The Chairman (orally: April 16, 1975):
1 This is an appeal by Donald L Neuls against a reassessment of the Minister of National Revenue for the 1971 taxation year. The point at issue is whether or not the sum of $24,000 included in the consideration for the sale of the assets of Neuls Construction to Neuls Construction Ltd, on the 1st, or as of the 1st, of January, 1971, is, first of all, a correct figure for goodwill; and secondly, or perhaps I should reverse the order, is there any goodwill that attaches to such a transaction? I should say at the outset that there is no question that this was a non-arm's length transaction and that what happened was that Mr Neuls simply incorporatel a sole proprietorship that he had been operating for some four years.
2 Briefly, the facts are that in 1958 Mr Neuls became a carpenter's apprentice at the age of about 23 or 24, with a grade eight education. He says that, through working, he improved his education, became a journeyman carpenter, and subsequently a supervisor or superintendent with J P Lord,—I think that was the company that he mentioned. In any event, he worked with two or three other general contractors until the year 1967. I should also say that at that time he had a farm of about a section and a quarter. The size of it doesn't really matter. At a later period he apparently acquired land in addition to his original holding. However, in the spring of 1967, he was asked to tender on the construction of a church and he was successful in getting that contract. Subsequently, in the same year, he built a water treatment plant, I think it was, and an Imperial Oil restaurant, or at least did some construction work for Imperial Oil. He said that he worked both physically and in a supervisory capacity and gradually gathered around him young people who were apprentices and who worked for him for part of the year and attended school for two years until they finished their apprentice training. He says that he continued to increase his staff from two to about six, and subsequently, I think, up to between ten and twenty. Generally speaking, except for perhaps one or two men, the nucleus of Neuls Construction was made up of the same people except that their skills improved as the years went on.
3 Apparently there was in the City of Regina a man by the name of Labenskas, who was a freelance estimator, who was obviously one of the more highly regarded men in his field in this area. As I said, the evidence indicated that he worked mainly for small contractors, but there is evidence that he also did work for one or two architects in this city.
4 As his business progressed, Mr Neuls sought the opportunity to bid on certain small projects that Shell Oil was constructing in this area, and he was successful in getting his name on their invitation bidding list and in obtaining work from them.
5 He gave his evidence in a very straightforward way and I was very impressed with the calm but determined manner in which he approached each question that was put to him. My assessment of him is that he is a rather intense man. The evidence indicates that while he was still working for other contractors he would work 48 hours a week, on a five-day week, and return to his farm, where he would, with the help of one main hired hand, attend to the seeding in the spring. However, as the construction business grew, he found it more economical to hire part-time help to harvest the grain crops on his property rather than to take time off from his business. He has stated that, in the year 1967, his work was perhaps equally divided between the farm and his construction work. This gradually lessened with respect to the farm, but I think he underestimates the time that he spent in developing the construction business as he did. From observing him and listening to him, I have the feeling that, regardless of where he might have been or what he might have been doing, he was continually endeavouring to increase his credibility as a reputable contractor. It is interesting to note that he still, to this day, is doing construction work for Shell. Mr Borax, who is in charge of construction of the type that Mr Neuls was doing for Shell back in the years '67 to '70, gave evidence that they still mail out to Neuls plans and invitations to bid.
6 The evidence (also from Mr Neuls) is that, when he worked for the other contractors that I have mentioned, he made approximately the same amount of money that was used in calculating the goodwill in issue in this case when, as the chartered accountant Mr Robinson said, in his arithmetical calculation of goodwill he used the figure of $7,200. I might say at this time that I cannot accept that figure, and I think I should give some explanation as to why I cannot give it effect. Mr Robinson was asked to make this arithmetical calculation on the basis of financial statements prepared by other people and including statements up to the current year. He has unquestionably used hindsight in showing justification for the figure that he arrived at, but he is quick to admit that he was not aware, for instance, as was given in evidence by Mr Neuls, that people doing the type of work and the amount of work that the appellant was doing would be worth eight to nine hundred dollars a month to a contractor. Mr Robinson also, in arriving at that figure, treated Mr Neuls as a part-time contractor, the rest of his time being divided between the petroleum construction company that he had set up, apparently for doing work for some oil companies, and the farm. On his own evidence, I cannot accept that this man Neuls was a part-time contractor. His evidence is that he worked and that he supervised, and that he physically took part in the construction when it was necessary. He dealt with Labenskas in the estimates, and was continually solidifying his construction company as each month went by. So I think there are too many imponderables in the evidence before me to allow me to accept the figure of $7,200 as a proper wage for such services.
7 But first I must decide whether or not there is any goodwill that follows such a transaction as took place as of January 1, 1971 when the proprietorship of Neuls Construction became Neuls Construction Ltd. At that time the proprietor's equity in the business consisted of only $8,000. He had only three trucks, and the evidence indicates that it is the case with most contractors in a business of this size that they own very little equipment, and either sublet or rent whatever equipment is needed to do the preparatory work on any jobs that they get. The evidence seems to indicate that the main work that Mr Neuls' employees would do would be in the carpentry end of the job, and I suspect that most, if not all, of the excavation or foundation work may have been sublet. However, the fact remains that he had built up a unit that had established a great credibility with a large, diversified group of people who were in a position to use the services of Neuls Construction. It is true that Labenskas was perhaps one of the most important people in the operation and it is also true that the young men that Neuls brought along and who were subsequently able to supervise and take charge of job construction, were able to do so because of the manner in which he operated his company. It is also, I think, a matter of some importance that Labenskas was never an employee after the sale of the assets of the proprietorship to the limited company. Here was a man that was perhaps most crucial to the operation who was neither an officer nor an employee and yet was almost always available to Neuls when needed. It strikes me as being a very salient feature that Labenskas was really coming to Neuls rather than the other way around. As the proprietorship progressed, it became obvious, in my view, on inference from the facts given in evidence, that Labenskas knew that Neuls was most likely to succeed in the future, and he was content to make his alleged, and I think proven, ability available to him for a relatively low stipend. Therefore, when the company was incorporated, the only outward change that took place was the addition of the letters Ltd to the name of Neuls Construction and the operation then moved en bloc into the corporate entity. I think the courts are now, and have been for some time, recognizing that one of the aspects that should be looked at in determining whether or not goodwill exists is whether or not there is a continuation of the service of the individual or individuals who have made the saleable company or proprietorship work.
8 It is argued that I must look at an arm's length transaction to see whether or not anyone would pay for goodwill in a business in which the proprietor had only an $8,000 equity. Perhaps that is what one does when one comes to calculate the figure. And clearly there is no definition in law or in any of the reported cases, in my view, that clearly defines goodwill or sets out in any precise detail when it shall be included and when it shall be excluded, except perhaps in the instance of professional men such as doctors who sell their practices to other doctors, and lawyers to other lawyers. But certainly it seems to me that the only firm law on the question of goodwill is that it cannot be split off and sold separately.
9 In my mind, I think the most important aspect in determining whether or not there was goodwill that could be sold to the limited company in 1971, is the continuing existence in the limited company of the group gathered by Neuls that had made his operation into a relatively successful construction business in a short period of time. I do not think I need to look at the figures to show that in the years after 1971 the company prospered. The mere fact that it is still in business, is operated by the same people and is on exactly the same terms with respect to Labenskas (except that, as the company apparently is now in a better financial position, it sometimes pays him a bonus), is indication enough to me that there did exist, on January 1, 1971, an amount of goodwill that could be sold with the other assets of the company. The matter of calculating its value is one of imprecise science almost verging on guesswork. In this case in particular, we have very little in the line of detailed financial statements and calculations to go on. In all fairness to Mr Robinson, he was merely given the financial statements and, as he said, he calculated an amount arithmetically from the information in those statements. He did this by taking the profits of the proprietorship as set forth in the financial statements, from which he subtracted an amount of $7,200 as the proprietor's salary, and came up with a net average figure of $19,813.40, less $7,200, or $12,613.49. From this he subtracted income tax at the rates then applying, arrived at a figure of profit after taxes, included interest on investment, and came up with a figure of $8,988.01. He then used multiples of three times the excess profits and four times the excess profits, and the results gave him an average of approximately $30,000 as being the proper value for the goodwill and, as has been argued by learned counsel for the appellant, the figure of $24,000 is well within that range. However, as I have pointed out, I cannot accept $7,200 as a fair salary for the proprietor. I also cannot overlook, and I do not think this fact should be overlooked, that the appellant lived in a house constructed by the company, and there is no evidence to show that this has been taken into account in any way. He is now occupying living quarters in the company's building, which is a converted or reconverted armoury in which he has a four bedroom dwelling wherein his wife and four children live with him. He says that, in his view, he has about 2,000 square feet of living space that is worth about $100 to $125 per month in Grenfell, which is the municipality where he resides.
10 I do not propose to know with certainty from the evidence that is before me what is the correct figure to be attributed to goodwill. I doubt that anyone could come up with an exact figure. Nor do I know, as I have said, of any precise formula that will be fair both to this appellant and to other taxpayers in the country. However, on his own evidence, and considering that he has the use of company facilities for his living quarters, I feel that a fair and proper proprietor's salary to be applied to this appellant is $12,000 per year. I base that, as I have said, on figures that have been presented in evidence by the appellant himself. Using this figure and then applying the formula used, or the calculations used, by Mr Robinson, I come up with a yearly net average figure of about $5,000. The question of the multiplier then to be used is one to be looked at most seriously, because Mr Robinson, who is a man of great qualifications, felt that, based on the figures that he used, and the risk in this type of business, the time it would take to get the money back would be three to four years. In my re spectful view, on the figures that I have come to, a man of the abilities of Mr Neuls, working with his experienced team, who continued on with the company as I have said, would have no difficulty in recovering that small investment in two years.
11 I therefore allow the appeal in part and fix the goodwill at $10,000 in round figures.
Email this Content