Commerce Holdings Limited v. Minister of National Revenue, [1981] CTC 2169, 81 DTC 195

John B Goetz:—On August 1, 1975, the appellant purchased a list of property management accounts from Murdock and Maber Agencies Ltd. for the sum of $30,000. The list included 17 small apartment buildings, 24 houses, a portion of one house, 5 duplex units and a parking lot. The list did not include all the properties managed by Murdock & Maber Agencies Ltd. (hereinafter referred to as “Murdock & Maber”).

The appellant contends that the expenditure of $30,000 made by it for the purchase of the list of property management accounts from Murdock & Maber was an expense properly deductible from income and should not be considered in any way as a capital outlay or as an “eligible” capital expenditure.

The respondent, on the other hand, treated such expenditure as an “eligible capital expenditure” within the meaning of section 14 of the Income Tax Act, SC 1970-71-72, c 63, as amended, for the purpose of paragraph 20(1 )(b) and relied, inter alia, upon sections 3, 4, 9, 14, 19 and 20 of the Income Tax Act.

Issue

Was the expenditure of $30,000 for the purchase of a list of property management accounts an “eligible capital expenditure” or a deductible expense within the meaning of paragraph 18(1 )(a) of the Income Tax Act.

Facts and Findings

It was agreed at the outset of the hearing that there was no dispute as to the accuracy of the figures involved in the assessments. Mr Thomas Clifford McClocklin was the President and majority shareholder of Commerce Holdings Limited, a successor to McClocklin Real Estate Limited. Mr McClocklin says that the business of the appellant was that of general insurance agent, residential and commercial sales and property management. He stated that his business was the largest real estate brokerage firm in the Province of Saskatchewan. The business involved the hiring of a chartered accountant as a controller, a computer system and a general manager for each division of the business. The insurance part of the business has been sold six or seven year ago. Mr MCClocklin states that the insurance business is quite different from property management account business and that once people select an insurance firm and when one acquires such an insurance account, it is usually kept. He describes the property management business as being very competitive and highly precarious. Quite often if the property manager leaves, the owner of the property takes over and retention of such accounts is always difficult in that residential property management contracts had only a 30-day termination clause, whereas commercial property management requires four to six months to terminate. He acknowledged that the acquiring of the list of names for property management was a precarious venture. He had established a successful property management business and it is also one of the largest property management businesses in the Province of Saskatchewan. His accounts were acquired prior to the sale of their services by the company in that they have sophisticated management.

In the summer of 1975, Robert Murdock, a partner of Murdock & Maber, inquired of the appellant whether they would be desirous of purchasing the list of property management accounts, as he, Murdock wished to retire. An official agreement was entered into between Murdock & Maber and McClocklin Real Estate Limited, now known as Commerce Holdings Limited, August 1, 1975, wherein a list of property management accounts was turned over to the appellant for the sum of $30,000. The agreement included a clause indemnifying and saving harmless the appellant, of all sums owing with respect to any rentals or revenues accuring due prior to the 1st day of August, 1975. There was no assumption of any liabilities of Murdock & Maber with respect to any of the accounts listed on the property management account list which was filed. Murdock agreed to co-operate in every way in assisting the appellant to acquire new contracts with the accounts listed in Exhibit A-3. To indicate the speculative and precarious nature of the purchase of the list, it is interesting to note that 39% of the accounts never took out a property management contract with the appellant. This involved 117 units. Further, after holding property management for a short period of time, 35% of the accounts listed on Exhibit A-3 failed to renew their property management contracts with the appellant. That left 80 units (26%) of the whole list dated August 1, 1975, which the appellant still services.

The appellant did not purchase anything other than the list (Exhibit A-3). Murdock & Maber continued to do business in their own name, retained their own telephone number, their equipment, there were no advertisements and there was no restrictive covenant in the Agreement turning over the management accounts to the appellant. As Mr McClocklin says, the purchase of the list was purely a gamble. At the time of the purchase, McClocklin clearly understood that there was no question of acquiring any goodwill of Murdock & Maber, but merely the obtaining of the property management list without any files relating thereto, or transfer of any personnel from Murdock & Maber in the dealing with the property management accounts.

The list of property management accounts acquired by the appellant could be handled quite easily having regard to the size of its existing property management business and its computer system. Mr McClocklin says that his own property management business was handled by an individual manager who was a certified property management administrator. The appellant had all the necessary physical equipment to service further property management accounts and all that he wanted from Murdock & Maber was the list of property management accounts in Exhibit A-1. This certified property manager had as an assistant property manager a young man who was in his third year in the certified property managementcourseof studies.

Mr McClocklin described the units that were to be managed, having made a physical examination of the premises. They required day-to-day management and administration with respect to collections, accounting and reporting to the owner. It also involved day-to-day maintenance of buildings and land.

Mr McClocklin says that property management accounts were lost because the appellant insists that the properties that they manage be maintained at a high level and many owners proved to be reluctant to act upon the advice of the property management manager. Most of these problems arose with small apartment units and generally did not occur with respect to larger units such as highrises where the superintendent of such a building would be highly trained and amenable to suggestions of firms such as the appellant with respect to the operation of such highrises.

All of the accounts in the list provided by Murdock & Maber required approaching the owners and the negotiating of new contracts by the appellant. As indicated earlier, it is quite apparent that the acquisition of the list was indeed a speculative and precarious purchase, and certainly not one of a nature of long enduring benefit. Mr McClocklin indicated that it was common in smaller apartment blocks for the superintendent to prevail upon the manager to let him manage and operate the building as opposed to the appellant. This is one of the reasons why the appellant only retained 26% of the accounts acquired under the agreement between the appellant and Murdock & Maber. The appellant did not wish to become involved in any way in the business of Murdock & Maber and hence, of course, acquired no goodwill in the purchase. All the list really represented was an introduction to the appellant of possible new accounts for property management purposes. Although the appellant is successful in the property management business, Mr McClocklin indicates that it is known as insecure, competitive and volatile as opposed to insurance lists of clients.

The appellant treated his purchase as a “mere list of potential customers” all of whom had to enter into new contracts with the appellant, which subsequently as the evidence disclosed, did not happen.

I cannot and do not consider the acquisition of the list of property management accounts as being an acquisition on account of capital but rather an expense made for the purpose of gaining or producing income by the appellant in the conduct of the property management portion of his substantial business. The transfer of the list of customers did not include goodwill of Murdock & Maber which in part refutes the argument of the respondent that the acquisition was with the view to bringing into existence an asset or advantage for the enduring benefit of the appellant’s business. See Farquhar Bethune Insurance Limited v Her Majesty The Queen, [1981] CTC 35; 81 DTC 5028.

I hold that the appellant merely acquired a list of potential clients or customers without anything more and that the expenses for so acquiring are accordingly deductible as they were laid out to earn income, especially in the absence of a covenant by the vendor not to compete with the appellant purchaser with respect to the acquired list. The evidence is indeed clear that the appellant did not buy the property management business of Murdock & Maber who continued to carry on property management business of other accounts. There was no enduring benefit to be gained by the appellant, because there was no assurance that the customers’ list in the property management list would stay with the appellant, and the facts of this case bear that out. It was the responsibility of the appellant to solicit the persons named on the list for the purpose of having them enter into new property management contracts with the appellant. The appellant, through its servants, made contact with every party listed on the list of property management accounts but ended up with only 26% of the accounts which it now manages.

The following cases were cited to me by the appellant and duly considered:

Halliday Fuels Limited v MNR, 25 Tax ABC 186; 60 DTC 541;

Pioneer Laundry & Dry Cleaners Limited v MNR, 25 Tax ABC 344; 60 DTC 650;

The Robert Dixon Company Limited v MNR, 29 Tax ABC 131; 62 DTC 650;

Francis David Moyls v MNR, 41 Tax ABC 411; 66 DTC 553;

Harbord Investments Limited v MNR, [1970] CTC 717; 70 DTC 1488;

Sproule Insurance Services Limited v MNR, [1976] CTC 2096; 76 DTC 1083;

Simon, Voyer & Castelli Inc. v MNR, [1979] CTC 2503; 79 DTC 41.

The following cases were cited by the respondent and duly considered:

Irvin Charles Schacter v MNR, (No. 723 v MNR) [1962] CTC 437; 62 DTC 1271;

Dominion Dairies Limited v MNR, [1966] CTC 1; 66 DTC 5028;

Southam Business Publications Limited v MNR, [1966] CTC 265; 66 DTC 5215;

Canada Starch Company Limited v MNR, [1968] CTC 466; 68 DTC 5320;

Cumberland Investments Limited (formerly Douglas, Rogers, Limited) v Her Majesty The Queen, [1973] CTC 821; 74 DTC 6001; [1975] CTC 439; 75 DTC 5309;

Walter J. Burian v Her Majesty The Queen, [1976] CTC 725; 76 DTC 6444;

Her Majesty the Queen v Baine, Johnstone & Company Limited, [1977] CTC 556; 77 DTC 5394;

Her Majesty the Queen v James Sundstrum, [1978] CTC 421; 78 DTC 6300;

D R Milne & Company Ltd v MNR, [1979] CTC 2294; 79 DTC 334;

Most of the cases cited by the respondent involved the acquisition of a business as a going concern which naturally would have included the goodwill of the business.

Decision

For the above reasons, the appeal for the 1975 and 1976 taxation years is allowed and the matter referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed.