Rip,
TCJ:—This
is
an
appeal
by
John
C
Lillico
from
reassessments
for
income
tax
for
the
1976,
1977,
1978
and
1979
taxation
years.
Mr
Lillico
claims
that
in
each
of
1976
and
1978
he
“purchased
the
files
and
client
expiry
lists”
of
a
general
insurance
business
carried
on
in
the
City
of
Prince
Albert,
Saskatchewan,
and
surrounding
area
for
the
sums
of
$11,000
and
$51,127.76
respectively.
The
issue
for
determination
for
the
1976
and
1978
taxation
years
was
whether
or
not
each
of
the
respective
expenditures
made
by
the
appellant
in
the
sums
of
$11,000
and
$51,127.76
was
an
outlay
or
expense
made
or
incurred
by
the
appellant
for
the
purpose
of
gaining
or
producing
income
from
his
business
within
the
meaning
of
the
exception
contained
in
paragraph
18(1)(a)
of
the
Income
Tax
Act
as
claimed
by
the
appellant,
or
whether
each
expenditure
was
a
capital
expenditure
within
the
meaning
of
paragraph
18(1)(b)
of
the
Income
Tax
Act
as
claimed
by
the
Minister
of
National
Revenue.
Paragraphs
18(
l)(a)
and
(b)
read
as
follows:
(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.
In
reassessing
the
appellant
for
1976
and
1978
the
respondent
disallowed
the
deductions
claimed
by
the
appellant
in
the
amounts
of
$11,000
and
$51,127.76
and,
allowed
the
appellant
deductions
of
$550
in
1976
and
$3,001.88
in
1978
in
respect
of
the
cumulative
eligible
capital
of
his
business;
in
1977
the
respondent
reduced
the
appellant’s
income
by
allowing,
amongst
other
amounts,
a
deduc-
tion
in
the
amount
of
$495
in
respect
of
the
cumulative
eligible
capital
of
his
business.
The
reassessment
for
the
1979
taxation
year
was
appealed
by
the
appellant
since
the
respondent
revised
the
general
averaging
calculations
pursuant
to
section
118
of
the
Income
Tax
Act
to
reflect
increased
income
for
previous
taxation
years.
Mr
Lillico
has
since
November
1,
1975
carried
on
the
business
of
a
general
insurance
agent
in
and
about
Prince
Albert,
Saskatchewan
under
the
firm
name
Lillico
Insurance
Agency.
Mr
Lillico
sells
all
types
of
insurance,
except
for
life
insurance.
In
1976
Mr
Lillico
was
approached
by
a
Mr
René
Pellerin,
who
also
carried
on
a
general
insurance
agency
in
Prince
Albert,
who
offered
to
sell
to
Mr
Lillico
a
“list
of
accounts”
for
$11,000.
Mr
Pellerin
had
previously
worked
at
a
grain
elevator
at
Henribourg,
Saskatchewan
but
because
the
dust
at
the
elevator
began
to
affect
his
health
he
gave
it
up
and
in
about
1974
commenced
to
carry
on
a
general
insurance
agency
in
Prince
Albert.
Previously
he
carried
on
the
insurance
agency
as
a
part-time
business.
Mr
Pellerin
was
offering
to
sell,
according
to
the
appellant,
because
he
was
returning
to
the
grain
business,
this
time
at
a
new
elevator
in
Biggar.
Mr
Lillico
accepted
to
pay
the
purchase
price
of
$11,000,
the
amount
suggested
by
Mr
Pellerin,
and
prepared
a
short
agreement
of
purchase
and
sale
which
was
executed
by
Mr
Pellerin
and
Mr
Lillico;
this
agreement
reads
as
follows:
April
27,
1976
In
consideration
of
$11,000
I
sell,
assign
and
transfer
all
my
right,
title
and
interest
in
my
insurance
files
to
John
Lillico,
115
Canada
Building,
Prince
Albert.
I
agree
that
I
will
not
engage
in
the
insurance
business
within
50
miles
of
Prince
Albert
for
a
term
of
5
years
from
this
date.
This
purchase
is
subject
to
the
approval
of
the
sale
by
the
Saskatchewan
Government
Insurance
Office
and
should
they
not
agree,
the
entire
purchase
price
of
$11,000.00
will
be
refunded.
Signed
at
Prince
Albert
this
27th
day
of
April
1976.
|
FE
Levitsky"
|
"René
Pellerin”
|
|
Witness
|
"John
C
Lillico"
|
On
May
4,
1976
Mr
Pellerin
wrote
the
following
letter
to
his
former
clients:
Dear
friend
Re:
SGIO
Policy
Last
year
I
gave
up
my
elevator
at
Henriboug
as
the
work
was
beginning
to
affect
my
health.
I
took
a
year’s
leave
of
absence
and
moved
to
Prince
Albert.
During
the
last
year
I
have
concentrated
on
my
Insurance
Agency.
I
accepted
the
appointment
by
the
Sask
Pool
to
their
elevator
at
Biggar,
Saskatchewan
and
will
be
moving
to
Biggar
this
month.
I
have
sold
my
Insurance
files
to
John
Lillico
of
Lillico
Insurance
Agency,
115
Canada
Building,
Prince
Albert.
John
has
over
15
years
experience
in
the
insurance
industry
and
is
well
qualified
to
look
after
all
your
insurance
needs.
He
will
provide
the
same
personal
service
that
I
gave
to
my
clients
over
the
25
years
in
this
area.
John
was
Insurance
Department
Manager
at
Prince
Albert
Agencies
until
November
1st,
1975
when
he
resigned
to
open
his
own
office.
I
hope
that
you
will
continue
your
insurance
with
Lillico
Insurance
Agency
and
if
you
have
any
problems
or
questions
you
can
drop
into
his
office
or
call
him
at
his
office
telephone
number
764-7211
or
his
home
number
763-7807.
I
would
like
to
thank
you
for
your
business
over
the
years
and
I
am
sorry
that
I
must
sell
out
at
this
time.
If
you
are
in
the
Biggar
area
drop
in
and
see
me
at
the
“Pool”.
Yours
truly
“Rene
Pellerin”
Mr
Pellerin’s
commission
income
from
the
insurance
business
for
the
year
prior
to
sale
was
$10,000.
Mr
Lillico’s
counsel
during
the
trial
led
evidence
to
the
effect
that
Mr
Lillico
took
a
very
keen
interest
in
the
law
in
so
far
as
his
business
was
concerned.
Mr
Lillico
testified
that
he
knew
the
income
tax
consequences
to
him
if
he
purchased
a
client
list,
in
which
case
the
expenditure
would
be
deductible
in
computing
his
income,
and
if
he
purchased
a
business
as
a
going
concern,
in
which
case
the
expenditure
would
be
on
account
of
capital
with
comparatively
little
of
the
amount
available
as
a
deduction
to
him
in
computing
income.
Mr
Lillico
was
also
of
the
view
that
a
restrictive
covenant
similar
to
that
contained
in
the
agreement
of
purchase
and
sale
with
Mr
Pellerin
was
not
enforceable
in
law.
Therefore
Mr
Lillico
says
he
was
very
careful
not
to
purchase
Mr
Pellerin’s
insurance
business,
but
only
a
list
of
his
clients.
He
did
not
know
why
he
included
the
restrictive
covenant
in
the
agreement
of
purchase
and
sale
especially
since,
in
his
view,
it
was
unnecessary
as
Mr
Pellerin
was
moving
away
from
Prince
Albert
to
Biggar.
In
fact
Mr
Pellerin
did
leave
Prince
Albert
once
the
sale
was
completed,
although
he
did
retain
his
general
insurance
license.
In
the
“Lillico
Insurance
Agency
Operations
Statement’’
for
the
period
ending
December
31,
1976,
the
$11,000
paid
to
Mr
Pellerin
is
described
as
being
paid
for
a
“list
of
customer
accounts’’
and
was
deducted
by
Mr
Lillico
in
computing
his
income
for
that
year.
By
agreement
dated
September
22,
1978
the
appellant
entered
into
an
agreement
with
Fred
Cluff
Agencies
Ltd
(“Cluff
Agencies’’)
of
the
City
of
Prince
Albert.
Cluff
Agencies
ws
primarily
in
the
business
of
selling
life
insurance
through
its
various
agents
but
also
carried
on
a
small
general
insurance
business
as
a
side-line;
Cluff
Agencies’
salesmen
tried
to
sell
general
insurance,
in
particular,
dwelling
and
automobile
insurance
to
its
clients.
Cluff
Agencies
operated
out
of
the
Prince
Albert
offices
of
Manufacturer’s
Life
Insurance
where
Mr
Cluff,
the
principal
shareholder
of
Cluff
Agencies,
was
employed.
The
agreement
with
Cluff
Agencies
reads
as
follows:
THE
VENDOR
carries
on
an
insurance
and
agency
business
at
the
City
of
Prince
Albert,
Saskatchewan
and
the
Purchaser
is
a
general
insurance
agent
conducting
his
business
under
the
name
of
Lillico
Insurance
Agency
at
Prince
Albert,
Saskatchewan;
THE
VENDOR
has
agreed
to
sell
his
insurance
portfolio
carried
on
at
the
City
of
Prince
Albert
and
elsewhere
in
the
Province
of
Saskatchewan,
to
the
Purchaser
and
the
Purchaser
has
agreed
to
purchase
the
same
on
the
terms
and
conditions
hereinafter
set
forth:
NOW
THEREFORE
THIS
AGREEMENT
WITNESSETH:
1.
The
Vendor
agrees
to
sell
to
the
Purchaser
all
of
his
insurance
portfolio
excluding
life
insurance
and
without
in
any
way
restricting
the
generality
of
the
foregoing
including
files,
records
of
customers,
clients
and
former
customers
and
clients
which
in
any
way
constitute
or
comprise
the
insurance
portfolio
of
the
Vendor.
2.
It
is
understood
between
the
parties
that
the
within
purchase
shall
not
include
any
furniture
or
fixtures
nor
accounts
receivable
but
only
the
insurance
files,
records,
policies
and
other
papers
and
documents
comprising
the
information
as
to
customers
and
purchasers
of
insurance
from
the
Vendor’s
insurance
portfolio.
3.
The
purchase
price
of
the
said
insurance
portfolio
shall
be
calculated
as
double
the
commission
earned
by
the
Vendor
for
the
twelve
(12)
month
period
preceding
the
first
(1st)
day
of
October,
AD
1978
and
shall
be
based
upon
those
commissions
earned
by
the
Vendor
from
the
preceding
twelve
(12)
month
company
statements
showing
the
purchase
and
sale
of
insurance
coverage
by
the
Vendor
during
the
twelve
(12)
month
period.
The
said
earned
commission
shown
on
the
said
preceding
twelve
(12)
month
statements
shall
be
doubled
and
that
figure
shall
constitute
the
purchase
price
for
the
said
business
as
herein
set
out.
The
purchase
price
shall
be
paid
as
follows:
(a)
The
sum
of
Five
Thousand
($5,000.00)
Dollars
upon
execution
by
the
Vendor
of
the
within
Agreement;
(b)
The
balance
as
above
calculated
upon
delivery
to
the
Purchaser
of
all
of
the
policies,
documents,
records
and
other
files
herein
agreed
to
be
sold
together
with
the
monthly
statements
establishing
the
Vendors
commissions.
4.
The
Purchaser
shall
have
the
right
to
possession
of
Vendor’s
insurance
portfolio,
its
lists,
documents,
records
and
other
materials
as
at
the
first
(1st)
of
October,
AD
1978.
5.
The
within
insurance
portfolio
is
sold
to
the
Purchaser
free
and
clear
of
any
debt
or
liability
and
the
Vendor
hereby
covenants
that
it
is
clear
of
all
debts
and
encumbrances.
6.
The
Vendor
covenants
with
the
Purchaser
that
he
will
furnish
all
necessary
proofs,
certificates
and
releases
as
shall
be
required
by
the
purchaser
to
establish
his
right
to
the
documents
hereby
sold
to
the
Purchaser
insofar
as
the
insurance
portfolio
hereby
sold
to
the
Purchaser
is
concerned
and
covenants
with
the
Purchaser
that
the
said
lists,
documents,
records,
and
other
information
and
material
hereby
sold
has
not
been
given,
provided,
sold
or
made
available
to
any
other
Purchaser,
person
or
legal
entity
and
that
the
Purchaser
John
C
Lillico
is
the
only
person
or
legal
entity
entitled
to
receive
the
same.
7.
The
Vendor
agrees
that
they
will
immediately
notify
all
brokers,
Insurance
Fidelity
and
other
companies
brokerages
and
agencies
with
which
it
has
previously
dealt
in
its
insurance
business
of
the
fact
that
the
Purchaser
has
purchased
the
said
Portfolio
and
will
take
all
steps
reasonably
necessary
to
favourably
introduce
the
Purchaser
to
them
and
its
clients
and
customers
both
present
and
past.
8.
The
Vendor
further
covenants
to
delivery
to
the
Purchaser
such
further
transfers,
assignments
and
acquaintances
that
may
be
necessary
for
the
purpose
of
more
effectively
conveying
the
Insurance
portfolio
and
its
records
and
documents
to
the
Purchaser.
9.
It
being
understood
and
agreed
that
in
consideration
of
the
Purchaser
having
entered
into
this
agreement
and
in
consideration
of
the
sum
of
One
($1.00)
Dollar
paid
by
the
Purchaser
to
the
Vendor,
which
payment
is
acknowledged,
the
Vendor
agrees
that
it
will
not
for
a
period
of
Ten
(10)
years
from
the
date
hereof,
either
directly
or
indirectly
or
as
a
partner,
shareholder
or
in
any
way
howsoever
undertake
the
sale
or
be
in
any
way
involved
in
the
general
insurance
business
within
a
radius
of
Fifty
(50)
miles
of
the
City
of
Prince
Albert,
Saskatchewan
and
that
the
Vendor
will
provide
the
Purchaser
with
an
agreement
and
undertaking
by
its
principal
shareholder,
Fred
C
Cluff
that
he
will
likewise
not
be
engaged
either
directly
or
indirectly
or
as
a
Shareholder
in
any
company
or
as
a
partner
associate,
salesman
or
advisor
in
the
insurance
business
other
than
life
insurance,
in
the
City
of
Prince
Albert,
Saskatchewan
or
within
Fifty
(50)
miles
radius
thereof
for
a
period
of
Ten
(10)
years
from
the
date
hereof
and
in
the
event
of
the
Vendor
or
the
said
Fred
C
Cluff
breaching
the
covenants
contained
in
this
paragraph
that
the
Vendor
and
the
said
Fred
C
Cluff
or
either
of
them
will
pay
to
the
Purchaser
such
amount
in
damages
as
shall
be
assessed
or
found
by
a
Court
of
competent
jurisdiction
to
have
been
suffered
by
the
purchaser.
10.
The
Purchaser
at
his
option
undertakes
to
sell
to
the
Vendor
such
insurance
policies
as
the
Vendor
shall
desire
and
agree
to
purchase
out
of
the
portfolio
hereby
sold,
which
policies
cover
insured
premises
located
in
the
City
of
Saskatoon,
in
the
Province
of
Saskatchewan,
and
the
parties
hereto
agree
that
the
purchase
price
thereof
shall
be
calculated
on
the
same
basis
as
the
terms
of
purchase
herein
con-
tained
by
the
Vendor
to
the
Purchaser,
namely
double
the
commission
earned
on
each
said
policy
so
sold
as
earned
for
such
policy
during
the
preceding
twelve
(12)
months
of
its
existence.
11.
Time
shall
be
of
the
essence
of
the
within
Agreement.
12.
The
terms
Vendor
and
Purchaser
and
references
herein
shall
include
the
executors,
administrators
and
assigns
of
the
Vendor
and
Purchaser,
respectively,
and
the
said
terms
and
references
thereto
in
the
singular
number
and
the
masculine
gender
shall
also
include
the
plural
number
and
feminine
gender
when
the
context
so
requires.
IN
WITNESS
WHEREOF
the
parties
hereto
have
hereunto
set
their
hands
and
seals
on
the
day
and
year
first
above
written.
|
FRED
CLUFF
AGENCIES
LTD
|
|
PER:
|
"Fred
Cluff’
|
|
SIGNED,
SEALED
AND
DELIVERED
|
|
|
in
the
presence
of
as
to
|
|
|
John
C
Lillico.
|
|
|
"John
C
Lillico”
|
|
John
C
Lillico
|
|
|
illegible
|
|
|
Witness.
|
|
On
October
27,
1978,
Cluff
Agencies
wrote
the
following
letter
to
its
general
insurance
customers:
Dear
Dr
Leon
Norris:
We
are
pleased
to
announce
that
effective
October
1st,
1978,
Fred
C
Cluff
Agencies
has
merged
with
Lillico
Insurance,
1308
—
Central
Avenue
in
Prince
Albert.
Our
decision
to
merge
with
Lillico
Insurance
was
made
after
a
careful
examination
of
other
available
offices
and
was
based
on
three
important
factors.
First
of
all,
in
the
interest
of
our
clients,
Lillico
Insurance
offers
a
broader
selection
of
other
insurance
markets
so
that
your
needs
can
be
more
closely
met.
General
Insurance
is
their
only
business,
which
means
more
exclusive
concentration.
Secondly,
Lillico
Insurance
operates
on
a
computer
accounting
system
which
will
prove
far
more
efficient
for
all
concerned.
And
finally,
the
qualifications
of
their
personnel
are
most
impressive.
John
Lillico
has
received
his
designation
as
a
Chartered
Insurance
Broker
from
the
Canadian
Federation
of
Insurance
Agents
and
Brokers.
There
are
fewer
than
150
of
these
qualified
people
in
Canada.
His
son,
Reid
Lillico
is
associated
with
him,
and
I
know
they
will
be
here
for
many
years
to
look
after
their
clients.
Personally,
since
I
plan
to
continue
my
involvement
with
clients
in
the
Saskatoon
area,
I
will
still
be
available
to
assist
clients
in
any
way.
The
billing
and
accounting
will
be
done
in
Prince
Albert,
so
the
service
will
not
be
changed
appreciably
from
the
past.
We
hope
to
have
everything
located
at
Lillico
Insurance
by
November
1st,
1978.
Telephone
764
3600.
Your
continued
support
will
certainly
be
appreciated.
Sincerely
Fred
Cluff
Agencies
Ltd.
"Fred
Cluff’,
President
The
contents
of
this
letter
had
been
reviewed
and
approved
by
Mr
Lillico
prior
to
being
sent
out
by
Cluff
Agencies.
Mr
Lillico
testified
that
the
transaction
with
Cluff
Agencies
came
about
when
Mr
Cluff
approached
him
in
1978
asking
him
if
he
wanted
to
buy
a
list
of
accounts
of
his
general
insurance
clients.
Mr
Cluff
suggested
a
price
equal
to
two
times
commissions
earned
during
the
twelve
months
prior
to
sale
date.
Mr
Lillico
testified
he
thought
that
price
was
a
little
too
high,
but
not
unreasonable,
and
since
he
thought
he
could
deduct
the
total
price
in
computing
his
income
for
tax
purposes
he
accepted
Mr
Cluff’s
offer.
Mr
Lillico
said
he
then
instructed
his
solicitors
to
prepare
an
agreement
on
the
basis
that
all
he
was
purchasing
was
a
customer’s
list.
Mr
Lillico
testified
he
did
not
instruct
his
solicitor
to
include
a
restrictive
covenant
in
the
agreement
with
Cluff
Agencies
and
in
his
view
paragraph
9
of
that
agreement
was
unnecessary
since
in
his
view
it
was
“unenforceable”.
Mr
Lillico
did
not
seek
any
legal
advice
as
to
whether
the
restrictive
covenant
was
enforceable
or,
if
it
was
not
wholly
enforceable,
whether
it
was
susceptible
of
being
severed.
Paragraph
9
was
also
unnecessary
in
Mr
Lillico’s
view
since
Mr
Cluff
was
selling
because
he
was
appointed
Saskatoon
Manager
for
Manufacturer’s
Life
Insurance
Company
and
was
moving
to
Saskatoon.
Mr
Lillico
testified
he
was
not
acquiring
the
Cluff
Agencies’
name,
work-inprocess,
staff,
equipment
supplies,
furniture
or
Accounts
Receivable.
Mr
Lillico
testified
that
most,
if
not
all,
general
insurance
policies
have
only
a
one-year
term
and
when
one
purchases
a
list
of
clients
from
another
agency
the
purchaser
has
no
“guarantee”
the
people
on
the
list
will
renew
their
policies
with
the
purchaser.
In
purchasing
such
a
list
the
purchaser
simply
obtains
knowledge
of
the
expiration
dates
of
the
policies
and
this
in
turn
permits
him
first
personal
contact
with
the
vendor’s
former
clients
when
the
clients
are
due
to
purchase
insurance
for
the
following
year.
Mr
Lillico
testified
there
were
1,045
names
on
the
customer’s
list
purchased
from
Cluff
Agencies;
of
these
customers
845
were
from
the
Prince
Albert
area
and
200
were
from
Saskatoon.
The
evidence
was
that
the
purchase
price
was
based
on
commissions
earned
from
all
1,045
customers.
After
the
first
year
Mr
Lillico
retained
70
per
cent
of
Cluff
Agencies’
customers,
after
the
second
year
57
per
cent,
after
the
third
year
42.7
per
cent
and
after
the
fourth
year
32.9
per
cent.
At
time
of
trial
Mr
Lillico
had
retained
46
per
cent
of
the
Prince
Albert
customers
and
only
7.5
per
cent
of
the
Saskatoon
customers
he
acquired
from
Cluff
Agencies.
Mr
Lillico
testified
that
Cluff
Agencies
has
competed
with
him
for
the
Saskatoon
customers
at
least;
Mr
Lillico
could
not
explain
why
he
lost
over
50
per
cent
of
the
Prince
Albert
customers
except
to
say
Prince
Albert
is
a
transient
area
and
many
of
the
former
customers
of
Cluff
Agencies
have
since
moved
out
of
town.
During
cross-examination
Mr
Lillico
was
asked
why
the
agreement
called
for
the
sale
of
the
records
of
former
customers
and
clients
of
Cluff
Agencies
since
all
policies
had
only
one
year
term,
as
well
as
their
present
customers
and
clients.
Mr
Lillico
replied
that
this
particular
phrase
was
inserted
by
his
solicitor
and
“solicitors
tend
to
draft
information
which
is
unnecessary”.
Again
in
reply
as
to
whether
in
his
view
paragraph
2
of
the
agreement
includes
the
sale
of
more
than
a
list
of
clients,
Mr
Lillico
said
he
only
acquired
a
list
of
clients
and
that
while
he
is
“not
an
expert
at
drawing
agreements,
I
wouldn’t
have
drafted
this
one”.
Also,
Mr
Lillico
was
not
satisfied
with
the
necessity
of
including
paragraph
7
in
the
agreement
since
he
said
he
had
been
dealing
with
over
20
insurance
companies
and
Cluff
dealt
with
only
two
or
three
general
insurance
companies;
therefore
he
had
nothing
much
to
gain
from
such
a
clause.
In
Mr
Lillico’s
view
paragraph
7
was
“not
relevant”.
Again,
as
far
as
the
restrictive
covenant
in
paragraph
9
is
concerned,
Mr
Lil-
lico
testified
it
was
not
enforceable
and
was
included
in
the
agreement
“without
my
instructions”.
Later
on
Mr
Cluff
started
dealing
with
some
of
his
former
clients,
even
some
clients
in
Prince
Albert,
and
Mr
Lillico
testified
he
did
not
attempt
to
enforce
the
covenant.
In
filing
his
income
tax
return
for
1978
Mr
Lillico
included
the
Lillico
Insurance
Agency
Statement
of
Operations
for
the
period
January
1,
1978
—
Dec
31,
1978;
included
as
an
expense
in
computing
the
net
loss
from
operations
in
the
statement
of
operations
was
the
sum
of
$51,127.76
for
“Agency
purchase”.
Mr
Lillico
also
testified
he
entered
into
the
transactions
hoping
he
would
keep
a
substantial
number
of
each
vendor’s
business
for
years
to
come,
notwithstanding
the
reduction
in
numbers
as
set
out
above.
He
agreed,
in
respect
of
the
Pellerin
acquisition,
to
pay
$11,000
since
“I’m
obviously
looking
ahead
for
more
than
a
one
year
advantage”.
Mr
Lillico
and
his
solicitor
have
asked
the
court
to
ignore
the
restrictive
covenants
contained
in
each
of
the
agreements
since
neither
was
enforceable.
In
their
view
since
these
covenants
were
not
enforceable
no
consideration
was
paid
to
either
vendor
for
such
covenant.
In
respect
of
the
Cluff
Agency
agreement,
I
am
asked
to
ignore
other
provisions
since
in
the
appellant’s
view
such
paragraphs
are
either
not
relevant
or
because
the
clause
or
wording
found
its
way
into
the
agreement
without
Mr
Lillico’s
instructions.
Mr
Lillico
testified
on
his
own
behalf.
My
impression
is
that
Mr
Lillico
is
an
astute
and
aggressive
businessman
who
knows
what
he
wants.
I
find
it
difficult
to
accept
that
when
he
read
the
Cluff
Agencies
agreement
prior
to
execution
he
did
not
query
his
solicitor
why
a
particular
clause
or
phrase
that
either
did
not
satisfy
him
or
which
was
completely
contrary
to
his
instructions
was
included
in
the
agreement.
If
Mr
Lillico
felt
so
strongly
about
a
particular
provision
I
am
sure
he
would
have
demanded
its
deletion.
I
doubt
that
when
Mr
Lillico
deals
with
any
adviser,
including
a
solicitor,
he
simply
“follows”
that
adviser’s
advice
without
question.
No
witness
was
called
to
testify
to
corroborate
either
Mr
Lillico’s
evidence
with
respect
to
negotiations
with
Mr
Cluff
or
his
instructions
to
his
solicitors
for
the
preparation
of
the
agreement.
Similarly
there
was
no
evidence
to
corroborate
any
negotiations
with
Mr
Pellerin
in
respect
of
the
restrictive
covenant
in
the
agreement
drafted
personally
by
Mr
Lillico.
The
Federal
Court
of
Appeal
has
rendered
two
decisions
which
are
particularly
helpful
in
deciding
the
issue
raised
in
this
appeal.
The
first
decision
was
in
the
case
of
Cumberland
Investments
Limited
v
The
Queen,
[1975]
CTC
439;
75
DTC
5309;
the
second
decision
was
in
the
case
of
The
Queen
v
Farquhar
Bethune
Insurance
Limited,
[1982]
CTC
282;
82
DTC
6239.
In
the
Cumberland
case
the
taxpayer
company
carried
on
the
business
of
a
supervising
general
insurance
agency.
All
of
the
company’s
business
was
handled
through
local
agents
with
sub-agents
who
dealt
directly
with
the
public.
The
appellant
entered
into
an
agreement
with
one
of
its
smaller
competitors,
Company
M,
whereby
the
appellant
purchased
for
$150,000
a
list
of
M’s
sub-agents,
card
index
systems
showing
the
names
of
all
of
its
policyholders
and
M’s
covenant
not
to
compete
against
the
appellant
in
the
future.
In
dismissing
the
taxpayer’s
appeal,
the
Court
held
that
the
acquisition
in
that
case
was
a
capital
asset
capable
of
increasing
the
taxpayer
company’s
income
and
that
the
expenditure
was
incurred
to
work
an
immediate
and
substantial
expansion
of
the
company’s
business.
Thurlow,
J
(as
he
then
was)
stated
at
5311:
It
was
a
lump
sum
payable
to
a
competitor
to
persuade
him
to
yield
up
his
business
and
goodwill
and
thus
not
an
ordinary
expense
incident
to
the
insuring
process
as
were,
for
example,
the
commissions
allowed
to
agents
for
their
services.
Justice
Thurlow
continues
at
the
same
page:
.
.
.
it
seems
to
me
that
it
was
not
anticipated
that
it
would
be
a
short-lived
advantage
but
must
have
been
expected
to
be
one
that
would
be
of
enduring
benefit
to
the
business.
Urie,
J
in
his
reasons
in
the
Cumberland
case,
(supra),
after
reviewing
various
relevant
authorities,
stated
at
5313:
In
my
view,
the
key
to
ascertaining
the
nature
of
the
expenditure
in
this
instance
lies
in
the
knowledge
that
the
Appellant
through
its
acquisition
enlarged
its
potential
income
structure
by
about
10%.
To
turn
this
potential
into
actuality
required
the
further
expenditure
necessary
to
ensure
that
the
sub-agent,
whose
names
were
acquired
would
do
business
with
the
Appellant.
The
latter
undoubtedly
would
be
outlays
made
for
the
purpose
of
earning
income
from
the
enlarged
income
earning
structure
and
thus
deductible
in
calculating
the
Appellant’s
taxable
income.
Viewed
in
this
way
it
is
quite
apparent
the
acquisition
was
a
capital
asset
capable
of
increasing
the
Appellant’s
income
and
the
Respondent
was,
therefore,
correct
in
disallowing
the
deduction
pursuant
to
section
12(
l)(b)
of
the
Act.
This
view
of
the
matter
is
in
no
way
affected
by
the
fact
that,
in
addition
to
the
once
and
for
all
expenditure
made
to
Mr
Hayes
expenses
would
be
incurred
thereafter
to
keep
the
sub-agents
in
the
Appellant’s
fold.
Such
recurrent
expenditures
can,
in
my
view,
be
analogized
to
those
made
by
the
owner
of
capital
assets,
such
as
production
machinery
for
repair
and
maintenance.
It
is
difficult
to
envisage
a
case
where
a
purchase
price
of
such
income
earning
machinery,
would
not
be
a
capital
expenditure
while
cost
of
repairs
and
maintenance
would
undoubtedly
be,
the
normal
course,
deductible
expenses.
The
same
may
be
said
for
the
once
and
for
all
payments
made
to
Mr
Hayes
for
the
capital
assets
he
sold
and
for
the
continued
expenditures
made
by
the
Appellant
thereafter
to
maintain
the
capital
asset
acquired
intact.
In
the
Farquhar
Bethune
case
the
taxpayer
company
purchased
the
customer
lists
and
file
information
of
another
insurance
company
for
the
purposes
of
assuming
that
company’s
fire
and
casualty
insurance
business.
The
Federal
Court,
Trial
Division,
found
that
the
evidence
established
that
the
taxpayer
company
did
not
purchase
the
business
as
a
going
concern
and,
since
it
relied
on
its
own
efforts
to
sell
policies
to
the
vendor’s
former
customers,
the
payment
was
for
the
purpose
of
gaining
or
producing
income
and
was
not
a
capital
outlay.
The
Federal
Court
of
Appeal
found
that
the
outlay
was
a
lump
sum
payment
for
the
acquisition
of
customers
and
goodwill
of
the
vendor
insurance
company
which
provided
the
taxpayer
with
a
capital
asset
of
enduring
benefit
to
its
business
and
therefore
the
outlay
was
properly
on
account
of
capital
and
was
not
a
business
expense.
While
it
is
exceedingly
rare
for
the
factual
situations
in
one
case
to
be
on
all
fours
with
the
facts
of
another
case
there
are
facts
in
both
Cumberland
and
the
Farquhar
Bethune
cases
which
are
sufficiently
similar
to
this
case
so
as
to
render
relevant
the
reasoning
of
the
Courts
in
both
Cumberland
and
Farquhar
Bethune.
In
the
Pellerin
transaction
there
was
an
immediate
sale
and
assignment
and
trasfer
of
the
vendor’s
interest
in
his
insurance
files
to
Mr
Lillico;
Paragraph
4
of
the
agreement
with
Cluff
Agencies
provided
that
“the
Purchaser
shall
have
the
right
to
possession
of
Vendor’s
insurance
Portfolio,
its
lists,
documents,
records
and
other
materials
as
of
the
first
(1st)
of
October,
AD
1978”.
The
agreement
with
Pellerin
contains
a
covenant
by
Mr
Pellerin
that
he
will
not
engage
in
the
insurance
business
within
50
miles
of
Prince
Albert
for
a
term
of
five
years
and
Paragraph
9
of
the
agreement
with
Cluff
Agencies
contains
a
covenant
by
Cluff
Agencies
that
for
a
period
of
ten
years
“it
will
not
.
.
.
either
directly
or
indirectly
or
as
a
partner,
shareholder
in
anyway
howsoever
undertake
the
sale
or
be
in
any
way
involved
in
the
general
insurance
business
within
a
radius
of
fifty
miles
of
the
City
of
Prince
Albert
.
.
To
paraphrase
Heald,
J
in
Farquhar
Bethune,
page
6243,
in
respect
of
the
non-competition
covenant
set
forth
in
both
the
Pellerin
agreement
and
paragraph
9
of
the
Cluff
Agencies
agreement:
it
should
be
pointed
out
that
the
viva
voce
testimony
of
Mr
Lillico
was
to
the
effect
that
he
did
not
direct
his
mind
to
the
necessity
of
non-competition
clause
because
Mr
Pellerin
was
moving
away
from
Prince
Albert
and
that
Mr
Cluff
was
moving
away
from
Prince
Albert
and
in
any
event
it
was
his
view
that
such
a
clause
was
not
enforceable;
Mr
Lillico
also
stated
that
he
did
not
know
why
he
included
the
non-competition
clause
or
how
it
found
its
way
into
the
Cluff
Agencies
agreement;
Mr
Lillico
also
stated
that
Cluff
Agencies
did
commence
to
compete
for
the
same
general
insurance
business
and
had
solicited
clients
on
the
list.
Based
on
all
of
the
evidence
submitted
during
the
course
of
the
trial
it
is
my
opinion
that
on
the
totality
of
the
evidence,
documentary
and
oral,
the
payments
made
by
John
C
Lillico
to
Rene
Pellerin
and
Cluff
Agencies
were
lump
sum
payments
to
a
competitor
in
return
for
which
the
appellant
received
the
general
insurance
business
of
each
of
Mr
Pellerin
and
Cluff
Agencies
in
Prince
Albert,
including
such
goodwill
as
those
businesses
possessed
as
of
the
date
of
the
respective
transactions
that
is,
as
of
April
27,
1976
in
respect
of
the
Pellerin
transaction
and
as
of
the
1st
day
of
October
1978
in
respect
of
the
Cluff
Agencies
transaction.
Justice
Heald’s
concluding
comments
in
the
Farquhar
Bethune
case
are
most
appropriate
to
the
factual
situation
in
both
the
Pellerin
and
the
Cluff
Agencies
transactions
and
deserve
to
be
paraphrased
here:
in
furtherance
of
both
agreements
and
to
ensure
that
the
goodwill
of
the
general
insurance
business
passed
to
the
appellant,
both
Pellerin
and
Cluff
Agencies
wrote
to
all
their
general
insurance
clients
advising
them
of
the
transaction
and
recommending
that
they
continue
their
general
insurance
policies
with
the
Appellant.
As
in
Cumberland,
(supra),
and
Farquhar
Bethune,
(supra),
it
is
my
opinion
that
the
advantages
accomplished
by
each
agreement
were
enlargement
of
the
appellant’s
income
earning
structure
by
the
addition
of
a
significant
amount
of
annual
premium
volume
and,
if
Mr
Lillico
did
not
wish
to
eliminate
a
competitor
in
the
general
insurance
business
by
acquiring
each
of
the
businesses,
he
did
prevent
another
competitor
from
purchasing
the
particular
business
from
either
Mr
Pellerin
or
Cluff
Agencies.
The
fact
that
the
annual
premium
volume
increase
was
reduced
in
subsequent
years
in
respect
of
the
customer
list
obtained
from
Cluff
Agencies
does
not
change
the
nature
of
the
transaction.
There
could
be
many
explanations
for
this
attrition.
Likewise,
the
fact
that
Cluff
Agencies,
at
a
later
date,
re-entered
the
general
insurance
business
and
competed
against
Mr
Lillico
for
the
same
business
does
not
alter
the
nature
of
the
transaction
in
1978.
The
fact
that
the
transaction
was
characterized
in
the
oral
evidence
of
Mr
Lillico
and
in
the
written
agreement
as
payment
for
the
Vendor’s
“insurance
portfolio’’,
which
was
to
include
the
insurance
files,
records,
policies
and
other
papers
and
documents
comprising
information
as
to
customers
and
purchasers
of
insurance
from
the
vendor’s
insurance
portfolio,
does
not
alter
the
true
nature
of
the
transaction.
I
am
of
the
opinion
that
when
the
“reality
of
what
transpired’’
and
the
“follow-up
procedure’’
carried
on
to
ensure
the
continuity
of
the
Pellerin
and
Cluff
Agencies
customer
relationships
are
scrutinized,
the
proper
conclusion
is
that
the
appel-
lant
acquired
from
each
of
Pellerin
and
Cluff
Agencies
a
capital
asset
capable
of
increasing
his
income.
I
therefore
have
the
view
that
the
Minister
was
correct
in
disallowing
the
deductions
pursuant
to
paragraph
18(l)(b)
of
the
Income
Tax
Act.
Accordingly,
I
would
dismiss
the
appellant’s
appeal
in
respect
of
the
1976,
1977,
1978
and
1979
taxation
years.
Appeal
dismissed.
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