D’arcy J Marentette v. Minister of National Revenue, [1977] CTC 2147, 77 DTC 97

Delmer E Taylor:—This is an appeal from an income tax assessment for the year 1972. The matter at issue is whether or not an amount of $1,500 received by the taxpayer was on account of income or capital. In his Notice of Appeal the appellant did not specify any particular section of the Income Tax Act upon which he relied. The respondent relied, inter alia, upon subsection 15(1) of the Income Tax Act, RSC 1952, c 148, as amended in particular by SC 1970-71-72, c 63.

Facts

The appellant was a general insurance agent and operated in the City of Windsor from June 1963 until February 1, 1969 as a sole proprietor (hereinafter referred to as “Marentette”), under an agency agreement with State Farm Insurance and its affiliates (hereinafter referred to as the “Companies”). As at February 1, 1969, the appellant incorporated D’Arcy Marentette Insurance Agency Limited (hereinafter referred to as “Marentette Limited”), transferred to that corporation his interest in the sole proprietorship, and became the controlling shareholder. Part of the interest in Marentette transferred to Marentette Limited was goodwill in the amount of $50,000 for which the appellant was to receive payment over a period of time, the first payment occurring in 1972.

Contentions

The appellant contended that there was a transferable asset— goodwill in Marentette to that value—and that there were no restrictions in the agreement between Marentette and the Companies to prevent such a transfer. The respondent asserted that:

(a) the appellant, at all material times, was a shareholder of D’Arcy Marentette Insurance Agency Limited and the appellant and the Said corporation were related persons and are deemed to deal with each other not at arm’s length;

(b) at all material times, no goodwill existed in the business of an insurance agent carried on by the appellant as a sole proprietor;

(c) the payment by the company of $1,500.00 to the appellant in 1972 was a payment to the appellant qua shareholder, otherwise than pursuant to a bona fide business transaction.

Evidence

The appellant himself, and Mr Kelvin Guy, an accountant, gave verbal evidence in support of the appeal. Certain documents were filed and the one regarded by the Board as significant is the State Farm Agent’s Agreement between Marentette and the Companies (Exhibit A-1). The appellant stated that he had obtained the approval of the Companies for the incorporation arrangements. Also, both the appellant and Mr Guy put forward the view that the $50,000 calculation for goodwill could be supported because it was approximately 1 /2 times a reserve of $38,000, allegedly existing in Marentette at the time of incorporation of Marentette Limited. Mr Douglas Lyons, an assessor with Revenue Canada, pointed out for the respondent that there was no relationship between the $38,000 amount and any basis for a calculation of goodwill. For reference purposes certain portions of Exhibit A-1 are reproduced:

SECTION I

1. The Agent will solicit applications for insurance, collect initial premiums, membership fees and charges, countersign and deliver policies, reinstate and transfer insurance, assist policyholders and cooperate with adjusters in reporting and handling claims, avoid conflicts of interest, and cooperate with and advance the interests of the Companies, the agents, and the policyholders.

2. You are an independent contractor for all purposes. As such you have full control of your activities, with the right to exercise independent judgment as to time, place, and manner of soliciting insurance, serving policy- holders, and otherwise carrying out the provisions of this Agreement.

3. State Farm will furnish you, without charge, manuals, forms, records, and such other materials and supplies as we may deem advisable to provide. All such property furnished by us shall remain the property of the Companies. In addition, State Farm will offer at your expense such additional materials and supplies as we feel may be helpful to you.

4. Information regarding names, addresses, and ages of policyholders of the Companies; the description and location of insured property; and expiration or renewal dates of State Farm policies acquired or coming into your possession during the effective period of this Agreement, or any prior agreement, are trade secrets wholly owned by the Companies. All forms and other materials, whether furnished by State Farm or purchased by you, upon which this information is recorded shall be the sole and exclusive property of the Companies.

5. The expense of any office, including rental, furniture, and equipment; signs; supplies not furnished by us; the salaries of your employees; telegraph; telephone; postage; advertising; and all other charges or expense incurred by you in the performance of this Agreement shall be incurred at your discretion and paid by you. We anticipate that in the location or relocation of your office you will not unduly infringe on the established office location of any other agent. You agree that you will not establish any office in addition to your principal office without the prior approval of the Companies.

6. We will advertise, provide promotional materials, and participate in the cost of your advertising, in accordance with policies determined from time to time by us. You will not use any advertisements referring to us or identifying us in any way without our prior approval.

7. The fulfillment of this Agreement will be your principal occupation, and you will not directly or indirectly write or service insurance for any other company, other than a State Farm affiliate or through an assigned risk plan, or for any agent or broker, except in accordance with the terms of any written consent we may give you.

SECTION IV

1. In the event this Agreement is terminated

(a) two years or more after its effective date, or

(b) at any time after its effective date, if you were first licensed as an agent for the Companies prior to November 1, 1965, and if at the date of termination you have been continuously so licensed for three or more years,

the respective Companies will, subject to the conditions set forth in paragraphs 2 and 3 below, pay you or your legal representative, less any deductions for commission charge backs, as follows: (details not reproduced).

SECTION V

1. Since each party is relying upon the other or others to carry out the provisions of this Agreement, neither the Agreement nor any interest thereunder can be sold, assigned, or pledged; and no right in any sum due or to become due to you hereunder can be sold, assigned, or pledged without the prior written consent of the Companies.

Argument

Counsel for the appellant placed great emphasis on Section I, clause 2 quoted above, in support of the view that the appellant was an independent contractor. Further, he stated that the calculation of goodwill at an amount of $50,000 was reasonable, in fact conservative, given the basis provided by Mr Guy. Finally, he pointed out that the appellant had obtained all necessary approvals from the Companies in connection with the transfer of assets to Marentette Limited.

Counsel for the respondent argued that the contentions of the Minister in making the assessment had not been disproven and that the appellant had failed to make his case.

Findings

The Board points out that the assertions by the appellant do not directly meet the assumptions made by the Minister in making his assessment. To that extent the position of counsel for the respondent in pointing out that the appellant has not fulfilled his obligations is sound. Nevertheless, the Board has reviewed these assertions of the appellant on their own merits. First, the Agent’s Agreement (Exhibit A-1) refers to the appellant as an independent contractor and appears to provide him with considerable latitude. However, these provisions effectively limit the appellant’s discretion in an operational sense only to “exercise independent judgment as to time, place, and manner of soliciting insurance, serving policyholders . . .”. The appellant does not appear to retain great flexibility, responsibility or right of completely independent action. He was not in the commercial position to develop or control the business endeavour, his actual position being more comparable to that of a commission salesman than an independent contractor. The Board questions whether the business arrangements under the Agency Agreement would contribute materially to the development of any intangible assets such as goodwill, but to whatever degree it might have existed in Marentette, the residual benefit of such “goodwill’’ would flow ultimately to the Companies, even though the appellant considers that he would have made a substantial contribution to this goodwill. This claim by the appellant that even within the constraints of the agreement, by special, individual extra attention to the agency, he had built up just such a store of goodwill, identifiable with his own efforts, is not supported. The Board does not question that indeed he was a conscientious and good agent, but there is no evidence that his insurance agency was of a character greatly different from the other agencies for the Companies in the general area. Further, if such personal “goodwill” existed, there is no evidence that it would have been transferable at a recognized value to a separate business structure outside the ambit of the insurance operations of the Companies. The argument of the appellant that the payments referred to in Section V of the Agreement (partially reproduced) verifies the existence of such a “reserve” and thereby “goodwill”, does not withstand close scrutiny. This “reserve” which had been estimated at $38,000 by the appellant and his accountant, Mr Guy, was based upon continuing insurance coverage and insurance policy renewals by the existing customers. To consider it as any form of asset—and therefore earned, determined and transferable—must border on speculation. There is absolutely no guarantee (although it is unlikely) that the Companies could or necessarily would maintain the coverage after termination of the Agency Agreement. The appellant has taken a multiple of this $38,000 (less than 1 /2 times) and from that calculation arrived at the conclusion that the “goodwill” he was transferring to Marentette Limited should be valued at $50,000. Leaving aside for the moment that such a transfer of an asset might not be at arm’s length, it is at best only a mathematical calculation and has no basis in fact.

The Board takes the position that any “goodwill” which did exist in the agency would relate to the Companies, not to the appellant, and that there is no connection between the alleged $38,000 “reserve” and any personal goodwill of the appellant.

There is, however, one other aspect of the matter which has concerned the Board, arising from an examination of the documentation and a review of the verbal evidence given by the appellant. Accepting for sake of examination that the $38,000 “reserve of goodwill” (or a multiple based upon it) did exist as a result of the provisions in Section IV of the Agreement, the appellant’s contention is literally that this should be transferred to him free of income tax liability—albeit in this appeal through the intermediary utilization of a limited company. To the Board there appear to be two substantial errors in that line of reasoning. First, and without coming to any final conclusion, the question might at least be raised that this “reserve” has other characteristics—such as deferred income—which could make its receipt in any event subject to scrutiny for income tax liability. Second, there is no basis for receipt of any such funds except from the Companies and after termination of the agreement. The particular $1,500 with which this appeal is concerned certainly did not come from the Companies under Section V of the Agreement, and there has been no suggestion that the Agreement was terminated, only that the Companies agreed to its continuation under Marentette Limited rather than under Marentette. The Board therefore concludes that even on their own merits, the contentions of the appellant are not soundly based. It is simply worthy of repetition that the appellant has not damaged in any way the three basic assumptions of the Minister—“that the appellant and the said corporation were related persons and are deemed to deal with each other at arm’s length ; “no goodwill existed in the business”; and ‘the payment . . . of $1,500 . . . Was a payment to the appellant qua shareholder . . . .”

The appeal is dismissed.

Appeal dismissed.