D R Milne & Company Limited v. Minister of National Revenue, [1979] CTC 2294, 79 DTC 334

M J Bonner:—The issue in this appeal is whether the sum of $28,850, being the price fixed by an agreement dated August 1, 1973, between the appellant and Black & Armstrong Limited (hereinafter “Black”) for the purchase by the appellant of, inter alia, an “Expiry List”, was a current outlay or a payment on account of capital.

The appellant carries on the business of an insurance agent and broker. The business falls into two divisions. Firstly, the appellant deals directly as agent with persons seeking insurance and, secondly, as provincial general agent it places insurance at the behest of sub-agents who themselves have clients who seek insurance.

In 1971 the Government of Manitoba introduced an automobile insurance scheme. In consequence the appellant’s business suffered massive premium losses. To combat such losses the appellant entered into the agreement with Black.

In its notice of appeal the appellant alleged:

1. In 1973 the taxpayer acquired customer lists of another insurance company at a cost of $28,850.

2. Because these lists consisted only of names, addresses, type and expiry dates of insurance policies they were only intended to provide “leads” to prospective clients.

3. There was no acquisition of a business, name or any other assets nor was there any assurance given that the customers on the list would place their renewal business with the taxpayer company.

The sole witness for the appellant was Daniel R Milne, the principal of the company. His evidence was that by the transaction in question the appellant in essence purchased information, namely, the names, addresses, policy numbers and policy details contained in Black’s expiry list.

Black carried on the business of real estate and insurance agents. The man who operated the insurance branch of that business had died and the insurance branch was therefore sold, according to Mr Milne, on behalf of the widow.

A review of the agreement between the appellant and Black makes it clear in my view that the appellant, by the expenditure in question, bought far more than information.

Under the agreement the vendor made certain representations and warranties which include the following:

(c) As of and from date of closing Black shall cease all of its active operations in connection with the insurance business and, without restricting the generality of the foregoing, will refrain from, either directly or indirectly, carrying on, being engaged in, concerned with or in any way interested in the sale, solicitation or servicing of any insurance whatsoever;

(d) Black presently places or influences the placement of approximately $10,000 of insurance of Western Dominion Investment Company Limited (hereinafter referred to as “Western Dominion”) annually and Black shall use its best efforts to cause Western Dominion to place or influence the placement of approximately $10,000 of insurance annually through Hammarstrand & Greeniaus;

(e) Black presently places or influences the placement of approximately $5,000 of insurance of Redwood Investments Co Ltd (hereinafter referred to as “Redwood”) annually and Black shall use its best efforts to cause Redwood to place or influence the placement of approximately $5,000 of insurance annually through Hammarstrand & Greeniaus;

(f) Black holds a valid provincial general agency agreement with the following insurance companies, viz: Pheonix Assurance Company of Canada;

Hammarstrand & Greeniaus Limited is the former name of the appellant.

The agreement called for the delivery to the appellant of the expiry list which was defined by the agreement to be:

All insurance agency expiry records, including, all Daily Reports and other documents, as determined by Hammarstrand & Greeniaus, which expiry records have been provided to Black by those insurance companies named in paragraph 1 of the Agreement, during the five years proceeding the date of the Agreement, which expiry records reflect all customers and clients that have placed insurance through Black as insurance agent or have been contacted by Black for the purpose of placing insurance, at any time during the five years proceeding the date of the Agreement.

The appellant was to have the ‘exclusive right’’ to solicit insurance business from the customers named in the expiry list.

Black agreed to send to its customers a letter in a form to be prepared by the appellant. Such a letter was in fact sent on Black’s letterhead stating:

For a number of reasons, not the least of which was the implementation of Autopac, we have decided to discontinue our insurance operations to concentrate on our other areas of business. In doing this, we have arranged for continuity in your insurance coverage by turning over all our files and records to Hammarstrand and Greeniaus Limited.

Our choice of Hammarstrand and Greeniaus Limited is based on the following:

Under the direction of Mr D R Milne, their competent staff can promptly and efficiently take care of all your insurance requirements.

Hammarstrand and Greeniaus Limited represents a wide variety of insurance companies, and we feel that with the changing conditions in the insurance business, this agency can provide the best in cost and service.

All policies issued by this office continue until renewal date at which time a representative of Hammarstrand and Greeniaus Limited will contact you personally.

From August 1, 1973 all inquiries regarding changes in policies, reporting of claims etc should be made to:

Hammarstrand and Greeniaus Limited 138 Portage Avenue, East Winnipeg, Manitoba R3C 0A1 942-3444

Confident that your future requirements will be completely taken care of, we wish to thank you for your patronage through the years.

A similar letter was sent to sub-agents.

The agreement provided:

11. It is understood and agreed that Hammarstrand & Greeniaus is not acquiring any asset of Black not specifically referred to herein and without limiting the generality of the foregoing, is not buying any goodwill, leasehold interest, furniture, fixture or book or other debts due or accruing due to Black, nor is Hammarstrand & Greeniaus undertaking to pay or satisfy any debts, liabilities, contracts or engagements of Black. Black warrants and agrees that until the closing of the sale Black’s business shall continue to be carried on in its usual and ordinary way.

The agreement contained the following restrictive covenant:

14. Black will not (for a period of 5 years after the execution of this Agreement) by themselves or in partnership or jointly or in conjunction with any person or persons as a manager, employee or agent of any other person, firm or company or syndicate or association, directly or indirectly carry on or be engaged in or be concerned in or interested in any way in the insurance business.

The benefits of the restrictive covenant were fortified by the following further provision:

15. Black covenants and agrees that it will prevent any use of the name within the Province of Manitoba “Black & Armstrong Limited” by any other person, firm or corporation in connection with insurance business and will take all action necessary at the expense of Hammarstrand & Greeniaus (or in the opinion of Hammarstrand & Greeniaus, desirable) to prevent such usage.

The appellant did not take over any of Black’s employees.

Mr Milne explained that the appellant’s purchase was not as successful, in terms of retention of Black’s customers, as had been desired. When the bargain was struck the appellant did not know that Black had been overpaying its sub-agents. When the appellant, after purchase, split commissions with sub-agents on a more realistic basis many of the former Black subagents ceased to do business with the appellant. As well, many of the direct clients of Black were not retained. However, the ultimate business outcome cannot affect the characterization of the transaction (see Her Majesty the Queen v Baine, Johnstone & Company Limited, [1977] CTC 556; 77 DTC 5394).

Despite the disavowal, in paragraph 11 of the agreement, of any sale of goodwill, the provisions of the agreement relating to the sending of the letter to clients and sub-agents and purporting to grant to the appellant the exclusive right to solicit Black’s customers seem, when coupled with the sale of the expiry list, to call for the taking of steps to effect the transfer of such goodwill as Black had to sell. The benefit of the connection with insurance customers which had been built by Black over the years was intended and required to be transferred to the appellant so far as was possible. Had this not been the intention the terms of the agreement relating to the letters to clients and sub-agents, the restrictive covenant and the restriction of the use of Black’s name in connection with insurance would all have been surplusage. It seems to me that the information contained in the expiry list was, as alleged, something of value but that the information was made known to the appellant in connection with a sale of goodwill.

The position in this case, as I see it, is not materially different from that considered by Noël, J, as he then was, in Southam Business Publications Limited v MNR, [1966] CTC 265, 66 DTC 5215. At page 277, [5222] His Lordship analyzed the nature of goodwill as follows:

In Foster v Mitchell, OWN 425, Teitzer J said at p 428 et seq:

As stated in Lindley on Partnership at p 476, the expression ‘goodwill’, when applied to a business is generally used to denote the benefit arising from connection and reputation and its value is what can be got for the chance of being able to keep that connection and improve it.

Or as put by Lord MacNaughton in Inland Revenue Commissioners v Muller, (1901) AC 217, at pp 223-224:

. . . It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first Start.

In Dominion Dairies Ltd v MNR, [1966] CTC 1 [66 DTC 5028], Gibson J held that in the purchase of a dairy business that part of the purchase price imputed to customers’ lists and related information was purchased goodwill and, therefore, a capital asset. In Schacter v MNR, [1962] CTC 437 [62 DTC 1271], Thurlow J also held that the purchase of an accountant’s list of accounts in the course of the purchase of his business was also goodwill and not deductible.

Goodwill is also, as stated in Trego v Hunt, [1896] AC 7, at p 8, with reference to what Wood VC said it must mean in Churton v Douglas (joh 174,188):

. . . every advantage, every positive advantage, if I may so express it, as contrasted with the negative advantage of the late partner not carrying on the business himself—that has been acquired by the old firm in carrying on its business, whether connected with the premises in which the business was previously carried on, or with the name of the late firm, or with any other matter carrying with it the benefit of the business.

In the same case reference was also made to what Sir George Jessel stated when discussing in Ginesi v Cooper, 14 Ch D 596, the language of Wood VC in the Churton v Douglas case (supra):

Attracting customers to the business is a matter connected with the carrying of it on. It is the formation of that connection which has made the value of the thing that the late firm sold, and they really had nothing else to sell in the shape of goodwill.

I conclude here, as did His Lordship in Southam, that goodwill was the only valuable thing the vendor had to sell.

In my view the appellant, by buying Black’s goodwill and by eliminating it as a competitor, sought to add Black’s income earning structure to its own. The cost of doing so is an outlay on account of capital within the meaning of paragraph 18(1 )(b) of the Income Tax Act (see Cumberland Investments Limited v Her Majesty the Queen, [1975] CTC 439, affirming [1973] CTC 821; 75 DTC 5309, affirming 74 DTC 6001).

By the notice of appeal the appellant purported to appeal from assessments for the 1972 and 1973 taxation years. The appellant had claimed to carry back 1973 non-capital loss to 1972. That claim was based on the premise that the $28,850 in question was an expense currently deductible in 1973. The most recent assessment for 1973 was made on February 10, 1978, and was a “nill assessment”, or more accurately a notification that no tax was payable for the year. That situation resulted from the carry back of a non-capital loss from 1974. The appeal from the assessment of tax for the 1972 year must be dismissed for the reasons set out above. In respect of the 1973 year it must be dismissed, not only for those reasons, but also because no appeal lies from a “nil assessment”.

Appeal dismissed.