William J Legere v. Minister of National Revenue, [1980] CTC 2202

The Assistant Chairman:— The Minister of National Revenue (the respondent), for each of the years 1972, 1973 and 1974, added to the reported income of William J Legere (the appellant) an amount being part of the amount which a corporation, William J Legere Enterprises Limited (hereinafter referred to as “Enterprises”), paid to the appellant in each of those years. In 1972 the amount added was $9,340.44, in 1973 it was $9,265.62 and in 1974 it was $6,021.30. The respondent took the position that those amounts were income from an office or employment within the meaning of subsections 5(1) or 6(1) of the Income Tax Act, SC 1970-71-72, c 63 as amended. The appellant contends that, on May 1, 1972, he and his equal partner, Marie Gauthier (hereinafter referred to as ‘‘Gauthier’’) (who later became Legere’s wife), in a non-arm’s length transaction sold their business carried on under the name of Town and Country Entertainment Agency to Enterprises for the sum of $59,013.48. Of that sum, $9,013.48 was for tangible assets and $50,000 was for goodwill. Since the appellant was an equal partner, Enterprises owed him $29,506.74. The respondent was of the view that the partnership had no commercial or transferable goodwill. If there were goodwill, it was personal goodwill to the partners Legere and Gauthier and consequently any amount paid to Legere “supposedly” on account of that goodwill was a payment as stated which was income within subsections 5(1) or 6(1) of the Income Tax Act.

The issue in these appeals thus becomes the question as to whether or not there was “commercial goodwill” or “transferable goodwill” in Town and Country Entertainment Agency which the appellant and his partner, Gauthier, could sell to a third person and, if there were, what its value was on the date of sale, May 1, 1972. Putting the same question another way—Was the goodwill in partnership that which is called personal goodwill so that it cannot be transferred unless the person who “has” that goodwill goes with the sale and that goodwill stays with the “purchaser” only as long as the vendor stays in the employ of the “purchaser”? It appears actually that that personal goodwill is an expertise which the purchaser will have to consider when he comes to arrange the salary of the person who has the expertise.

In the early 1960’s the appellant started his career as an entertainer, playing (and I am not sure of this phrase) town and country music in various hotels and lounges at least around the area known as Metropolitan Toronto, if not a larger area of Ontario. He was a professional musician. This lasted for about eight years, when he branched out into the booking agency business. For a while the two activities overlapped and, in the latter part of 1968, he commenced to confine his activities strictly to the agency business. The name under which that business was carried on was Top Country Entertainment Agency and this name was used until about the early part of 1970 when the name was changed to Town and Country Entertainment Agency. It had a logo of “T & C”. By this time (early 1970) Gauthier, who had joined the agency business after it started, was an equal partner with Legere. The partnership continued until the end of April 1972. It should be mentioned that all fiscal years ended on April 30. Financial statements were prepared for each year by the chartered accountant who was retained, William Browne. The statements were “without audit”. As of April 30, 1972, the business of Town and Country Entertainment Agency was sold to a newly incorporated Ontario company, Enterprises. No agreement of sale was produced but the total selling price was $59,013.48, of which $50,000 was for goodwill.

In his years as a musician and entertainer, the appellant had come to know other acts (performers) and hotels and lounges. When he became a booking agent, in effect he became a middleman; that is, he knew the hotels and lounges and he knew the acts and performers and then he endeavoured to bring them together. The appellant’s evidence, as I understand it, was: “I knew what the hotel or lounge wanted and I knew who could supply it”. Exclusive contracts exist insofar as an agent is concerned, but not really. The hotel operators get to know the agency and know it is good so that the partnership really had no exclusive contracts. Nor does it have them with performers. There are some, but they are discouraged. The fee the agency received was a percentage of the fee paid by the hotel and the fee received by the entertainer. The bulk of the agency’s business was in the provinces of Quebec and Ontario, with some in the three maritime provinces. Contact was made, especially in the early years, by Legere travelling to various communities where there were hotels and lounges to get to know the operators and what type of music they wished and also of course to let them get to know him. In addition, while at those lounges and hotels, the appellant would hear the entertainers then playing and, for his own purpose and future reference, he would judge their skills and abilities. It was in this manner that he would get to know musicians so that when a lounge or hotel wished a certain type of entertainment he could get the appropriate group for it. Needless to say he let it be known to the entertainers that he was in the booking agency business and, if they wished, he would endeavour to get bookings for them. As mentioned, while there were exclusive contracts both with hotels and lounges as well as entertainers, usually it was free lance work. Entertainers as well as hotels used more than one agency. Once made, the contact with a hotel or entertainer was kept alive by the appellant periodically sending to hotels pamphlets or brochures to let the hotel know the entertainer he had available for booking and to get from the groups updated information. According to the appellant, even if a lounge or hotel changed hands, because of those phamphlets or advertising in the yellow pages (a reference there to Town and Country only, with no reference to him), calls would be received to book entertainers from people he did not know.

In the opinion of the appellant as well as another booking agent, Mr Gordon, it took between two and four years to establish the business. Mr Gordon was in that business two years part time and two more years full time before he believed his business was established. The cash requirements were not great as the appellant had only about $800 invested at the beginning. The advertising is by the flyers or word of mouth among the hotel operators or the entertainers. As to a purchaser of his business, the most likely one would be a competitor who bought to eliminate a competitor or to increase his business with no real increase in overhead. Mr Gordon suggested yet another potential purchaser, namely, an employee of a booking agency who wanted to go out on his own. At the time of the hearing the appellant thought Mr Gordon had been in business about three years. Mr Gordon said it was five. Mr Gordon also stated that, while the two businesses (his and Enterprises) were about equal in size, he thought that his was the larger. There is more competition in the booking agency business today than there was in 1968 when the appellant started. The appellant believed he had a talent for recognizing the ability of an artist and consequently the hotel owners would respect his selection. His service was in bringing the two parties together and those parties would sign the contract. However, if he had an exclusive contract with a person or group, more services had to be provided to that person or group and they would be promoted a little more to the lounges and hotels. However, in the exclusive contract there was a provision that if the booking agency sold its business the artist could, on 90 days notice, terminate the exclusive contract.

Mr Browne, a chartered accountant, commenced private practice in 1967 and the appellant became a client of his in 1968. He has been the accountant of Enterprises since its incorporation. Mr Browne acted for people who carried on all types of businesses. He had acted for people who were buying businesses. He had purchased his own accounting practice and had paid for goodwill approximately the fees the business had received in the previous year. After consultation with the appellant and Gauthier, it was decided that $50,000 would be fair and reasonable. It was felt that $65,000 was too high. The goodwill was built up over the years and it was the name Town and Country with its “logo” wh«ch, in his opinion, became well known. Of course, while the name was well known, it was still in the circumstances, in Mr Browne’s opinion, necessary for the vendor to associate himself with the purchaser for six months or at least a reasonable time to introduce the purchaser to the hotels, lounges, etc.

Mr Browne did not produce a valuation report showing how he valued the goodwill. It was brought out that he was not a qualified business valuator. He considered the financial statements, thought the drawings of the owners and the expenses were irrelevant, and reviewed the contracts he had. He stressed the name T & C and Town and Country as important factors. He believed an organization was established if it could carry on after being sold. The goodwill value was about 80% of the prior years gross commission. He continued that the goodwill was worth $50,000 even without a non-compete clause, yet Mr Gordon stated that if there were no noncompete clause he doubted if the goodwill would be as valuable as it would be if it did have such a clause, and if the purchaser did not get the phone number as well it would be worth even less. Mr Gordon did make an oral offer to buy the appellant’s business in the spring of 1978, which he reduced to writing at the request of the appellant in the fall of that year, for $30,000. In making that offer he did not expect it to be accepted but hoped it would open the door to negotiations. He would want a non-compete clause, someone to stay on to introduce him, the name, the phone number and the equipment. The offer Mr Gordon made to the appellant was made after the appellant offered to buy out Gordon.

Donald Cowan, another booking agent, gave evidence. Mr Cowan, a qualified chartered accountant, had as a client Mr George King, a booking agent who carried on business under the firm name and style of George King Entertainment Services. Mr King had been the proprietor of this agency for about 30 years. The business was basically a one night specialist for parties, etc which was concentrated on the university or school area. In the early spring of 1967 Mr King died. The business had one employee at the time. This employee carried on over the slack summer months but in the early fall informed Mr Cowan that, if the executors did not get someone in to run the business within two weeks, she was leaving. He discussed the matters with the executors of the estate and, to encourage them to decide on what they should do, he stated regardless of the size of the best offer they had received he would match it. He bought the business for $2,500 and he stated he would have gone to $25,000 if they had asked. He is now in that business full time and that business is carried on under the name of George King Entertainment Services. He stated he gets his business because of the name. He doesn’t know whether or not the name Town and Country has a value but he would buy it. While the King agency had no standard customer list as they only hired for one night, it is however a repeat type of business. If he bought out the appellant’s business it would be to expand but he would not let them compete. He wanted protection. If there were not a non-compete clause, he would reduce the price by 75%. He has not dealt with goodwill in such an agency but he would look at the financial records to see how soon he could get his money back.

The Crown called as an expert business valuator Mr A M Rose. Mr Rose had been graduated from Sir George William College in Montreal, Quebec, with a Bachelor of Commerce degree; he was with Pitfield MacKay Ross Ltd as a foreign investment dealer for 15 years; with Jones Heward & Co as assistant treasurer and security manager for 5 years; and with the Department of National Revenue, Taxation, since 1975. He had taken a six month valuator course and had done many valuations of shares in public and private companies, notes, bonds, goodwill and debentures. He has appeared in other court cases on business valuations. The valuation in this case was done about a year ago and the formal written report a month ago. To determine the valuation of goodwill he had access to the financial records, considered the business involved, reviewed the contracts, made inquiries outside and reviewed valuations done by the department. Looking at the business, it was a competitive industry considering the number of firms in the agency business according to the yellow pages of the telephone book, it had two regular employees, a small number of clients under exclusive contract and there would have been little if any profit if a reasonable salary had been paid. As to contracts with musicians, they had to be approved by the American Federation of Musicians before the musician could perform; with the oral contracts, they were not of much value. Another feature to consider was the fact that the musician himself or the group itself had personal goodwill which of course did not belong to the agency. All things considered, Mr Rose was of the opinion that if goodwill existed it was personal goodwill and so, not transferable. He expressed the view that the name itself cannot generate income of itself, however, it possibly could if it had musicians under contract. If the former owner went with the business and there were a non-compete clause there would be value but the business would have no value over the tangible assets if there were not a non-compete clause. On cross-examination Mr Rose stated what was said in his report at clause 3(C)(b)—there would be no goodwill if there were no super profits. He also stated the covenant not to compete was not part of goodwill. He estimated that a good salary for a manager of the business in 1972 would be around $15,000 to $18,000.

It should be noted that the financial statements for the three fiscal years ending April 30 before the sale were as follows (in summary form):

(Net income is before management salaries and personal taxes and before $1,628 depreciation in 1971)

There are a few facts which should be noted from the evidence: the business which was sold had only been in existence about 3/2 years; really there was no office since all that was needed was a telephone; outside of the two partners there were no employees; there were, in reality, no exclusive contacts with hotels or entertainers; in the first couple of years the appellant worked up to 100 hours a week going around to hotels and lounges to make contacts. What did the business produce from a profit point of view? There was a net profit of about $20,000 and $26,000 in the last two years of the partnership and this was before any salary to the two partners. If a profit were made in a corporation, then of course salaries would be paid to the former partners and any profit remaining would be subject to taxation before there could be any dividends to the shareholders. What return would the purchaser get on his investment? Mr Gordon and Mr Cowan who carried on entertainment agency businesses stated that whet they would pay for the business would be greatly reduced if there were no non-compete clause and one said it would be further reduced if he did not acquire the telephone number.

The leading Canadian case of goodwill is the decision of Thorson, P in Herbert Wallace Losey v MNR, [1957] CTC 146; 57 DTC 1098. At 152 and 1101 respectively he states as follows:

But the value of the goodwill of a business is what a purchaser would be willing to give for the chance of being able to keep the connection of which it consists: vide Austen v Boys (1858), 11 De G & J 626 at 635; Lindley on Partnership, 10th Edition, page 523. And whether the goodwill of a business has a saleable value is a question of fact to be determined in each case: vide Hill v Fearis (1905), 1 Ch 466. But two things are clear. One is that the sale of the goodwill of a business does not include a covenant by the vendor that he will not compete against the purchaser. If the purchaser wishes the benefit of such a covenant he must provide for it apart from the goodwill. And it is also clear that the sale of the goodwill of a business does not carry with it a right to the personal services or the business ability of the former proprietor of the business.

With respect to the value of goodwill if the vendor drops out, he states at 153 and 1102 respectively:

Mr Lebrock was not able to express an opinion on what a prudent purchaser would have been willing to pay for the business by itself but his view was that if the appellant dropped out of it the value of the goodwill would have dropped to nothing. And Mr Gilmour said that where the earnings of a business are dependent on personal effort the value of the goodwill disappears with the disappearance of the owner. And he admitted, in effect, that the value of the goodwill of the appellant’s business without the appellant would have been a very minor amount.

Mr Browne was of the view that the goodwill was there even if there were no non-compete clause, while the two other agency operators called by the appellant stated that with no non-compete clause the value of the goodwill was considerably reduced and one said it was further reduced if the telephone number did not go with the business.

Mr Rose, the expert for the respondent, expressed the view that the goodwill was personal and not transferable. It had no value separate from the appellant. I have no hesitation in accepting his opinion over Mr Browne’s as to value and transferability. It would appear that Mr Gordon and Mr Cowan were of the view that the goodwill was transferable, however no considered opinion was given as to its value.

The result is the appellant has not destroyed in fact or law the assumptions upon which the assessments were based, with the result that judgment will go dismissing the appellant’s appeals.

Appeal dismissed.