Walter J Burian Et Al v. Her Majesty the Queen, [1976] CTC 725, 76 DTC 6444

Collier, J:—This action and seven others have been consolidated for all purposes. The plaintiffs in each action were, in 1969 and 1970, chartered accountants. They were, at that time, partners in a firm known as Young, Peers, Milner & Co. Subsequently there has been a merger. The present firm is known as Deloitte Haskins and Sells. Young, Peers, Milner & Co, prior to the merger, had essentially a local practice based in Vancouver, British Columbia.

In May of 1969 an agreement was made with one Charles F Graves and Cyril Vickers. Graves was also a chartered accountant. He had been in practice in Vancouver since 1960. In 1967 Cyril Vickers joined the operation. He became an equal partner in 1968. The firm carried on business under the name C F Graves & Co. It had a local practice similar to Young, Peers, Milner & Co. It was, however, substantially smaller. lis largest client was Fields Stores Ltd.

It is out of the agreement referred to that the present litigation arises. For the 1970 taxation year the eight plaintiffs seek to deduct from their incomes, as an expense, their individual proportionate share of an amount of $20,000 paid to Graves. Burian’s share is $3,666.67. The Minister of National Revenue, in each case, disallowed the deduction. He viewed the expenditure as an outlay on account of capital, relying on paragraph 12(1)(b) of the Income Tax Act.* The plaintiffs disagreed, hence this appeal.

Some time prior to May 10, 1969 Graves decided to withdraw from public practice. He had been offered a position with Fields Stores Ltd. His partner, Vickers, thought of taking over Graves’ interest, but decided against it. Graves approached Young, Peers, Milner & Co (hereafter “the plaintiffs”). They wanted to expand and saw an opportunity in that direction if they could acquire the C F Graves & Co clientele. They decided to acquire, as well, if they could, Vickers. His joining them was, according to Burian, key to the transaction entered into. By bringing Vickers in, it was felt they could then ethically approach the Graves & Co clients, and offer to service their accounts.

The agreement dated May 10, 1969 (Exhibit 1) was signed. Graves agreed to sell his half interest in the business of his firm. Vickers was to retain his half interest, but was to become a partner with the plaintiffs. Clause 1 of the agreement provides (in part):

Graves represents to the Purchaser^ that the billing on the Vendor’s accounts are approximately $130,000.00 per year and he hereby sells, transfers and assigns his interest in and the Purchaser hereby buys the half interest of Graves in the accounts and goodwill of the business of accountants carried on under the name of C F Graves & Co, for the sum of FORTY THOUSAND DOLLARS ($40,000.00) . . .

“Any references are to the so-called ‘old Act”.

fYoung. Peers, Milner & Co or, as I have referred to them, the plaintiffs.

The clause went on to provide for payment of $20,000 on execution, and the balance (with interest) to be paid one year later. There was provision for an increase or decrease in the balance payable, based on whether the gross fees obtained from Graves & Co accounts by the purchaser, in the succeeding year, exceeded or were less than the represented figure of $130,000.

At the time of this agreement, the plaintiffs had not examined, nor apparently been given the opportunity of examining, the C F Graves & Co books. The $40,000 purchase price was one fixed by Graves. There was, seemingly, little negotiation between the vendor and the purchaser.

I revert to Exhibit 1. “Vendor’s accounts” and “accounts and goodwill” were (“without limiting the generality thereof”) defined as follows:

“Vendor’s accounts” also mean all accounts with companies, corporations, partnerships, proprietorships, individuals and the like for whom the Vendor has in the past rendered professional service and regardless of whether the Vendor has in the past earned or is presently earning professional fees therefor;

“Accounts and goodwill” also mean files, books, billing records, balance sheets (whether annual or semi-annual), statements and all other material and documents necessary to conduct the business of Chartered Accountants, but exclusive of accounts receivable, office equipment and fixtures of C F Graves & Co.

Finally, Graves and Vickers agreed to discharge all liabilities of their firm. Graves agreed to a five year covenant restricting him from practising “in the profession of public accounting” in the relevant area.

At or about the time of the signing of this agreement, the Graves firm provided a list of its clients. There were approximately 175. The plaintiffs, around the same period, employed about one-half of the former bookkeeping staff of the Graves firm. Their duties had been in respect of the firm’s customers’ accounts. Where the others went is unknown to me. Some desks and chairs were purchased from the firm for approximately $2,000.

Its lease had expired, or was just about to. In these activities, the plaintiffs did not find it necessary to increase the physical size of their office premises. Vickers came to the plaintiffs in May or June 1969. A new partnership, effective May 1, 1969, was formed with the plaintiffs (see Exhibit 3). Vickers agreed to contribute $10,000 capital by a scheme restricting, for a specified period, his monthly drawings to certain figures. The files of the Graves firm clients were brought to the plaintiffs’ offices. These consisted of working papers, tax returns, annual statements and back-up material. Through Vickers, the plaintiffs were then able to approach the Graves firm clients in order to try and bring their business into the new partnership of the plaintiffs and Vickers.

All work in progress had been billed, as of May 10, 1969, by the Graves firm. As I understand it, no accounting work was done or billed by the Graves firm after May 10, 1969. For practical purposes, if not for legal purposes, the Graves firm went out of business.

The firm’s telephone number was kept for several months. Calls were routed into the plaintiffs’ office. Finally, in the one year period following the agreement of May 10, 1969, the plaintiffs billed $185,000 in respect of services rendered to former Graves firm clients.* [1]

The plaintiffs contend there was never a purchase of the Graves firm as a going concern. They assert it was not their intention to make such a purchase; they did not, at the time of the contract, have sufficient knowledge of the firm or its practice, to warrant such an arrangement. It is urged that all that was purchased was a list of customers. specifically, the following were not part of the sale and purchase:

(a) work in progress

(b) the firm name

(c) accounts receivable

(d) accounts payable

(e) the leasehold premises

(f) the physical assets

(g) the employee contracts.^ [2]

lt is further submitted that C F Graves & Co remained in existence after May 10, 1969; bills were sent out by Vickers on its behalf, the moneys collected and distributed by him; it was open to Vickers or anyone else to continue the C F Graves & Co business. While all that may be technically true, it ignores practicalities. The Graves firm was really out of business; its clients, because of Vickers’ new alliance with the plaintiffs, went to the new firm or elsewhere. If they went elsewhere, they obviously, on the facts here, did not continue with what, if anything, was left of the C F Graves & Co operation.

It is argued on behalf of the plaintiffs that because there was no purchase of the Graves firm as a going concern, there was no purchase of the goodwill of which the so-called “customers list’’ usually forms part. The cases deciding that, where there has been the purchase of a business and its goodwill the expenditure is on account of capital and not deductible against income, are, it is said, accordingly not applicable; the acquisition of Vickers makes those decisions distinguishable^ [3] any goodwill attached to Vickers. Counsel for the plaintiffs put their position in another way: only when a business is acquired as a going concern can a list of clients be considered part of the goodwill purchased, and the expense be classified as on the capital side.

Counsel for the defendant put forward two submissions in support of the contention the expenditure of $20,000 was not deductible:

(1) The plaintiffs purchased a one-half interest in a business as a going concern, including goodwill. The list of clients was part of the goodwill.

(2) Alternatively, if it could not be classified as a purchase of a business and its goodwill, it nevertheless fell under the general category of an outlay in respect of capital.

The well-known statement as to what is a capital outlay is that of Viscount Cave, LC in British Insulated and Helsby Cables, Limited v Atherton, [1926] AC 205 at 213-14:

But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.

The Supreme Court of Canada approved that passage in British Columbia Electric Railway Company Limited v MNR, [1958] SCR 133 at 137; [1958] CTC 21 at 31; 58 DTC 1022 at 1027. Abbott, J made this comment:

Since the main purpose of every business undertaking is presumably to make a profit, any expenditure made “for the purpose of gaining or producing income” comes within the terms of Section 12(1)(a) whether it be Classified as an income expense or as a capital outlay.

In MNR v Algoma Central Railway, [1968] SCR 447 at 449-50; [1968] CTC 161 at 162; 68 DTC 5096 at 5097, the Supreme Court of Canada said this:

Parliament did not define the expressions “outlay . . . of capital” or “payment on account of capital’. There being no statutory criterion, the application or non-application of these expressions to any particular expenditures must depend upon the facts of the particular case. We do not think that any single test applies in making that determination and agree with the view expressed, in a recent decision of the Privy Council, BP Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia, [1966] AC 224, by Lord Pearce. In referring to the matter of determining whether an expenditure was of a capital or an income nature, he said, at p 264:

“The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer.”

The frequently quoted words in the dissenting reasons of Dixon, J in Hallstroms Proprietary Limited v Federal Commissioner of Taxation (1946), 72 CLR 634 at 646-7, are, I think, applicable to this case:

. . . Once more, however, I shall endeavour to apply what I conceive to be the principles that determine whether an outgoing is on account of capital or of revenue. As a prefatory remark it may be useful to recall the general consideration that the contrast between the two forms of expenditure corresponds to the distinction between the acquisition of the means of production and the use of them; between establishing or extending a business organization and carrying on the business; between the implements employed in work and the regular performance of the work in which they are employed; between an enterprise itself and the sustained effort of those engaged in it.

He said at page 648:

. . . What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.

In this case, I do not think it necessary to engage upon a “juristic classification of the legal rights, if any, secured . . .” in the transaction heretofore described. The appellations ‘‘purchase of a business as a going concern’, “purchase of goodwill’, or purchase of a “list of customers” neither clarify the dispute nor provide the solution.

In my opinion, when one views the “practical and commercial aspects”* [4] of this purchase, the plaintiffs were in reality acquiring, or endeavouring to acquire, an opportunity for potential future custom or business—the trade of the clients of C F Graves & Co. The purpose, to my mind, was to bring into the existing business a further asset or advantage with the expectation of lasting benefit. The transaction, as I view it, was to strengthen and expand the plaintiffs’ business entity, the profit-yielding subject. It therefore affected the capital structure, and the expenditure of $20,000 was rightly treated as an outlay of capital.t [5] The acquisition of Vickers merely provided ethical access to the sought after asset or advantage.

The eight appeals are therefore dismissed. The defendant is entitled to costs. Technically there could be, in my view, eight sets of costs up to and including the consolidation order, and one set of costs thereafter. The problem arises, as I understand it, because it is felt that several different assessments in respect of several different taxpayers cannot be combined in one action. I therefore direct that there be oral or written submissions (as counsel may wish) on the question of costs.