Rigid Box Company Limited v. Minister of National Revenue, [1991] 2 CTC 2374, 91 DTC 1173

Sobier, T.C.J.:— The appellant appeals the reassessment of the respondent with respect to its 1987 taxation year whereby, the respondent disallowed as a current expense $100,000 paid by the appellant relating to the acquisition of a customer list and treated it as a capital expenditure and allowed a deduction of $5,000 on account of cumulative eligible capital.

Mr. Jack Early gave evidence on behalf of the appellant. The gist of his evidence was that the set-up or rigid box business is extremely competitive with very few manufacturers supplying most of the purchasers of set-up boxes. He explained the difference between set-up or rigid boxes and folding boxes. It was made clear that about 99 per cent of the boxes used were folding boxes and that set-up boxes represented only about one per cent of the total box sales.

It was Mr. Early's evidence that the large customers of set-up boxes required annual bids from the manufacturers and sometimes even required bidding on a per contract basis rather than on an annual basis.

Prior to the events giving rise to the reassessment, there were only four setup box manufacturers in Metropolitan Toronto: the appellant, Progress Packaging, Torham Packaging Inc., ("Torham") and A.E. Long & Company Ltd. ("Long").

Torham and the appellant each agreed to pay Long $100,000 pursuant to an agreement dated October 23, 1986 (the "Agreement"). As a result of this Agreement and other factors, Long ceased carrying on the set-up box business and the appellant and Torham divided Long's customers list.

The Agreement provided for Long to cease production of set-up boxes, for some of Longs' machinery to be made available to the purchasers under certain circumstances and for employees to be hired, if needed. In addition the appellant acquired estimate files, production dockets, forms and dies. Long produced a letter addressed to its customers announcing the change and suggesting that the appellant could meet the customers' set-up box needs. A follow-up letter was sent by the appellant to those same customers.

It was Mr. Early's evidence that because he believed that Long would be going out of the set-up box business in any event and because of the competitive nature of the business, acquiring the customer list would have no lasting or enduring benefit for the appellant. This would merely give it a short-term “leg up" on the competition since the list would point the appellant's sales force in the direction of the proper persons to contact. Mr. Early stated that knowing who to contact as a potential customer was an important piece of information. Acquiring the estimate files and production dockets would also give the appellant further knowledge as to costs, pricing and sources of supply. But on the whole, it was the witness’ opinion that there were only short-term benefits to be had.

Mr. Early prepared the Agreement without legal assistance since he had previous experience in acquiring businesses. He believed that Long was effectively barred from re-entering the set-up box business and therefore he would not need a firm non-competition agreement. He did insert some noncompetition language in the Agreement but stated that he did not place much weight on its worth.

As it turned out, the information the appellant received from the acquisition was not as beneficial as expected. In addition, Long was not carrying out its agreement with respect to the customers except for sending out the letter announcing the change.

The appellant's sales representatives called on the potential customers with varying degrees of success. It was discovered in some instances that the customer shown on the list was already one of the appellant's customers.

The issue therefore, is whether the acquisition of the list and other assets and the benefit of the covenants and agreements set forth in the Agreement was an expenditure made for current account or capital account.

That the appellant did not receive everything Mr. Early thought it would receive, begs the question. The appellant paid a great deal of money for assets which proved to be less valuable than originally believed. However, what it bargained for was not only a customer list but also the assurance that Long would no longer be a competitor; thus, reducing the number of manufacturers in Metropolitan Toronto to three.

The cumulative effect of possessing the customer list and allowing the appellant's sales personnel to call on the customers prior to the industry in general coupled with other sources of intelligence such as sources of supply and costs of material, the removal of a competitor and a letter of introduction is a great deal more than a fleeting advantage.

The appellant's sales increased after the purchase and it was demonstrated that a good portion of these sales came from former customers of Long. The appellant complained that it did not obtain the volume of sales that it expected to receive. However, the success or lack of success is not determinative of whether the expenditure was on capital or current account.

According to Mr. Early the $100,000 was paid to allow the appellant an early opportunity to call on Long's customers. In his evidence, he stated that everyone in the industry knew who the customers were and in fact all set-up box manufacturers called on those customers. Mr. Early claimed that in a few cases, such as Court's Greeting Cards, it was valuable to know the actual person on whom to call in the various divisions of Court's. To pay $100,000 for this right does not seem reasonable.

Long's pricing practice in the set-up box industry was a thorn in the appellant's side. The final removal of Long as a competitor would allow the appellant to call upon those customers even though its prices might be higher than they were in the habit of paying. The appellant would be in a position to convince the customers of the facts of life in the set-up box business. This it could never do if Long was permitted to continue its pricing practice.

If it were as Mr. Early said, that the industry knew that Long would be going out of business in any event, the competition would merely have had to wait and let the fruit fall into their hands. With Long out of the business, the appellant would be in a position to bid without the low price competitor to thwart it. The appellant had to assure that Long was out of business and the Agreement was that final assurance.

The business and commercial reality was not merely the first opportunity to call on customers, it was the right to call on them without hindrance from Long. The reality was that a competitor was completely eliminated. This was a lasting and enduring benefit.

In argument, the appellant's agent relied heavily on Halliday Fuels Ltd. v. M.N.R. (1960), 25 Tax A.B.C. 186; 60 D.T.C. 541 (T.R.B.). He pointed out that the coal business was also highly competitive, that supply contracts were negotiated annually and that the Court concluded that the nature of the item purchased, i.e., a customer list, was non-permanent. Therefore, the payment was a deductible expense.

The appellant's agent also referred to R. Dixon Co. Ltd. v. M.N.R. (1962), 29 Tax A.B.C. 131; 62 D.T.C. 237 (T.A.B.) and Pioneer Laundry & Dry Cleaners Ltd. v. M.N.R. (1960), 25 Tax A.B.C. 344; 60 D.T.C. 650 (T.A.B.) in support of his position. The Court has considered these cases.

Counsel for the respondent referred to R. Bruce Graham Ltd. v. M.N.R., [1986] 1 C.T.C. 2326; 86 D.T.C. 1256, a decision of Judge Kempo of this Court. In Graham, supra, Judge Kempo canvassed the recent cases concerning the determination of whether an expenditure be classified as either expense or capital. In particular, she referred to the reasons for judgment of Estey, J. in Johns-Manville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111; 85 D.T.C. 5373 (S.C.C.). At page 2337 (D.T.C. 1264) of Graham, supra, she stated:

Very recently Mr. Justice Estey, in the reasons for judgment of the Supreme Court of Canada in Johns-Manville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111; 85 D.T.C. 5373, extensively reviewed the jurisprudence and appropriate principles of law to be considered and applied to the determination of the classification of an expenditure as being either expense or capital. On page 5377 he noted the pronouncement of Lord Pearce in B.P. Australia Ltd., supra, and cited Dixon, J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation (1946), 72 C.L.R. 634 at 648 wherein it was stated:

[The] answer depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.

Judge Kempo also sets out on page 2338 (D.T.C. 1265) a statement of Dubé, J. in Aliments CA-MO Foods Inc. v. The Queen, [1980] C.T.C. 75; 80 D.T.C. 6043 (F.C.T.D.) as follows:

So far as the purchase of a customer list is concerned, there is a long and nearly consistent line of authority holding that such an expense is on capital account, since it secures a “lasting benefit” and cannot really be considered as merely a current expense incurred by the taxpayer in order to earn income.

Referring to Halliday Fuels, supra, Judge Kempo said at 2339 (D.T.C. 1265-66):

I have considered the decision of Halliday Fuels, supra, which is a decision of the then Tax Appeal Board in 1960. Its merit is with respect to its factual compatibility with the situation at hand. However, in view of the ante-dated authorities which are at a higher judicial level, the persuasiveness of the decision is doubtful.

With this statement I concur.

For the aforesaid reasons, the Court finds that the expenditure of $100,000 was on account of capital and that it was properly treated by the respondent as an eligible capital expenditure.

Accordingly, the appeal is dismissed.

Appeal dismissed.