Farquhar Bethune Insurance Limited v. Her Majesty the Queen, [1981] CTC 35, 81 DTC 5028

Gibson, J:—This is an appeal from a reassessment for income tax for the taxation year of 1973 of Farquhar Bethune Insurance Limited.

Farquhar Bethune Insurance Limited submitted that in 1973 by contract dated June 14,1973 with Orville Kerr Limited, it acquired customer lists and access to the information in the latter’s files of its fire and casualty insurance business which the latter operated in the City of Ottawa for which it paid $75,000 (see Exhibit P-1). It further submitted that Orville Kerr, the owner of Orville Kerr Limited, in 1973 was in ill health and wanted Orville Kerr Limited to get out of its fire and casualty insurance business; that Orville Kerr Limited in this business in the main sold customers policies of fire and casualty insurance, issued for the most part by Travellers Insurance Company; and that in such policy files of Orville Kerr Limited were the names of its various customers for fire and casualty insurance policies, the type of policy issued, the coverage in the policies, and other like relevant information.

The issue in this appeal is whether or not this expenditure of $75,000 in respect to the contract (Exhibit P-1) was an outlay or expense that was made or incurred by Farquhar Bethune Insurance Limited for the purpose of gaining or producing income from its business within the meaning of the exception in paragraph 18(1)(a) of the Income Tax Act which reads:

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;

Farquhar Bethune Insurance Limited says it was such an outlay or expense.

The Minister says it was not, and instead it was a capital expenditure within the meaning of paragraph 18(1 )(b) of the Income Tax Act which reads:

In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(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 the subject re-assessment the expenditure was categorized as on capital account within the meaning of paragraph 18(1 )(b) of the Income Tax Act in respect to which the provisions of subsection 14(5) of the Income Tax Act apply, namely, that it would be treated as an “eligible capital expenditure’’ under paragraph 14(5)(b) of the Income Tax Act and become part of the “cumulative eligible capital’’ of Farquhar Bethune Insurance Limited qualified for a deduction computed pursuant to the provisions of paragraph 20(1 )(b) of the Income Tax Act.

John Henderson Farquhar, President of Farquhar Bethune Insurance Limited and Robert Kelson of Thorne Riddell, chartered accountants, gave evidence in respect to this contract and certain documentary evidence was also adduced.

From a careful consideration of the whole of the evidence I am of the view that this oral and documentary evidence established that Farquhar Bethune Insurance Limited by this contract Exhibit P-1 did not purchase the fire and casualty business of Orville Kerr Limited as a going concern. Instead, Farquhar Bethune Insurance Limited only acquired the customer lists and access to the information in the files of Orville Kerr Limited of the annual policies issued to the latter’s fire and casualty customers. Further, this evidence established that although there was a restrictive covenant in Clause 4 of the contract (Exhibit P-1), it was not operative and was gratuitously inserted by whoever drew that contract; and not only was it not operative, it was not intended to be so in that what was in the contemplation of the parties and one of the premises for this contract being entered into was the premise that Orville Kerr, because of ill health, would be ceasing in the ordinary course of events to carry on the fire and casualty business of Orville Kerr Limited. Further, this evidence established that Farquhar Bethune Insurance Limited also did not contract with Orville Kerr Limited to employ it or Orville Kerr and did not in fact employ Orville Kerr Limited or Orville Kerr personally to assist Farquhar Bethune Insurance Limited in trying to convince the persons who held annual fire and casualty policies of insurance with Orville Kerr Limited to buy policies of insurance from Farquhar Bethune Insurance Limited when the policies sold to them by Orville Kerr Limited expired. Instead, Farquhar Bethune Insurance Limited relied on its own efforts to sell the fire and casualty policies to these persons, and that was what was contemplated. In this latter connection, this evidence also established that Farquhar Bethune Insurance Limited in its efforts to obtain new business from these people, quite aside from any contractual obligation, however, did obtain the concurrence of Orville Kerr Limited to send letters to its former customers telling them what had taken place (see Exhibit P-2) and did cause certain newspaper advertisements to be published (see for example Exhibit P-3). But neither of these two facts are material in the determination of the issue in this case.

There are no special provisions in the Income Tax Act dealing with acquisitions of this type. Instead certain general principles of income tax law apply. Such general principles of income tax law applicable to the facts of this case are discussed for example in British Insulated and Helsby Cables, Limited v Atherton (1926), AC 205 (HL); and BP Australia Ltd v Commissioner for Taxation of the Commonwealth of Australia (1966), AC 224 (PC). In addition, some of the salient and material evidentiary matters where a business such as a general insurance business of this type is purchased and sold as a going concern are discussed in Cumberland Investments Limited v The Queen, [1975] CTC 439; 75 DTC 5309.

Referring to and considering all the salient and material evidentiary matters in this case and applying these general income tax principles to the facts of this case, in my view, Farquhar Bethune Insurance Limited has proven that the expenditure of $75,000 in the year 1973 was on income account in that there was no acquisition of the fire and casualty insurance business of Orville Kerr Limited as a going concern, and no acquisition of any tangible capital asset or any intangible asset such as goodwill* [1] (the most intangible of intangible assets which cannot be purchased as a separate asset apart from a business as a going concern) but on the contrary there was only an acquisition of customer lists and access to the information in the policy files on the fire and casualty insurance business of Orville Kerr Limited.

It follows as a consequence that the cost incurred in 1973 of $75,000 by Farquhar Bethune Insurance Limited for such acquisitions was for the purpose of gaining or producing income from its business and was therefore an outlay or expense within the meaning of the exception in paragraph 18(1 )(a) of the Income Tax Act.

The appeal is therefore allowed with no costs and the matter referred back for re-assessment, not inconsistent with these reasons.