Lucien R Ledaire v. Minister of National Revenue, [1977] CTC 2539, 77 DTC 391

Delmer E Taylor:—This is an appeal against income tax reassessments for the years 1971, 1972 and 1973, in which the Minister of National Revenue added to the reported taxable income of the appellant amounts of $11,595.01, $1,255.19 and $3,787.33 respectively, representing amounts received by or credited to the appellant for goodwill during the years in question. The respondent relied, inter alia, on subsections 15(1) and 15(2) of the Income Tax Act, RSC 1952, c 148 as amended by section 1 of c 63 of SC 1970-71-72.

Facts

The appellant is an architect now practising his profession in Nova Scotia as LeDaire, Morris and Associates Limited (hereinafter referred to as “LM Limited” or “the company”), a company incorporated in 1969. The appellant had been carrying on business under his own name in the area before that time. As part of the eventual transfer of assets and liabilities to the company an amount of $28,778 was established as the valuation for goodwill, and the amounts in dispute are the result of the appellant obtaining from the company, funds or benefits in payment for the sale of this goodwill to the company.

Contentions

The appellant asserted that commercial saleable goodwill was transferred and that he was entitled to be recompensed therefor just as for any other asset.

The respondent denied that the goodwill purportedly sold to the company had any commercial value, or value for tax purposes, and that the amounts received were deemed to be dividends within the meaning of the Income Tax Act.

Evidence

The appellant and two other witnesses gave evidence in support of the case. Essentially, this evidence was that the appellant had operated from 1965 through 1971 in a silent partnership arrangement with a Mr Arthur Morris. Mr Morris, at certain times during this period, contributed time, effort and money to the business. The incorporation which had occurred in 1969 had originally used the name Lucien R LeDaire and Associates Limited. The appellant, Mr Morris and a Mr Duffus had each taken one of the three common shares issued and the evidence is not clear to what extent the appellant used this company as his business vehicle up until 1971. This, however, does not appear to me to be relevant. But in 1971 when Mr Morris became active in it on a full-time basis, the partnership assets were transferred to the company and the company name was changed to its present form about 1972. Considerable detail was supplied regarding clients, operating roles and responsibilities of the two main participants (the appellant and Mr Morris), the staff and public view of the operation of the business, and the good reputation it enjoyed in the area.

Argument

The fundamental points brought out by counsel for the appellant were that although there was no written partnership agreement in the years 1965 to 1969, this should be no bar to the arrangement being considered a partnership; that architects and other professionals can accumulate and sell goodwill; that the basis for the calculation of the amount of goodwill in this case had been adequately supported; and although the business was small, it should nevertheless be accorded the same opportunity to benefit from the sale of such goodwill as should be available to any larger operation.

Counsel for the respondent argued that there was no evidence of a partnership; that Morris had only loaned funds to the appellant, and indeed he had been living away from the area for a considerable portion of the time material before 1971; that there was no evidence of “surplus profits’’, very little of any profit in fact; that no long-term contracts existed; that the transaction involving the sale of “goodwill” was not at arm’s length; that any “goodwill” which could be alleged to have existed was personal to the appellant and non-transferable.

Both counsel made reference to several of the accepted cases dealing with the subject of goodwill for income tax purposes.

Findings

The Board has dealt only briefly with the evidence and argument since the matter at issue appears to me to be very fundamental—the proposition by the appellant that the act of including in the asset package acquired by the company provided, in itself, viability to that which had been designated as goodwill.

In a non-arm’s-length transaction where the taxpayer is recompensed for the sale or transfer of an intangible asset to a corporation, the responsibility to establish first the existence of, second the value of, and third the transferability of the goodwill alleged, rests clearly with the taxpayer. It should not fall to the Minister to prove non-existence, non-value, or non-transferability to the corporation. Such a responsibility for a taxpayer is onerous, and is not discharged merely by indicating that the taxpayer had a degree of acceptability in his trade or profession in the area, that there was a certain amount of repeat business, and that the prospects for continued operations and even expansion seemed good. These are characteristics that might be found in almost any reasonably well-conducted business. Goodwill, although intangible, still must exist before any process of assigning an arbitrary value to it, or of arriving at such a value by the application of mathematical formulae, can be of great use to a taxpayer. For goodwill to exist it should be demonstrable that as an asset in itself, it would be an attractive acquisition to a third party.

I have carefully reviewed the attributes of the appellant’s business arrangement with Mr Morris, as detailed by counsel (which whether one terms it a partnership or not appears to me to be irrelevant), and I do not find therein factors which would be of more than passing interest to a party other than the participants in the arrangements themselves. The business record financially was not good; the product available—architectural services—was not unique (although it was contended it might have been provided to a client more economically because of the engineering background of Mr Morris); there were no major continuing contracts; the staff was not especially skilled or qualified; there were no substantial fixed assets; and there was no evidence of external interest by anyone in purchasing the business, least of all if the main element, the appellant himself, might have been excluded from any such transaction. There does not appear to be evidence that any discernible or quantifiable business goodwill existed prior to 1969, and merely the continuity of the business activity of the appellant without noticeable interruption, either at the time of incorporation in 1969, or at the date of the transfer of the assets in 1971, created of itself no goodwill.

Decision

The appeal is dismissed.

Appeal dismissed.