Ronald Rooke v. Minister of National Revenue, [1976] CTC 2412, 76 DTC 1307

The Chairman:—This is the appeal of Ronald Rooke from an income tax assessment in respect of the 1971 taxation year.

By notice of reassessment dated September 30, 1974 the respondent disallowed an amount of $8,000 claimed by the appellant as deductible expenses incurred in 1971 for the purpose of earning income from the purchase of customers lists (insurance). The issue in this appeal is whether or not the said amount was a capital expenditure as claimed by the respondent.

The appellant, as insurance agent dealing in general insurance as well as in life insurance, entered into an agreement on May 21, 1970 With Hunter A Hamilton Limited, which, inter alia, also dealt in general insurance (Exhibit R-1).

In this agreement Hunter A Hamilton Limited agreed to sell to the appellant its general insurance business (excluding from it, however, that part of the business dealing with life, accident, sickness and disability insurance) for the sum of $40,000, which was to be paid to the vendor on June 1, 1970.

At the time this agreement was made, the beneficial owner, Mr Hunter A Hamilton, referred to in the agreement as the covenantor, was 70 years old and his company was in fact discontinued in 1970. It is not clear from the evidence whether Mr Hamilton personally continued in the life insurance business after 1970, but under the circumstances it is doubtful.

The appellant, who was in business for himself, admitted that, for a period of six months prior to the Signing of the agreement, he had relatively few customers as compared to those of Hunter A Hamilton Limited. He also testified that life insurance policies could not be sold or transferred from one agency to another and that, on the discontinuation of a life insurance agency, the life insurance companies would take over each life policy as a home account. However, he added that it was very probable that customers of Hunter A Hamilton Limited holding life insurance policies would also hold general insurance policies through that same agency, and those would be included when the appellant acquired the vendor’s general insurance business.

In my opinion, there can be instances in which the purchase of a customers list and nothing else might in itself be considered to be an operational expense made by an agent to acquire new customers and to produce more income. However, the circumstances and the facts surrounding the purchase of such a a list must be very carefully examined, because the customers lists and the insurance policies of those customers constitute the very essence of an insurance agent’s business.

There is, of course, no doubt that the appellant entered into the agreement with a view to earning more income. However, the circumstances in which the acquisition was made and the terms of the agreement signed by the appellant lead me to believe that more than the purchase of a customers list was contemplated.

Regardless of what may now be said as to what was being bought by the appellant, the preamble to the agreement makes it quite clear that what was being sold was the vendor’s general insurance business. The life insurance portion of that business could not legally be sold or transferred.

Paragraph 2 of the agreement specifies that the purchaser is acquiring an intangible asset, viz, goodwill, as well as copies of existing policies, company records, correspondence, expiration cards and addresses.

Paragraph 5 is a restrictive covenant whereby the vendor agrees not to carry on business as a general insurance agency (except for business relating to life, sickness, accident and disability insurance) within a radius of 50 miles of Metropolitan Toronto for a period of five years.

Paragraph 6 permitted the turnover of the vendor’s records to the appellant prior to June 1, the date of purchase, so that the appellant might proceed with the mailing of premium renewals for the month of June 1970 without any interruptions. On June 1, all the finalized physical records were to be delivered to the appellant, and the vendor undertook to immediately proceed to finalize any records not completed by June 1.

Paragraph 7 states in part: “The Vendor undertakes to notify all insuring companies of the transfer of ownership and to recommend to such companies that the purchaser be engaged thereby.”

Paragraph 8 stipulates that the agreement was made in accordance with The Bulk Sales Act and that all the documents necessary to comply with that Act would be provided by the vendor on closing.

A letter signed by Mr Hunter A Hamilton to all the clients of Hunter A Hamilton Limited states that his company would become associated with another firm as of June 1, 1970 and that Mr Rooke was going to assist him in looking after the general insurance customers’ interests (Exhibit R-2).

Whether or not Mr Rooke assisted Mr Hamilton, or vice versa, is immaterial. What is important, in my view, is that the circumstances of the acquisition and the terms of the agreement clearly reveal that what the appellant acquired was not merely a bone-dry list of customers. It was a going concern, complete with copies of customers’ policies, renewal cards, records and correspondence, as well as the vendor company’s important intangible asset, “Goodwill”. A great deal of care was taken by both the appellant and the vendor that the transition of the insurance business from the vendor to the appellant was intact and complete.

On the basis of the evidence before the Board, I conclude that the appellant purchased a general insurance business and the goodwill thereof for $40,000, an amount which, pursuant to paragraph 12(1)(b) of the Income Tax Act, RSC 1952, c 148, as amended, is not deductible in whole or in part because it constitutes an expenditure for the acquisition of a capital asset of an enduring nature.

The appeal is therefore dismissed.

Appeal dismissed.