Michajlo Bishyk v. Minister of National Revenue, [1983] CTC 2693, 83 DTC 594

Taylor, TCJ [TRANSLATION]:—This is an appeal that was heard on June 13 and 14, 1983, at Montreal, Quebec, from an income tax assessment for 1976 in which the Minister of National Revenue taxed a sum of $125,000 from the sale of an establishment known as Taverne du Parc as “goodwill” rather than as a “government licence”. I heard the appeal as a member of the Tax Review Board but I am rendering this judgment as a judge of the Tax Court of Canada.

There was little dispute regarding the facts. Counsel for the appellant called as witnesses Mr Donat Beauchamp, an accountant, who had prepared a table in order to show that the profits from the business were not high enough to support a conclusion that this was goodwill, and Mr Boire, who has experience in appraising and selling taverns and who stated that in the early 1970s it was difficult to obtain a permit to sell beer and that such a permit made it possible to determine the value of an establishment on the basis of the number of gallons of beer sold. He also stated that in 1983 such permits were no longer of any value as a result of the more liberal attitude which the authorities had adopted toward issuing them since 1970, the year in which their value began to fall gradually but continuously.

Counsel for the respondent called as a witness Mr Gilles Patenaude, counsel for the Régie des permis d’alcool du Québec, who testified that such permits remained the property of the Société des alcools and that they could not be sold or transferred. Mr Jacques Pelletier, a valuator with the Department of National Revenue, stated that since the permit could not be sold or transferred, he had assigned no value to it during his review of the matter. He felt that the sum of $125,000 calculated on the basis of the very high gross profits realized by the business, was attributable to goodwill. The respondent called a final witness, Mr Henri Montpetit, the present owner of the establishment and the person who purchased it from the appellant. At the time of the purchase Mr Montpetit was well aware that the capital assets were not worth the purchase price, but he felt he was buying a business with good potential for profit, as indicated by the financial statements. He would certainly not have bought the business without a liquor licence, but he agreed that he had treated the extra cost as “goodwill” when he filled out his own income tax return.

Counsel referred to numerous decisions, but the following are the most relevant to the case at bar, in my view: Franciss Enderes and IEM Management Limited v MNR, [1980] CTC 2602; 80 DTC 1523 (currently under appeal and hereinafter referred to as “IEM”) and Irving Erenberg and Joseph Isenman v MNR, [1981] CTC 2138; 81 DTC 96 (also under appeal and referred to as “Erenberg”).

In IEM the Board held that the property in question was a “government right” and that the “consideration [was] received ... for allowing the expiry of a government right”. There is nothing in the case to indicate that the government had a right of supervision or any rights whatsoever over the patients’ contracts, which, it seems, could be transferred directly from one party to the other. In IEM the licences in effect were allowed to expire and new ones were issued. The term “transfer” was perhaps in general use in a commercial context, but there is nothing to indicate that it was accurate from a legal point of view.

IEM and the case at bar seem to have numerous points in common. The “right” in question came from the government; it could not be sold or transferred by the licensee; its original cost was minimal; it was renewable regularly, upon payment of a minimal additional fee. The business could be operated subject to government rules and regulations, and inspection of the premises; the licence could even be cancelled, where necessary. The right to operate the business could be granted by the government to another party on certain conditions, and the contract of sale was valid only on condition that the purchasers obtained such an operating licence. In my view there is only one basic distinction, namely that in IEM the operating licence was for an establishment that contained a certain number of beds, and this fact, it could be argued, practically guaranteed a certain income. To a certain extent this is what the Minister relied on in characterizing the sum in question as “goodwill”, maintaining that it was this practically guaranteed source of income that made the purchase attractive. This argument seems weak to me — neither a specific number of beds nor even the patients’ contracts were of any value to a purchaser who did not have a government licence authorizing the use of these two factors within the framework of a comprehensive commercial activity. There were perhaps certain elements of “goodwill” in IEM (see in that case the comments concerning Metropolitan Taxi Limited v MNR, [1980] CTC 2609; 80 DTC 1528, but the Board did not accept the Minister’s argument that the amount of the “goodwilll” should be attributed to the number of beds, even when considered together with the patients’ contracts.

In the case at bar it is impossible to maintain that there was a specific, guaranteed number of gallons of beer for the Taverne du Parc. The permit probably contained a condition concerning the number of seats in the tavern, which, together with the financial statements for the business’ previous years and its location, convinced the purchaser (Mr Montpetit) that the future profits would be satisfactory. To the extent “goodwill” is a calculation of anticipated future profits, it is understandable that the Minister might call the amount in question “goodwill”. However, the fact remains that the essential factor for the purchaser, the sine qua non, was the permit — a government right that would be granted to another party only on the expiry of the permit already in effect.

The following is the reasoning relied on by Mr Beauchamp, one of the witnesses for the appellant: since the purchase price was greater than the value of the physical assets and there was no calculable indication of “exceptional profits”, this excess could only be attributable to the government permit. However, the Minister’s witness explained that since the vendor could not transfer the permit, no value could be attributed to it; in any event, the books showed very substantial profits in previous years, indicating the existence of “goodwill”, according to Mr Pelletier. In my view neither of these theses is entirely correct, or entirely false. The appellant cannot simply allocate the excess of the purchase price to a permit which he did not own and which he could not transfer, unless it can be proved that there was no goodwill. The calculations provided by Mr Beauchamp are quite irrelevant, inconclusive and probably misleading. With respect to the re- spondent’s argument, it is true that the present permit could not be sold or transferred, but the government could issue another one to a new owner, and that is what it normally did. However, a new permit could not be issued as long as the old one was still valid. The calculations provided by the respondent do not establish clearly that the business was much more profitable than could be expected of a tavern of this type in a similar area. What is of capital importance, in my view, is the fact that the appellant effectively owned an asset, in addition to the physical assets of the tavern. This was not merely the government permit as such, but his personal right to let that permit expire. In my view this is what he agreed to do as part of the sale, and he received $125,000 for this purpose. I am unable to see in this case any point that would distinguish it substantially from /EM, (supra), but I note again, for the record, that the extreme positions taken by the parties in the case at bar do not reflect the comments made in Erenberg, (Supra), (at 2141 and 98):

The position taken by Mr Smith ignores the fact, which I think is obvious, that the market will pay for a licence at least as much as it would cost to obtain it on a fresh application. In a case such as this where licences of the type held by the appellants were not available on fresh application, the market would pay at least as much as the cost of obtaining, on fresh application, either a licence which would offer the operator equivalent economic advantages or the cost of obtaining the most advantageous licence plus a premium for an additional advantage inherent in the licence held. Unfortunately there was not direct evidence as to what that cost would be.

It would be quite possible to maintain that a value can be attributed both to “goodwill” and to “the expiry of a government right”; in Erenberg the Minister essentially advanced this thesis and the Board upheld it on appeal. I would also point out that according to the evidence in Erenberg the licences in question were transferable, entirely unlike the situation in the case at bar and in /EM.

The appellant’s basic proposition that he sold the government permit for $125,000 is not tenable, but he is nevertheless entitled to rely on the other provision concerning the fact that he allowed the government right to expire.

The appeal is allowed and the matter is referred back to the respondent for reconsideration and reassessment in accordance with the above reasons for judgment.

Appeal allowed.