customers (paras. 3.03.2, 3.03.3 and 3.03.4).

The precarious financial situation of the vendor cannot necessarily be considered as a negative indicator. In Tomenson Inc. (para. 4.02(H)), the financial situation of the firm which was the subject of the sale was such that the management had retained a trustee in bankruptcy, which did not prevent the Court from finding that the payment was a capital outlay.

4.03.7(2) The sale price was established by the insurance companies involved and by the appellant. In the course of discussions, no financial statements for

H. & B.'s previous years were available (paras. 3.03.6 and 3.03.7).

Despite the absence of financial statements, each insurance company present at the discussions was nonetheless in a position to provide substantial pieces of information concerning H. & B.'s business: the number of insurance policies, renewals, and so on.

Moreover, with his vast experience in the field (all his testimony confirmed this, particularly on cross-examination), Mr. Verrier was certainly in a position to weigh all these elements and come up with a sales figure, and to use it as the basis for establishing the overall purchase price ($161,000) and the price for goodwill in particular ($30,000).

Moreover, did Mr. Verrier not testify that the discussion was based on H. & B.'s sales figure of $350,000 to $400,000 (para. 3.06.9)? Even if there were no financial statements, these figures were surely taken from somewhere.

Even though Mr. Bouchard did not participate in the discussions, he agreed to the terms of the contract, Exhibit A-2, and he signed it.

Finally, on this point, we see that based on the $600,000 sales figure, the M. G. & V. transaction is effected for $150,000, $80,000 of which is for goodwill, and that based on a sales figure of $350,000 to $400,000, the H. & B. transaction is concluded for $161,000, $30,000 of which is for goodwill. There were certainly factors which influenced this decision. One of these factors was undoubtedly the deterioration in H. & B.'s management and financial situation, which lowered the price of the goodwill. Even though Mr. Verrier asserts that no portfolio was examined in assessing the goodwill (para. 3.08), he nonetheless had enough information in hand to arrive at a sales figure of $350,000 or $400,000 and $161,000 as the sale price.

With respect to the goodwill, even though Mr. Verrier asserts that the customers were not to be approached in the name of H. & B. (para. 3.03.8), that did not prevent him from signing a letter (Exhibit 1-1) that agents were to use in meeting with these customers. This letter started out as follows:

We welcome Robert Verrier & Fils Ltée into the centralized insurance services of Heppell & Bouchard Inc.

[Translation.]

The Court believes that the $30,000 in goodwill actually existed.

4.03.8 According to Mr. Verrier, out of the 2,800 to 3,000 H. & B. files, 40 to 45 per cent of customers were recovered (para. 3.03.7). Mr. Verrier had expected more. Undoubtedly La Royale du Canada's failure to protect the appellant from people changing brokers was the cause of much of this (para. 3.09).

However, the mere fact that this sale was not as lucrative as anticipated does not affect its nature at the time when the contract was signed, as Addy, J. noted in R. v. Baine, Johnstone & Co. Ltd. (para. 4.02(5)), at page 558-60 (D.T.C. 5397).

4.03.9 Finally, in this H. & B. transaction, if I consider the following evidence:

1. the transfer of the portfolio relating to 2,800 to 3,000 files (paras. 3.02.4 and 3.03.7);

2. the existence of $30,000 in goodwill (para. 3.03.5);

3. the five-year period for payment of the purchase price (para. 3.03.5);

4. the durable benefit obtained by the appellant by retaining about 1,300 files, thereby expanding its income structure (para. 3.03.7),

I cannot do otherwise than conclude that this was not simply a purchase of a customer list. In fact, on the balance of evidence, it was an actual purchase of a going concern.

The reassessments must therefore be upheld in respect of this transaction.

5. Conclusion

For the reasons for judgment set out above, the appeal is dismissed.

Appeal dismissed.