Canadian Propane Gas & Oil Ltd. v. MNR, 73 DTC 5019, [1972] CTC 566 (FCTD)

Cattanach, J:—These are appeals from the assessment of the appellant to income tax for its 1966 and 1967 taxation years by the Minister.

The appellant is a corporation resulting under the laws of the Province of Alberta from an amalgamation of two companies on March 30, 1962. The corporate name as a result of that amalgamation was Canadian Propane Consolidated Limited. In 1969 the corporate name was changed to Consolidated Hydrocarbons Limited. The appellant was assessed under that name and the present appeals were launched under that name. Subsequently the corporate name was changed to Canadian Propane Gas & Oil Limited. On a motion of the appellant consented to by the respondent, I permitted the pleadings to be amended to reflect the present corporate name of the appellant as indicated in the above style of cause. The appellant is a wholly owned subsidiary of Canadian Hydrocarbons Limited.

The business of the appellant, transacted either directly or through subsidiary or associated companies, is to buy, sell, supply, distribute and otherwise deal in liquid and gaseous hydrocarbons for lighting, heating, motive power and sundry like purposes. The greater proportion of the appellant’s business is selling propane gas to the consumers thereof, that is, it engages in the retail trade in this product but in some isolated instances the appellant may sell its product to other suppliers to the public on a wholesale basis.

The appellant is one of the largest retailers of propane gas in Canada. In addition to its own enterprise and marketing techniques the appellant achieved that pre-eminence in its trade by a systematic policy of purchasing smaller retailers in the same trade when those retailers are competitors in the same area or when the appellant wished to expand into a different geographic area. This resulted in the appellant having a plethora of subsidiary companies so that the corporate structure became too complex which dictated a policy of consolidation.

The obvious purpose of the appellant in acquiring the businesses of other retailers was to promote its own growth, to increase its earnings and to broaden its geographic area of coverage.

The basic philosophy that the appellant used in calculating the value of the assets of another retailer which it contemplated purchasing was to consider the assets involved, their location, the area capable of being served, and try to estimate what the other retailer was doing in that area.

Most of these other retailers were smaller than the appellant with inadequate financial records.

What the appellant sought to do by making a tentative offer to purchase the business of the other retailer, either by the purchase of its shares or assets was, in effect, to get an option to look at the proposed vendor’s financial records without paying for that option.

The preference of the appellant was to purchase the assets whereas the vendor almost invariably wished to sell its shares.

The appellant usually began negotiations by an offer to purchase the assets. If the vendor was insistent upon selling its shares the appellant would comply but by a contract which was predicated upon conditions which would permit the appellant, after its examination of the vendor’s records, to avoid the contract or alter it.

The appellant’s preference for the purchase of assets was that it gave the appellant more flexibility. It would not acquire another subsidiary but rather it could integrate the assets acquired into its own business, if the vendor was a competitor and if not, it could then expand its own business into an area in which it was not in business by the use of the acquired assets in that locality and so substantially expend its own operations by the use of the businesses so acquired. Further, because of the incomplete financial records sometimes maintained by the vendor, the appellant, when it purchased the shares, found itself burdened with a liability which its examination of the records had not disclosed.

However while this was the basic method adopted by the appellant in acquiring the business of another retailer, each transaction was individually negotiated depending on the circumstances peculiar to each transaction.

After having succeeded in getting access to the vendor’s financial records the appellant would then prepare its own pro forma operating statement which was in reality a projection of potential earnings taking into account the assets involved, their location, the vendor’s business in the area and the appellant’s estimate of the better use it could make of these assets by the use of its superior marketing techniques and business experience. It also took into account any trade or marketing name in use by the vendor which the appellant could use as a “fighting” trade name.

The thinking which influenced the preparation of a projection of earnings is that the value of physical assets by themselves are best taken from “a value-in-use” view-point rather than the original cost or depreciated value to the vendor. The appellant directed its attention primarily to the likely future earning capacity of the assets to be acquired when in its hands.

The appellant, after having made its basic projection of earnings, taking into account all factors affecting that projection, would then estimate what amount it would be prepared to lay out to earn that estimated income over a predetermined period of years, normally five years, and that amount would be the amount that the appellant was willing to pay for the assets or shares of the vendor as the case might pe.

The present assessments by the Minister which are under appeal resulted from three specific transactions of the general nature just described.

The appellant, on August 6, 1964, after prolonged bona fide arm’s length negotiations made an offer to purchase all the assets of Zenith Propane Ltd (hereinafter called Zenith). These negotiations began in April 1961. The appellant then made an offer of $225,000 for the assets of Zenith. Later, payment partly in cash and by instalments for the balance was discussed. The offer of the appellant of August 6, 1964 was accepted by the vendor and a formal bill of sale was entered into between them on September 15, 1964 (Exhibit 13).

In Exhibit 1, which is the appellant’s offer to purchase, accepted by Zenith on August 7, 1964 an amount of $314,000 was paid for the fixed assets of Zenith, which were set out in Schedule A to Exhibit 1. The sum of $39,660.88 was paid for inventory and the sum of $55,172.83 was paid for accounts receivable, making a total purchase price of $408,833.71.

This purchase price was deemed to cover all the assets of Zenith excluding cash but including goodwill which, for the purpose of the agreement, was valued at $1.

lt was also a provision of the agreement that Zenith make available to the appellant the exclusive right to use the names “Zenith Propane” and “Zenigas” and assign to the appellant all trade names that Zenith owned.

Zenith also undertook, during the interval until final closing, to act as agent for the appellant for the purpose of retaining all of its customers for the benefit of the appellant. The purpose of the acquisition of Zenith, which operated in the area served by Calgary, Alberta, was that the area to the west, where the appellant had not previously conducted its business, would be served by the assets acquired from Zenith and in the area to the east where the appellant and Zenith were in competition, the expanded business of the appellant, because of its acquisition of Zenith, would be served both by its own assets and those acquired from Zenith.

Following the completion of the asset purchase from Zenith by the appellant, the Minister applied the capital cost recovery provisions of the Income Tax Act to Zenith and reassessed that company accordingly. The original cost of the assets disposed of within Class 8 and Class 10 categories to Zenith was approximately $86,230. Over the years following this acquisition those assets were depreciated in the approximate amount of $39,000 which leaves a net book value of those assets of approximately $47,000. There were minor adjustments with respect to classification of assets which makes the recital of exact figures difficult, but for the purposes of these reasons the approximate figures are adequate.

lt was quite obvious to the Minister that Zenith had fully recovered all capital cost allowances previously claimed by it. This would be so on the basis of the appellant paying Zenith $314,000 for those assets and would remain so even after the Minister reduced the amount of $314,000 to $126,427 as being reasonably regarded as the consideration for the disposition of those assets in accordance with paragraph 20(6)(g) of the Income Tax Act.

Because Zenith was reassessed for the recapture of capital cost and because Zenith was in need of further cash the vendor asked the appellant to purchase its shares rather than its assets.

The purchase price of the assets of Zenith by the appellant was $408,833.71 payable $60,000 in cash, $14,079.63 for accounts receivable and the balance of $334,754.08 was secured by a promissory note of the appellant payable in three equal annual instalments.

The purchase price for the shares of Zenith was $354,375 which closely approximates the liquidation value or net book worth of Zenith, that is, the difference between its remaining assets and its remaining liabilities. The principal asset of Zenith was the promissory note of the appellant held by it in the amount of $334,754.08 which had been given as security for the prior purchase of Zenith’s assets by the appellant. The appellant paid off the promissory note by cheque. Zenith cashed the cheque and advanced the proceeds to the parent company of the appellant.

In the result the vendor, Zenith, received no advantage. The shareholders of Zenith received approximately $350,000 and Zenith became a wholly owned subsidiary of the appellant.

If the appellant had purchased the shares of Zenith at the outset, rather than purchasing the assets prior to the ultimate purchase of its shares, then the capital cost allowances would continue to have been based upon the historical cost of the depreciable cost to Zenith because Zenith would continue to operate with those assets. However, upon the acquisition of the assets by the prior purchase thereof, the appellant set up a much higher value therefor in its hands based upon the price of $314,000 agreed upon by the appellant and Zenith.

The second transaction, giving rise to the assessments of the appellant herein was the purchase by the appellant of the assets of Burro Gas & Electric Ltd (hereinafter referred to as Burro) which operated in the area of Edmonton, Alberta. The same motives which prompted the appellant to acquire the assets of Zenith were present in the purchase of the assets of Burro.

The negotiations for this purchase were also protracted beginning in 1964 and were conducted at arm’s length. The first agreement reached was for the purchase of shares. This agreement was rescinded by mutual consent.

An offer of the appellant dated January 21, 1965 was accepted by Burro on January 22, 1965, the transfer to be effective as from November 30, 1964. The purchase price was $740,483.70 of which $539,335.66 was specified to be for certain described fixed assets and was specifically allocated to the fixed assets in the amounts set forth in a schedule to the offer. Included in the assets acquired were land and buildings with respect to which an appraisal was obtained. The Minister has accepted the amount and accordingly there is no dispute with respect thereto.

By the agreement between the appellant and Burro an amount of $242,685 was allocated as the purchase price of the depreciable property acquired in Class 8 and $246,150 to the property within Class 10.

The original cost of such property to Burro was with respect to Class 8, $130,972.91 and Class 10, $12,584.89. This was known to the appellant. There were additions and disposals which do not materially affect these figures.

lt was also known to the appellant that there could be certain tax advantages if the assets were purchased, which would not prevail in the purchase of shares, but the testimony was that this did not dictate the change from an offer to purchase shares to an offer to purchase assets. This change was explained by reason of the fact that it was difficult to ascertain the liabilities of Burro and accordingly the appellant preferred to buy the assets to avoid incurring any liability unknown to It.

Burro had not claimed any capital cost allowance on its depreciable property and accordingly it was not faced with any recovery thereof.

By paragraph 9 of Exhibit 17, the agreement between the appellant and Burro, the appellant was granted the right to the name “Burro” which it used as a fighting brand name. Burro undertook to and did change its corporate name and also undertook not to and did not compete with the appellant. Further, during the interval to closing, Burro undertook to retain its customers for the ultimate benefit of the appellant.

A contract with a supplier of propane with Burro was taken over by the appellant.

The third and last transaction was the purchase of the assets used by Grover’s Propane Ltd in the conduct of a propane retailing business by that company. This company operated in the area of Lethbridge, Alberta and it conducted a variety of diverse businesses under the corporate name of Grover’s Propane Ltd (hereafter called Grover’s).

The appellant was interested only in the assets used in the propane retailing business of Grover’s.

The negotiations for the purchase of this particular portion of Grover’s business were conducted by Canadian Hydrocarbons Limited, the parent company of the appellant. The reason for the interposition of the parent company was that preferred shares of the parent were offered as payment of the purchase price. When the assets were acquired by the parent they were transferred to the appellant at cost. lt was agreed by the parties hereto that this transaction was a purchase by the appellant and the matter was argued on that basis.

The negotiations for this purchase were prolonged because Grover’s was undecided.

Eventually an agreement was entered into by the parent company and Grover’s on December 16, 1966. The purchase price of the propane business to Grover’s was $195,796 of which $187,061.76 was stated in the agreement to be for the described fixed assets and was specifically allocated in various amounts to various fixed assets.

It was estimated by the appellant that the original cost of Grover’s assets acquired by the appellant was in the neighbourhood of $97,000.

Grover’s was assessed to income tax on the basis of a 100% recapture of capital cost allowances. The Grover’s accepted the allocation of the price to the assets but insisted that it be compensated for the increased tax resulting from such recapture. This the appellant agreed to do and the purchase price was increased accordingly.

The appellant did not acquire the use of the Grover name because Grover’s would continue its businesses other than propane retailing. However Grover’s agreed to remove the word “propane” from its corporate name and did so.

Two separate agreements were entered into with the two principal shareholders in Grover’s, both of whom bore the surname, Grover, that these two persons would not compete in the propane business.

The assets acquired from the three companies were transferred to the books of the appellant at the cost value of the fixed assets as set out in the schedules to the pertinent agreements and amortized and charged to earnings. In short the transactions were treated as normal purchases.

In two instances there was a provision for the vendor not competing with the appellant. In the third instance the individual shareholders of the vendor company agreed not to compete.

In two instances the appellant acquired the right to brand names. In the third instance the vendor company removed the word “propane” from its corporate name.

In the case of Zenith, the names “Zenith Propane” and “Zenigas” was well known and accepted by the consumers.

In all three instances the vendors agreed to preserve its customers, in so far as that is possible, until the time of closing of the respective agreements.

The use of these names was discontinued by the appellant a year or so after their acquisition and have been replaced by the name “Canadian Propane”.

In the case of “Burro” that name is still in use by the appellant in the Edmonton area.

Mr Dennis Anderson, the vice-president of the appellant and an officer at all relevant times testified that the purpose of the appellant in acquiring these three retailers was to expand its own business. The purchase of those businesses could be accomplished either by the purchase of the outstanding shares in the capital stock of the vendor companies or to purchase their assets. The appellant’s preference was to purchase the assets rather than the shares and this was done in the three transactions herein.

There is no doubt that the ultimate end was the same by whichever method it was accomplished and that end was to acquire the business of the vendors.

Mr Anderson testified that the appellant was not interested in buying the used physical assets as such, but only those assets in the locations in which they were gathered together and installed and he quite candidly testified that the appellant would not be interested in buying used physical assets so gathered and installed unless there was the prospect of retaining the customers of the vendors served by those assets.

The appellant foresaw that it could use those assets to continue to serve the customers of the vendors, either by themselves or in conjunction with the assets already owned by the appellant in the area.

In short what the appellant was buying was not only the physical assets as such but the whole business undertakings of the vendors. I should qualify this with respect to Grover’s where what was acquired was the propane retailing business exclusive of the other businesses of Grover’s. Mr Anderson candidly admitted this to be so.

Mr Anderson was equally frank in admitting that the appellant would not have purchased the assets of the vendors if that purchase was not accompanied by the definite prospect that the customers of the vendors would become the customers of the appellant.

I might add, that in my opinion, while there was no assurance that the customers of the vendors would follow the assets into the hands of the appellant there was every reasonable expectation that this would be the result.

The three transactions were in fact predicated upon that assumption. The appellant estimated the value-in-use to it of the assets acquired upon the earnings that those assets would generate in its hands. The assets in the appellant’s hands could only gain income if there were customers to be served and it was a paramount consideration in estimating that income that the customers of the vendors would be served by the appellant after the purchase of the assets by it.

The provisions in the respective agreements with the vendors, that the vendors would not compete with the appellant, that the appellant was assigned the brand names of the vendors and that, in the interval before closing, the vendors would make every effort to preserve their customers for the appellant, to which provisions no value was assigned in the agreements, were all designed to ensure that the customers of the vendors would become the customers of the appellant. I would add that in all three agreements goodwill was included at the nominal value of $1.

The appellant, for the purpose of calculating its capital cost allowance allocated the consideration paid to each of the three vendors for the fixed assets acquired under the agreements with the vendors to land and depreciable assets as follows:

The Minister accepted the appellant’s figures with respect to the land acquired from Burro which had been appraised. There is no dispute with respect to Classes 6 and 13. The dispute centres on the consideration allocated by the appellant to Class 8 and Class 10 items as above indicated. There was no independent appraisal of the Class 8 and Class 10 property by the appellant. These were the prices paid to the vendors as allocated in the agreements with the vendors.

In assessing the appellant as he did the Minister invoked the provisions of paragraph 20(6)(g) of the Income Tax Act and accordingly reduced the capital cost of the Class 8 and Class 10 depreciable assets as follows:

In determining the amounts that the Minister allowed as being reasonably regarded as being in part the consideration for the depreciable property within Classes 8 and 10, the Minister considered each item within those classes as outlined in Schedules A, B and C to his Reply to the Notice of Appeal. These items consist mainly of trucks and automotive equipment within Class 10, some of which trucks had tanks installed, and storage tanks within Class 8. The amounts arrived at by the Minister and listed in Schedule A, B and C were based on, in the case of Grover’s, the value of similar new equipment determined by inquiry from suppliers and from suppliers’ lists, with respect to items within Class 8, that is storage tanks and the like, added to which was the cost of fittings and installation. The value of such new equipment was selected because depreciation was negligible.

At this point I repeat that the original cost of this equipment to Grover’s was, Class 8, $56,267.47 and Class 10, $37,626.53 for a total original cost of $93,894. The amount allowed by the Minister was $93,282 being slightly less than the original cost to Grover’s.

In the cases of Zenith and Burro the values were arrived at by the Minister for depreciable property within Class 8, ie storage tanks, from quotations received from suppliers for similar new equipment to which was added the cost of fittings and installation.

The values of depreciable property within Class 10, ie automotive equipment, in the cases of Zenith and Burro were, determined by the Minister by getting quotations from dealers for equipment in similar condition to that acquired by the appellant. For example a 1962 truck was valued as at the date of its acquisition by the appellant. However this practice was not uniformly followed by the Minister. In some instances the value of similar new equipment was taken.

Again, in the case of Zenith, the original capital cost was $14,983.05 for Class 8 property and $70,647.43 for Class 10 property, a total of $85,630.52. The Minister’s allocation, in Schedule A, was for Class 8 property $55,685 and for Class 10 property $53,742 for a total of $109,427.

In the case of Burro the original capital cost of Class 8 property was $130,972.91 and $12,584.89 for Class 10 property for a. total of $143,557.80. The allocation by the Minister was $65,726 for Class 8 property and $78,337 for Class 10 for a total of $144,063.

During the course of the trial the suggestion arose that in some instances the value given to some items by the Minister was too low. However no contradictory evidence was called and in the result the appellant accepted the figures arrived at by the Minister as accurate.

lt was also suggested during the course of the trial that the Minister had made different allocations of the values of the assets in the hands of the appellant from the allocation of the value of those assets in the hands of the vendors.

This I fail to follow. There was no allocation of proceeds by the Minister in assessing Zenith, Burro and Grover’s. In each instance the vendors received more than the capital cost of the property to them. li therefore follows that there was a recapture by Zenith and Grover’s. The Minister reviewed and accepted the figures submitted by them and recapture followed. In the case of Burro no depreciation had been claimed so there was no recapture. There was no breakdown item by item. Lump sums were used. Furthermore, I do not consider this matter vital to the present appeals because it is the assessments of the appellant that are under review, not those of the vendors. The only merit implicit in the suggestion is that the Minister made inconsistent allocations. For the reasons I have expressed the Minister made no allocation in the case of the vendors.

Paragraph 20(6)(g) is the statutory provision under which the present assessments were made and this paragraph reads as follows:

20. (6) For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the following rules apply:

(g) where an amount can reasonably be regarded as being in part the consideration for disposition of depreciable property of a taxpayer of a prescribed class and as being in part consideration for something else, the part of the amount that can reasonably be regarded as being the consideration for such disposition shall be deemed to be the proceeds of disposition of depreciable property of that class irrespective of the form or legal effect of the contract or agreement; and the person to whom the depreciable property was disposed of shall be deemed to have acquired the property at a capital cost to him equal to the same part of that amount;

In applying principles outlined in the above section the matter for determination is not simply one of interpreting the contract or agreement or of giving effect to its provisions. The section states that the part of the amount that can reasonably be regarded as being the consideration for depreciable property shall be deemed to be the proceeds of disposition irrespective of the form or legal effect of the contract or agreement.

Rather, the first problem to be decided is whether the amount can be regarded as being in part the consideration for depreciable property and as being in part consideration for something else. In short is paragraph 20(6)(g) applicable?

If the first problem is answered in the affirmative the next problem that arises for determination is what amount of the total can reasonably be regarded as consideration for the depreciable property and what amount of the total can be reasonably regarded as consideration for something else. It seems to me that the determination of the foregoing respective amounts can best be determined by ascertaining the reasonable value of the property and the deduction of that amount from the total consideration results in the amount attributable to something else.

Reverting to the initial problem, that is whether the transactions here in question, fall within the ambit of paragraph 20(6)(g), the position in this respect taken by counsel for the appellant was, as I understood it, that since the parties to the agreements were dealing at arm’s length and concluded the consideration for the physical assets in each of the three instances, which considerations were recited in the agreements as being for the assets, it cannot be concluded that the considerations allocated in the respective agreements are unreasonable for which reason paragraph 20(6)(g) is not applicable and the Minister cannot properly interfere.

On this subject Noel, J (now ACJ) pointed out in Herb Payne Transport Limited v MNR, [1964] Ex CR 1 at 8; [1963] CTC 116 at 122; 63 DTC 1075 at 1078, that evidence is properly admissible that would otherwise be excluded if the contract or agreement alone governed the rights of the taxpayer and the Minister as parties to the proceeding.

In Klondike Helicopters Limited v MNR, [1966] Ex CR 251 at 254; [1965] CTC 427 at 429-430; 65 DTC 5253 at 5254, Thurlow, J pointed out that the agreement is a circumstance to be taken into account in the overall enquiry and if the agreement purports to determine the amount paid for the depreciable property then, in the absence of other circumstances, the weight of the agreement “may well be decisive”.

There is no question that in the present appeals what the appellant sought to acquire was the businesses of the vendors as going concerns. It was the policy of the appellant to do this by one or the other of two means, either to purchase the shares of a vendor company or to purchase its physical assets.

In the three transactions which give rise to the present appeals the appellant purchased the physical assets of the vendors. It was not interested in buying used equipment, but it bought that equipment as the means of acquiring the businesses of the vendors as going concerns and the price allocated to the assets was the price paid for the businesses. The price of the assets, determined upon a value-in- use-to the appellant, was the yardstick by which the price of the businesses was measured. Value-in-use to the appellant presupposes the existence of something else. Value-in-use, which is the criterion used by the appellant, consists of the expectation of income from the property. A paramount consideration in the expectation of income from the acquisition of assets, which in the three transactions here involved is tantamount to the acquisition of the businesses as going concerns, is the expectation that the customers of the vendor will follow the business to the purchaser and become customers of the new owner.

It has been said that goodwill is something easy to describe but difficult to define. Some of the accepted elements of goodwill are the benefit and advantage of a good name, reputation and connection of a business. The expectation that the purchaser will have the customers of the vendor is certainly an element of goodwill.

In the present instance the agreements between the appellants and the vendor assigned only a nominal value to goodwill. Mr Anderson on behalf of the appellant testified that the appellant considered that there was no value to the goodwill and accordingly so provided in the agreements.

The fact that no value is assigned to goodwill in the agreements is not conclusive of the matter.

The agreements did provide for the use by the appellant of brand names owned by the vendors, and the agreements also contained covenants that the vendors would not compete against the appellant and there were also provisions that the vendors would, until final closing, conduct its business in a manner to ensure that the appellant would succeed to the customers of the vendor.

In Losey v MNR, [1957] CTC 146 at 152; 57 DTC 1089 at 1101, Thorson, P said that a covenant that the vendor will not compete with the purchaser is not included in the sale of goodwill. To secure the benefit of such a covenant the purchaser must so provide apart from goodwill.

However such covenants, such as the three above mentioned are normal and incidental to the purchase of a business as a going concern and all three are designed to ensure that the vendors’ customers will become customers of the purchaser.

It was frankly admitted on behalf of the appellant that if such expectation of succeeding to the vendors’ customers was not present the appellant would not have purchased the three businesses.

It is not necessary for me to categorize such an expectation in the appellant as goodwill which is, of course, a non-depreciable asset. It was a factor present in the mind of the appellant in making the purchases and that is sufficient to constitute “something else” within the meaning of paragraph 20(6)(g) to which an amount may be reasonably regarded as attributable. This being so it follows that paragraph 20(6)(g) is applicable to the transactions here in question.

Having concluded that paragraph 20(6)(g) is applicable, the next problem is what amount of the total price paid for the depreciable property can reasonably be regarded as consideration for that property and what amount of that total can be reasonably regarded as for something else.

In my view the crux of the issue between the parties is what was a reasonable consideration for the depreciable property.

On behalf of the appellant it was contended that since the purchases were negotiated on an arm’s length basis for proper business motives and the prices at which the assets were sold were determined by bona fide bargaining between the parties to each sale, it follows the resultant written agreements ascribing prices to the assets must be conclusive.

The difficulty lies in determining what is reasonable.

I should think that “reasonable” as used in the context of paragraph 20(6)(g) does not mean from the subjective point of view of the Minister alone or the appellant alone, but rather from the point of view of an objective observer with a knowledge of all the pertinent facts.

In furtherance of its contention that the contract price negotiated between the appellant and the vendors should be decisive, it was pointed out that the assets were already assembled in particular locations. This to the appellant was an advantage for which it was prepared to pay a premium price. In effect what the appellant contends is that the assets had a value to it enhanced above the fair market value bearing in mind the motive of the appellant in acquiring the assets which was, of course, to expand its own business and thereby increase its income.

The standard applied by the Minister was the fair market value of the assets which standard the appellant pointed out is not necessarily the test. That would be the test applicable to any purchaser of the physical assets but not to the appellant in view of the peculiar value of those assets to the appellant when considered in conjunction with the motivation of the appellant.

The depreciated net value of the assets does not commend itself as a reasonable standard to be applied. Even if I were to accept this standard, which I do not in the circumstances of this case, it would not advance the position of the appellant because that value is less than the Minister allowed.

Similarly if the original capital costs to the vendors were accepted as the values of the assets, which again I do not accept in the circumstances of this case, that would not advance the appellant’s position because the Minister has allocated to the depreciable assets considerations in the aggregate which exceed the original capital costs.

The Minister contends that, in the circumstances of this case, the fair market value of the assets which were determined by him upon enquiry of suppliers the cost of similar new equipment within Class 8 plus an amount for auxiliary equipment and installation and in the case of Class 10 equipment by obtaining quotations from suppliers of similar new equipment in some instances and in other instances the value of the particular item on the date acquired by the appellant, is the acceptable standard. The Minister determined the replacement value or the fair market value and applied that standard in assessing the appellant as he did and it is his contention that this is the proper standard by which to determine the amount that can be reasonably regarded as the consideration attributable to the depreciable property.

On the other hand the contention of the appellant is that the negotiated value between the parties to the agreement allocated to the depreciable property is the proper test to apply.

I am obliged, therefore, to decide between those two rival contentions.

Normally to an informed vendor and purchaser of a business there is a conflict of interest between them. It is to the purchaser’s advantage to have a high price allocated to depreciable property in order to claim a high capital cost allowance. It is to the advantage of the vendor to have the price of depreciable property as low as possible to avoid recapture of capital cost allowance.

In my view there was no hard bargaining between the vendors and the appellant in the transactions as to the allocation of amounts of depreciable property.

What the appellant was buying and what the vendors were selling were businesses as a going concern. What the vendors were interested in was getting as high a price for their businesses as they could extract from the appellant. It was the appellant’s preference and decision to acquire those businesses by a purchase of assets rather than a purchase of shares. The price of the assets to the appellant was the price agreeable to each vendor for its business. Therefore the appellant tailored the price of the assets to fit the vendor’s price for its business. In my opinion there is no question of this. The appellant worked out a projection of earnings from the assets it would acquire over a period of five years. In one instance an offer of $200,000 was made to a vendor on the basis that the appellant could earn $40,000 per year from those assets. Therefore the appellant was prepared to expend $200,000 for the prospect of recouping itself of that amount in five years. That was the criterion which determined the purchase price the appellant was prepared to pay for the assets or the business.

The vendors’ concern was exclusively that of getting as much as possible for their businesses. It was immaterial to them what the appellant assigned to each item of equipment so long as the aggregate thereof which the vendor received coincided with its estimate of what it could get for its business. In so stating I have not overlooked the fact that the vendors signed the agreements but it is my considered conclusion that the appellant was the dominant party in such allocation of prices to the depreciable property and that the vendors passively acquiesced thereto secure in the knowledge that the sum total met their prices for their businesses.

I am confirmed in this conclusion by the fact that after the original purchase of the assets of Zenith, Zenith was assessed for recapture of capital cost allowance and thereupon approached and persuaded the appellant to purchase its shares. In the case of Grover’s when that vendor was assessed for recapture of capital cost allowance it demanded of the appellant and received compensation therefor.

In considering the problem as to the applicability of paragraph 20(6)(g) I concluded that not only was there a disposition of physical assets but “something else” as well. That “something else” might well be goodwill to which there was assigned in the agreements nominal amounts of $1.

In the Zenith transaction $314,000 was allocated to physical assets and $1 to goodwill. In Burro $539,335 was allocated to physical assets and $1 to goodwill and in Grover’s $187,061 to physical assets and $1 to goodwill.

For the foregoing reasons I have concluded that the apportionment between depreciable property and something else was in effect unilaterally done by the appellant and that there was in reality no genuine negotiated apportionment as a result of bargaining between the parties to the agreement from which it follows that the allocations in the agreements are not decisive of what is reasonable.

The assumptions of the Minister in assessing the appellant as he did were that the amounts of $314,000, $539,335 and $187,061 can reasonably be regarded as being in part the consideration for the disposition of depreciable property of Zenith, Burro and Grover’s respectively, and as being in part consideration for something else.

It was further assumed by the Minister that of the immediately foregoing amounts not in excess of $126,427, $175,063 and $93,282, respectively, can be reasonably regarded as the consideration for such disposition and, by virtue of paragraph 20(6)(g), are deemed to be the proceeds of the disposition of depreciable property and that the appellant is deemed to have acquired the property at a capital cost to it equal to the same parts of those amounts.

The figures of $126,427, $175,063 and $93,282 are the fair market value of the depreciable property within Classes 8 and 10 which was acquired by the appellant as determined by the Minister and which figures have been accepted by the appellant as accurate.

The onus of demolishing the Minister’s assumptions falls on the appellant and, in my view, for the reasons expressed, the appellant has failed to discharge that onus. Accordingly it cannot be said that the assumptions of the Minister in assessing the appellant as he did were not warranted.

The appeals are, therefore, dismissed with costs.