Guy
Tremblay
[TRANSLATION]:—This
case
was
heard
in
Montreal,
Quebec
on
June
9,
1977.
Following
the
submission
of
written
pleadings,
it
was
taken
under
advisement
on
December
13,
1977.
1.
Point
at
Issue
The
Board
must
decide
whether
the
architectural
partnership
of
Roux,
Morin
and
Langlois,
which
included
the
appellant,
possessed
goodwill
at
December
31,
1972
and,
if
so,
how
much.
In
order
to
determine
the
amount
deductible
against
his
share
of
the
accounts
receivable
existing
in
the
partnership
at
December
31,
1971,
we
must
know
the
adjusted
cost
base
of
his
interest
in
the
partnership
at
December
31,
1972.
In
order
to
establish
this
adjusted
cost
base,
we
need
to
know
the
tax
equity
of
which
goodwill
is
one
part.
The
appellant
argued
that
the
existing
goodwill
amounted
to
$155,000.
The
respondent,
however,
contended
that
it
was
nil,
which
would
result
in
the
addition
of
$21,763.94
to
the
appellant’s
income
for
1972.
2.
Burden
of
Proof
The
burden
of
proof
is
on
the
appellant
to
show
that
the
respondent’s
assessment
is
incorrect.
This
burden
of
proof
derives
not
from
one
particular
section
of
the
Income
Tax
Act,
but
from
a
number
of
judicial
decisions,
including
the
judgment
delivered
by
the
Supreme
Court
of
Canada
in
R
W
S
Johnston
v
MNR,
[1948]
CTC
195;
3
DTC
1182.
3.
Facts.
3.1
The
main
facts
that
resulted
in
the
issuing
of
the
assessment
are
as
follows:
(1)
In
calculating
his
income
for
1972,
the
appellant
had
included
the
sum
of
$50,302.02,
that
is,
his
share
of
the
accounts
receivable
at
December
31,
1971,
in
the
architectural
partnership
of
Roux,
Morin
and
Langlois.
The
appellant’s
interest
in
the
partnership
was
40%,
Mr
Roux’s
50%
and
Mr
Langlois’
10%.
(2)
The
appellant
had
also
claimed
as
a
deduction
a
reserve
for
accounts
receivable
of
$50,302.02.
According
to
him,
this
sum
was
the
lesser
of
the
following
two
amounts:
the
above-mentioned
$50,302.02
in
accounts
receivable,
and
$65,070.44,
which
he
said
was
the
adjusted
cost
base
of
his
interest
in
the
partnership.
(3)
According
to
the
respondent,
however,
the
adjusted
cost
base
of
the
appellant’s
interest
in
the
partnership
was
$28,538.08,
which
left
$21,763.94
in
the
income
for
1972,
that
is,
$50,302.02
less
$28,538.08.
(4)
The
difference
in
the
appellant’s
and
the
respondent’s
data
is
explained
by
the
fact
that
the
respondent
considered
the
goodwill
to
be
nil;
goodwill
is
a
factor
that
must
be
taken
into
consideration
when
calculating
tax
equity
pursuant
to
subsection
26(9)
of
the
Income
Tax
Application
Rules,
1971.
The
appellant,
on
the
other
hand,
placed
the
value
of
the
goodwill
at
$155,000.
(5)
The
other
figures
that
must
be
taken
into
account
in
calculating
the
adjusted
cost
base
and
the
tax
equity
are
not
challenged.
Goodwill
remains
the
only
point
in
dispute.
3.2
The
main
facts
entered
as
evidence
before
the
Board
regarding
the
matter
of
goodwill
are
well
summarized
in
the
appellant’s
written
submission,
as
reported
below
in
paragraphs
1
to
27.
1.
Mr
Maurice
Roux
has
been
a
practising
architect
since
1952.
2.
Mr
Jean
Morin
joined
with
Mr
Roux
in
1956
to
form
the
architectural
partnership
of
Roux
and
Morin.
3.
In
1972,
the
partnership
was
known
as
Roux,
Morin,
Langlois
et
Associés
when
it
acquired
the
services
of
Mr.
Charles
Langlois,
an
architect,
as
a
partner.
4.
Messrs
Roux
and
Morin
also
acquired
the
services
of
another
architect,
Mr
Lagace,
in
the
Sept-Iles
region,
and
operated
under
the
name
of
Roux,
Morin
and
Lagace;
this
partnership
was
separate
from
the
one
in
Montreal.
5.
The
partnership
of
Roux,
Morin
and
Langlois
in
addition
had
four
full-
time
employees
at
December
31,
1972:
—
Mrs
Yolande
Capobianco,
a
secretary
with
the
firm
since
1964;
—
Mr
Jean
Daigneault,
an
architectural
draftsman
with
the
firm
since
1962;
—
Mr
Joseph
Fiore,
an
architectural
draftsman
with
the
firm
since
1957;
—
Mr
Serge
Perras,
an
architectural
draftsman
with
the
firm
since
1964;
6.
Architectural
draftsmen
were
in
great
demand
at
December
31,
1972,
and
had
been
for
a
number
of
years
because
of
work
resulting
from
the
Staging
of
the
Olympic
Games
in
Montreal.
7.
The
partnership
of
Roux,
Morin
and
Langlois
did
not
specialize,
and
did
all
kinds
of
construction
work.
8.
It
was
established
that
architectural
work
was
closely
connected
with
that
of
engineers
who
construct
buildings.
Whereas
the
engineer
was
in
charge
of
carpentry,
electricity
and
plumbing,
the
architect
was
in
charge
of
the
remainder
and
his
chief
concern
was
the
esthetic
aspect
of
the
building.
9.
It
was
established
that
draftsmen
frequently
moved
back
and
forth
between
architects’
and
engineers’
firms,
with
both
professional
firms
preparing
plans
and
supervising
the
work.
10.
The
Montreal
partnership
had
a
diverse
clientele,
primarily
composed
of:
—
school
boards,
—
cities
and
towns,
—
religious
orders,
—
private
and
public
corporations,
—
individuals
and
—
promoters.
11.
The
partnership’s
clientele
chiefly
resided
in
Ville
LaSalle,
Lachine,
Ville
St-Pierre,
St-Laurent
and
Dorval.
12.
Messrs
Roux
and
Morin
reside
in
Lachine.
13.
Some
of
the
partnership’s
clientele
are
repeat
customers
who
either
award
new
contracts
because
they
were
satisfied
with
previous
contracts,
or
who
want
additions
or
alterations
made
to
a
construction
that
the
partnership
had
designed.
Below
are
four
examples
cited
by
Mr
Jean
Morin:
(a)
a
school
board
gave
four
different
contracts
to
the
partnership:
these
were
for
the
construction
of
a
“polivalente”
school,
a
student
resi-
dence,
schools
and
the
repair
of
the
said
schools:
(b)
the
City
of
Lachine
gave
the
partnership
a
contract
for
the
construction
of
an
arena,
a
fire
hall,
a
community
centre
and
a
civic
centre;
(c)
Spinelli’s
Garage,
which
is
owned
by
two
brothers,
gave
the
partnership
four
contracts
for
enlarging
the
garage
and
others
for
constructing
a
showroom
and
building
each
of
the
brothers
a
home;
(d)
the
partnership
was
given
a
contract
to
convert
a
school
it
had
constructed
in
1969
into
a
“polivalente”
school.
14.
The
general
breakdown
of
the
fees
charged
by
an
architectural
firm
is
as
follows:
(a)
15%
of
the
gross
fees
for
the
sketch
(preliminary
plans);
(b)
55%
for
the
complete
plans
and
specifications;
(c)
30%
for
supervision.
15.
It
was
established
that
all
an
architect
had
to
prepare
was
the
sketch.
The
complete
plans
and
specifications
are
generally
done
by
draftsmen,
and
supervision
of
the
work
might
just
as
easily
be
entrusted
to
a
senior
architect,
junior
architect
or
a
senior
draftsman.
16.
Transferring
the
projects
of
Messsr
Roux
and
Morin
to
prospective
buyers
could
be
accomplished
fairly
easily,
by
introducing
the
buying
architects
to
their
clients,
and
by
urging
that
the
technical
team
that
was
on
hand
remain.
One
example
cited
was
the
case
of
Mr
Lagacé,
to
whom
Messrs
Roux
and
Morin
had
transferred
their
contracts
in
Sept-Iles,
and
who
in
the
second
year
of
operation,
namely
1973,
reported
a
$60,000
profit.
17.
Contracts
are
obtained
primarily
by
the
senior
partners.
The
junior
partners
and
even
the
draftsmen
nevertheless
thought
so
highly
of
the
firm
that
they
were
always
promoting
it
and,
in
a
number
of
cases,
attracted
clients.
18.
Both
the
junior
architects
and
the
draftsmen
came
into
contact
with
the
clients,
especially
when
supervising
work.
19.
One
way
to
make
contact
with
prospective
clients
is
to
mail
out
a
prospectus
containing
a
description
of
the
organization,
the
work
performed,
and
so
on.
20.
To
Mr
Morin’s
knowledge,
no
client
of
the
partnership
has
had
another
architectural
firm
enlarge
or
alter
one
of
its
constructions.
21.
The
client
must
approve
the
transfer
of
architects
working
on
a
project.
22.
There
is
a
mandatory
fee
if
another
architect
uses
the
partnership’s
plans
to
renovate
a
building
or
other
construction
which
the
partnership
originally
designed.
23.
Very
rarely
did
the
partnership
give
subcontracts
to
other
architectural
firms,
although
it
did
obtain
them
from
time
to
time.
24.
An
architect
may
receive
from
33
/3
to
50%
of
the
fees
on
work
given
to
another
architectural
firm.
25.
Mr
Morin
would
not
have
obtained
as
many
contracts
as
he
did
if
he
could
not
point
to
the
quality
of
the
organization
behind
him.
26.
A
firm’s
past
achievements
are
just
as
important
as
contact
with
the
client
for
obtaining
contracts.
2/.
The
partnership
had
$388,000
on
its
order
books
at
December
31,
1972
(these
were
contracts
that
had
been
signed
but
not
begun
or
not
completed).
3.3
The
facts
relating
to
the
issuing
of
the
notice
of
assessment
and
the
objection
and
appeal
proceedings
are
as
follows:
(1)
a
notice
of
reassessment
was
issued
on
April
14,
1975;
(2)
a
notice
of
objection
was
filed
on
May
26,
1975;
(3)
on
March
12,
1976,
the
Minister
made
known
his
reply,
upholding
the
assessment
issued
on
April
14,
1975;
(4)
on
June
9,
1976,
the
appellant
appealed
to
the
Tax
Review
Board.
4.
Act,
Case
Law
and
Comments
4.1
The
Board
does
not
feel
it
is
necessary
to
cite
at
length
the
sections
of
the
Act
and
Regulations
relied
on
by
the
parties,
since
these
are
not
being
challenged
and
are
not
involved
in
the
dispute,
which
is
solely
concerned
with
goodwill.
We
need
only
mention
the
main
sections
here:
section
23,
subsection
26(9)
and
paragraph
26(12)(g)
of
the
Income
Tax
Application
Rules,
1971,
and
subsections
53(1)
and
52(2)
of
the
new
Act.
4.2
The
parties
cited
a
long,
line
of
authority
and
referred
to
many
articles
on
legal
theory.
The
Board,
for
its
part,
referred
to
Georges-Henri
Couture
v
MNR,
[1978]
CTC
2687;
78
DTC
1511
and
Raymond
Ducharme
v
MNR,
[1978]
CTC
2562;
78
DTC
1414.
Although
these
judgments
cite
the
same
legal
theory
and
case
law,
they
differ
in
their
conclusions
because
the
main
facts
were
different.
In
these
judgments,
the
Board
summarized
sixteen
of
the
leading
judgments
handed
down
in
Canada
on
goodwill
in
the
last
twenty
years.
In
Ducharme,
the
Board
disallowed
a
large
portion
of
the
goodwill
because
it
was
personal
(and
so
not
permanent,
which
contravenes
one
of
the
basic
principles
of
an
intangible
asset,
namely,
that
it
must
be
permanent,
stable
and
durable).
Further,
basing
itself
on
the
case
law
and
articles
on
legal
theory,
the
Board
allowed
transferable
business
goodwill
because
of
the
organization
then
existing
(made
up
of
two
specialists,
excluding
the
appellant
and
two
secretaries)
of
a
firm
of
management
consultants,
and
also
because
of
contracts
then
current.
These
conclusion
were
based
on,
inter
alia,
Donald
L
Neuls
v
MNR,
[1975]
CTC
2215;
75
DTC
170,
and
Jack
Richard
Thomas
v
MNR,
75
DTC
37.
It
relied
on
the
basic
components
of
general
business
goodwill
as
set
forth
in
the
articles
on
legal
theory
and
case
law:
length
of
time
the
business
has
been
in
operation;
past
profits;
the
competence
of
employees;
good
relations
between
the
business
and
its
clients;
a
competent,
experienced
team
of
managers;
current
contracts,
and
so
on.
The
evidence
entered
in
the
case
at
bar
reveals
an
impressive
number
of
points
that
are
solid
proof
of
general
business
goodwill,
such
as
the
following:
(a)
the
firm
has
been
operating
since
1956;
(b)
it
has
a
stable
organization
with
three
architects,
three
draftsmen
and
one
secretary;
(c)
it
has
a
well-established
repeat
clientele
owing
to
the
serious,
professional
manner
in
which
work
is
performed;
(d)
the
firm
had
$388,000
worth
of
contracts
that
had
been
signed,
but
not
yet
begun
or
not
completed.
When
we
consider
that,
at
bottom,
goodwill
is
based
on
earning
Capacity,
it
is
clear
from
the
few
points
mentioned
above
that
such
a
capacity
existed.
4.3
Might
all
or
part
of
the
earning
capacity
in
the
case
at
bar
be
considered
personal
goodwill?
The
respondent
advanced
a
number
of
arguments
in
his
pleading.
4.3.1
In
the
course
of
the
hearing
it
was
established
that
a
large
percentage
of
the
clientele
were
obtained
either
through
the
partners’
or
even
the
employees’
personal
contacts,
or
through
the
mailing
of
prospectuses
on
the
partners’
qualifications.
Was
this
not
a
sign
of
personal
goodwill
and
an
absence
of
permanence?
Even
though
personal
contact
could
have
accounted
for
a
large
part
of
the
clientele,
it
was
nevertheless
established
that
almost
as
large
a
part
of
the
clientele
were
persons
who
had
had
work
done
in
the
past.
In
the
Board’s
view
if,
at
the
outset
of
a
career,
personal
contact
is
almost
the
sole
means
of
attracting
clientele,
this
is
no
longer
so
after
a
number
of
years
of
practice.
The
quality
of
the
work
done
and
the
resultant
good
reputation
assume
more
importance.
Someone
will
not
ordinarily
give
a
professional
work
to
perform
if
the
latter
is
incompetent,
even
though
he
is
a
friend
or
acquaintance.
There
is
no
business
that
has
not
at
some
time
or
another
needed
personal.
contact,
courtesy
and
human
relations
either
to
obtain
or
retain
clientele.
Some
institutions
make
their
employees’
courtesy
a
key
feature
of
their
advertising.
This
does
not
mean,
however,
that
the
earning
capacity
resulting
from
all
these
personal
relations
is
personal
goodwill.
4.3.2
Are
not
the
facts
that,
in
the
contract
with
the
client,
the
rights
of
the
parties
are
not
transferable,
that
the
contract
expires
with
the
death
of
the
professional
or
professionals
party
to
the
contract,
or
if
they
are
given
a
suspension,
and
that
a
professional
can
only
undertake
work
specified
in
the
agreement,
indicative
of
personal
goodwill?
In
the
contract
entered
in
evidence
in
court,
the
partnership
of
Roux,
Morin,
Langlois
et
Associés
was
the
contracting
party,
and
not
the
appellant
or
one
of
his
partners
in
particular.
Further,
as
a
general
rule,
even
though
the
contract
is
concluded
with
a
partnership,
the
latter
does
not
have
the
right
to
transfer
its
rights
to
someone
else.
If
a
partnership
is
selected
for
its
competence
and
organization,
it
obviously
cannot
substitute
a
new
organization
for
itself
unless
the
other
party
is
informed.
The
Board
does
not
therefore
see
these
as
arguments
in
favour
of
personal
goodwill.
4.3.3
Is
there
also
not
something
transitory,
impermanent
and
nondurable
in
the
fact
that
some
of
the
clientele
are
located
in
the
vicinity
of
the
partners’
office?
The
Board
does
not
concur
with
this
opinion.
Such
a
thing
is
normal.
Besides,
there
is
also
evidence
that
the
partnership
had
contracts
in
Sept-Iles
even
before
an
office
opened
there.
4.3.4
Counsel
for
the
respondent
cited
Lucien
Fl
Le
Daire
v
MNR,
[1977]
CTC
2539;
77
DTC
391,
which
concerned
an
architect
who
incorporated
his
architectural
firm
in
1969,
setting
goodwill
at
$28,000.
According
to
Delmer
E
Taylor,
CA,
the
Member
who
dismissed
the
appeal,
the
financial
records
were
incorrect,
and
there
was
no
qualified
Staff
nor
sizable
current
contracts.
No
one,
apart
from
the
appellant
through
a
corporation,
would
have
been
interested
in
buying
this
business.
This
case
cannot
apply
to
that
at
bar
where
the
organization,
qualified
staff
and
current
contracts
could
attract
a
third
party
and
are
hence
transferable.
4.4
It
now
remains
to
establish
the
value
of
the
goodwill.
The
appellant
substantiated
his
valuation
by
three
different
valuation
methods:
gross
fees,
net
profits
and
current
contracts.
The
respondent
did
not
call
witnesses.
4.4.1
Gross
Fees
Method
Taken
once,
the
average
gross
fees
for
the
last
six
years
of
the
partnership
are
$155,000.
The
respondent
did
not
challenge
the
absolute
figure,
although
he
did
dispute
that
it
represented
goodwill.
This
gross
fees
method
was
used
in
W
E
Butler
et
al
v
MNR,
[1967]
CTC
7,
67
DTC
5019,
which
cited
an
article
that
appeared
in
the
November
1959
issue
of
Canadian
Chartered
Accountant,
written
by
Mr
Clem
L
King,
FCA:
“The
valuation
may
be
computed
as
a
percentage
of
gross
fees.
Amounts
reputed
to
have
been
paid
in
Canada
in
the
last
number
of
years
have
ranged
from
under
75%
of
one
year’s
gross
fees
to
125%
of
one
year’s
gross
fees
paid
in
one
amount
or
in
a
few
cases
over
a
period
of
years.
In
the
United
States,
prices
paid
are
reputed
to
have
ranged
from
45%
to
200%
on
one
year’s
gross
fees.”
In
the
same
case,
Gibson
J
cited
an
article
that
appeared
in
the
October
1975
issue
of
the
Journal
of
Accountancy,
which
was
written
by
Mr
Richard
C
Rea,
CPA:
“It
is
generally
believed
by
small
practitioners
and
small
firms
that
their
practice
is
worth
one
year’s
gross
fees.”
4.4.2
Net
Income
Method
Using
the
average
net
income
for
the
last
three
years,
1970,
1971
and
1972
(after
a
reasonable
salary
was
paid
to
the
three
partner
architects),
the
appellant’s
witness
Mr
Michel
Guertin,
CA,
arrived
at
a
figure
of
$53,000,
which,
after
a
50%
tax
provision,
leaves
$26,500.
A
net
income
after
salary
($53,000)
may
be
capitalized
with
factors
of
three
or
four
in
professional
firms,
according
to
Messrs
George
Ovens
and
Donald
I
Beach
in
their
book,
Business
and
Securities
Valuation,
page
138.
According
to
Mr
Clem
L
King,
cited
by
Gibson,
J
in
Butler,
the
average
net
income
may
be
capitalized
one
to
three
times.
According
to
Messrs
Ovens
and
Beach,
the
average
net
income
after
salary
and
taxes
($26,500
in
the
case
at
bar)
may
be
capitalized
six
to
eight
times.
Both
calculations
(either
before
or
after
taxes)
give
a
minimum
figure
of
$159,000.
4.4.3
Current
Contracts
Method
It
was
explained,
using
the
books
with
$388,000
worth
of
orders
(contracts
signed
before
December
31,
1972,
but
not
begun
or
not
completed)
that
an
architect
who
took
two
years
to
complete
these
contracts
would
realize
net
profits
of
$183,000:
|
—
gross
fees
|
$388,000
|
|
—
operating
costs
(40
per
cent)
|
155,000
|
|
—
net
profits
before
architect’s
salary
|
$233,000
|
|
—
architect’s
salary
for
two
years
|
50,000
|
|
—
net
profits
|
$183,000
|
Hence
this
figure
of
$183,000
only
represents
current
contracts,
and
does
not
take
into
account
other
intangible
assets
existing
in
the
partnership.
The
respondent
did
not
call
expert
witnesses
to
contradict
these
facts.
The
Board
concludes
that
$155,000
is
a
reasonable
estimate
of
the
goodwill
existing
in
the
partnership
of
Roux,
Morin,
Langlois
et
Associés
at
December
31,
1972.
5.
Conclusion
The
appeal
is
allowed
and
the
whole
is
referred
back
to
the
respondent
for
reassessment
in
accordance
with
the
above
reasons
for
judgment.
Appeal
allowed.
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