Crosbie and Company Limited v. Minister of National Revenue, [1978] CTC 2091, 78 DTC 1083

A J Frost:—This is an appeal from a notice of reassessment dated November 2, 1973 with respect to the appellant’s 1972 taxation year wherein the amount of $125,044 paid to Winsor Insurance Agencies Limited pursuant to a letter of confirmation dated October 19, 1971, and claimed as a deduction from income, was [treated by the Minister as] an outlay' of capital within the meaning of paragraph 18(1 )(b) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The admitted facts are as follows:

1. The Plaintiff is a corporation which carries on business of an insurance agent in the Province of Newfoundland.

2. During the course of the 1971 taxation year the Plaintiff made an outlay of $133,167.00 to A Harvey and Company Limited and acquired a list of that company’s insurance customers (the “Harvey list’’).

3. The Minister disallowed the outlay for the Harvey list as a deduction in computing the Plaintiff’s income for the 1971 taxation year on the ground that it was an outlay in respect of capital within the meaning of that expression in paragraph 12(1)(b) of the Income Tax Act, RSC 1952, c 148, as amended (the “Act’’) as it read in respect of such year.

4. The effect of disallowing the outlay made to acquire the Harvey list was to reduce the business losses of the Plaintiff in respect of the 1971 taxation year.

5, The result of the calculations described in paragraphs 3 and 4 hereof was that no tax was payable by the Plaintiff in respect of the 1971 taxation year.

6. The Plaintiff duly objected to the reassessment in respect of the 1971 taxation year, and on December 20, 1973 the Minister notified the Plaintiff that he had reconsidered his notification having considered the facts and reasons set forth in the Notice of Objection and confirmed that no tax was payable for the taxation year 1971.

7. In 1972 the Plaintiff made an outlay in the amount of $125,044.00 to Winsor Insurance Agencies Limited and acquired a list of that company’s insurance customers (the “Winsor list”).

8. The Minister disallowed the outlay for the Winsor list as a deduction in computing the Plaintiff’s income for the 1972 taxation year on the ground that it was an outlay of capital within the meaning of paragraph 18(1 )(b) of the Act as it read in respect of such year.

There are two transactions involved in this appeal: (1) the Harvey transaction, and (2) the Winsor transaction.

According to the evidence, A Harvey and Company Limited (hereinafter referred to as “Harvey”) carried on an insurance business under the name of Harvey’s Insurance Agencies. The appellant acquired the Harvey business and/or the Harvey list for the sum of $133,167 in 1970. In consideration of the purchase price the appellant was appointed the official brokers of Harvey for a period of six years for all insurance matters. Harvey agreed to write all its customers and advise them that the appellant would look after their needs. Harvey assumed all liabilities prior to the completion of the agreement and retained all assets other than Harvey’s clientele. After the sale Harvey’s manager joined the staff of the appellant.

On the evidence it was established in connection with the transaction by which the Harvey list was acquired that the appellant:

(a) did not acquire the right to use the vendor’s name;

(b) did not acquire any agencies for insurance companies:

(c) did not obtain any rights to renewal of policies;

(d) did not acquire any assets of the vendor other than a list of its insurance clientele;

(e) did not acquire the vendor’s business as a going concern;

(f) did not take over any premises occupied by the vendor:

(g) did not require an undertaking by the vendor to cease carrying on any insurance business;

(h) did not assume responsibility for any losses of commissions on insurance business entered into by the vendor; and

(i) did not receive profits commission from insurance companies in respect of business written by the vendor.

It was counsel’s submission that because of the points enumerated above the appellant did not purchase an insurance business and that the outlay was an ordinary transaction made in the appellant’s course of business.

The Board’s view is that in so far as the facts stated touch on normal trading risks they are discounted in the price paid and do not alter the capital nature of the transaction.

An insurance company, incorporated or otherwise, is essentially a service organization selling insurance coverage to its customers for gain. When one insurance agency sells its customers list to another agency it is selling its main revenue-producing asset. For all practical purposes the sale of an insurance list is the sale of the business of the former owner. Normally the seller, as is the case here, goes out of business, except for the collection of accounts receivable and the disposition of its physical assets. The purchaser carries on with an enlarged group of customers and, if he has made a good deal, is able to increase his gross revenues from commissions without adding appreciably to his overhead costs, thereby increasing his net revenues. In the case at bar the impact of the Harvey list and the Winsor list appears to have been considerable. The financial statements show the following increases in revenues:

In view of the fact that the impact from the Winsor list came in late in the year ended March 31, 1972, its full benefit could not have been felt.

In Bainbridge Agency Limited v MNR, [1971] Tax ABC 878; 71 DTC 592, the Board dealt with a situation very similar to the one at bar. That appeal was. dismissed on the ground that the appellant had in fact bought the goodwill and business of the seller’s insurance agency. It was held that goodwill is an intangible fixed asset and represented the capitalized value of extraordinary earning power generated by the fact that old customers do not like to be disturbed in their business relationships. In that case a bare list was held to be a capital acquisition and, in my opinion, the same principles enunciated in the Bainbridge case (Supra) apply here.

With respect to the Winsor transactions, the questions at issue are similar in many respects to the Harvey transaction except that in this case it is necessary to determine whether or not the outlay of $125,044 was the result of a transaction occurring, after 1971. If the said transaction occurred before the date the appellant is not entitled to deduct, in computing income for its 1972 taxation year, any amount pursuant to paragraph 20(1 )(b) of the new Income Tax Act in respect of the outlay.

The terms and conditions of the said purchase were as follows:

(a) The Plaintiff purchased the insurance business of Winsor Insurance Agencies Limited for the sum of $125,044.00, the effective date of such purchase being December 31, 1971.

(b) The terms and conditions of the said purchase were as follows:

(i) Winsor Insurance Agencies Limited agreed that it would not engage in the insurance business for a period of ten years.

(ii) Gerald Winsor, the President and majority shareholder of Winsor Insurance Agencies. Limited agreed that he would never act in the insurance business other than as a senior sales and service agent for the Plaintiff.

(iii) Gerald Winsor agreed to service major accounts as required by the Plaintiff for a minimum of three years.

(iv) The Plaintiff agreed to take over the offices of Winsor Insurance Agencies and assume liability for the payment of rent thereon.

(v) The Plaintiff agreed to pay book value for the equipment and office furnishings owned by Winsor Insurance Agencies Limited and also agreed to assume the lease in respect of equipment rented by Winsor Insurance Agencies Limited.

It was not too clear from the evidence when the transaction took place which gave rise to the outlays in early 1972 and the general transfer of business records as of January 1. 1972. However, on balance I am satisfied that the date in question was prior to the 1971 year-end. The balance sheet of Winsor Insurance Agencies Limited reflects the sale transaction as of December 31, 1971. Also there were discussions between Mr Gerald Winsor and the Crosbies before that time and as Mr Percy Crosbie was in Europe in December of 1971 I can only conclude that the deal was made earlier in the year as evidenced by the letter of confirmation dated October 19, 1971. The deal is the transaction, for the purposes of the Act.

In respect. of both the timing question and the nature of lists purchased the appeal must be dismissed.

Appeal dismissed.