Taylor,
T.C.J.:—This
is
an
appeal
against
an
income
tax
assessment
for
the
year
1983,
heard
on
October
3,
1986,
in
Belleville,
Ontario,
in
which
the
Minister
of
National
Revenue
had
included
in
income
an
amount
of
$110,170.46,
rather
than
only
50
per
cent
of
that
amount
$55,085.23
reported
by
the
appellant.
The
circumstances
of
the
appeal
are
such
that
the
contrasting
positions
of
the
parties
are
best
described
by
reference
to
the
pleadings
filed:
Notice
of
appeal
—
filed
by
Geo.
A.
Welch
&
Company,
Chartered
Accountants.
Facts
1.
The
Taxpayer
is
a
Canadian-controlled
private
corporation.
2.
The
company
(which
was
then
known
as
Quinte
Technical
Products
Limited)
sold
its
business,
effective
April
1,
1980
and
the
sale
encompassed
the
products,
inventory,
goodwill,
name
to
a
product,
labour
services,
customer
lists,
etc.
In
determining
a
price
for
the
sale
of
the
business,
a
price
was
determined
as
a
percentage
of
future
sales
over
the
period
April
1,
1980
to
December
31,
1986.
3.
Copies
of
correspondence
from
the
parties
is
included
with
this
Appeal
which
specifies
the
intentions
of
the
parties
at
the
time
that
the
negotiations
were
made.
Some
of
the
correspondence
was
not
available
to
the
appeals
officer
at
the
time
that
the
decision
was
made
to
confirm
the
assessment.
4.
The
company
filed
its
return
for
the
year
ending
March
31,
1983
on
the
basis
that
the
amount
received
under
the
sale
agreement
of
$110,170.46
was
eligible
capital
amounts,
taking
50%
of
this
or
$55,085.23
into
income.
5.
Revenue
Canada
disallowed
the
company's
treatment
and
treated
the
whole
amount
of
$110,170.46
as
income
received
from
sale
of
business
in
accordance
with
paragraph
12(1
)(g)
of
the
Income
Tax
Act.
6.
The
taxpayer
was
subsequently
reassessed
on
January
28,
1985
for
the
tax
on
the
additional
amount
assessed
as
income.
Reasons
We
are
of
the
opinion
that
the
amounts
received
are
on
account
of
eligible
capital
property
and
not
a
royalty
or
“payment
for
use”
as
defined
in
paragraph
12(1)(g).
Our
reasons
for
this
opinion
are:
1.
The
purchase
was
for
the
entire
business
of
the
company.
The
customer
list,
goodwill,
know-how,
etc.
are
all
characterized
as
eligible
capital
property
under
paragraph
14(5)(b).
2.
The
determination
of
the
total
business
was
struck
as
a
formula
of
future
sales
to
facilitate
the
sale
and
to
resolve
the
issue
of
determining
the
present
value
or
future
expected
value
of
the
profits
of
the
business.
3.
The
total
rights
to
the
assets
have
been
surrendered
to
the
purchasers,
including
the
patents,
trademarks,
right
of
resale,
etc.
Therefore
the
amounts
received
by
the
company
are
not
received
as
royalties
or
rent
on
an
asset
currently
held
by
the
company
but
rather
as
payments
in
respect
of
the
sale
of
such
assets.
4.
An
“eligible
capital
amount”
is
credited
to
the
cumulative
eligible
capital
account
of
the
taxpayer
under
paragraph
14(5)(a)(iii).
An
“eligible
capital
amount”
is
an
amount
that
would
have
been
an
"eligible
capital
expenditure”
under
paragraph
14(5)(b).
In
other
words,
an
eligible
capital
amount
is
the
mirror
image
of
what
is
an
eligible
capital
expenditure.
We
know,
and
so
does
Revenue
Canada,
that
the
purchaser
has
treated
this
acquisition
as
eligible
capital
expenditure.
Therefore,
given
the
specific
link
in
the
law,
the
same
treatment
must
be
accorded
the
vendor.
5.
A
similar
case,
Andre
Varga
v.
MNR,
84
DTC
1278
closely
parallels
this
situation.
The
substance
of
the
two
transactions
is
virtually
the
same
and
the
receipts
for
goodwill,
calculated
as
a
percentage
of
sales,
were
treated
as
goodwill
payments.
6.
The
substance
of
the
agreement
must
be
taken
over
the
form
as
in
Porta-Test
Systems
Ltd.
v.
MNR,
80
DTC
6046.
This
case
had
to
deal
with
the
question
of
royalties
and
the
case
was
decided
in
favour
of
the
taxpayers
because
in
substance
the
payments
made
were
not
for
royalties
but
rather
to
spur
the
U.K.
company
into
a
concerted
sales
efforts.
7.
A
review
of
other
court
cases
does
not
fairly
represent
our
case
particularly
where
the
primary
reason
for
the
difference
lies
in
the
law
itself.
Section
14
was
only
implemented
in
1972
and
most
of
the
reported
cases
are
applicable
to
taxation
years
before
that
time.
Reply
to
notice
of
appeal
(selected
relevant
portions)
—
filed
by
Minister.
—
The
Respondent
relies,
inter
alia,
upon
sections
3
and
9
and
paragraph
12(1
)(g)
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
as
amended.
—
The
Respondent
respectfully
submits
that
the
Minister
of
National
Revenue
has
properly
included
in
computing
the
income
of
the
Appellant
for
its
1983
taxation
year
the
said
amount
of
$110,170.46
in
that
such
amount
was
an
amount
received
by
the
Appellant
in
its
1983
taxation
year
that
was
dependent
upon
the
use
of
or
production
for
property
within
the
meaning
of
paragraph
12(1
)(g)
of
the
Income
Tax
Act.
The
“Agreement”
noted
above
was
filed
with
the
Court,
as
Exhibit
A-1
and
certain
parts
which
I
consider
particularly
relevant
to
this
hearing
are
quoted:
WHEREAS
the
Buyer
has
agreed
with
the
Seller
to
purchase
the
business
and
certain
of
the
assets
(as
hereinafter
set
out)
of
the
Seller
for
an
aggregate
consideration
equal
to
the
Net
Value
thereof
(as
hereinafter
provided)
together
with
the
Royalty
(as
hereinafter
provided);
NOW
THEREFORE,
THIS
AGREEMENT
WITNESSETH
that
in
consideration
of
the
premises
and
of
the
mutual
covenants
and
agreements
hereinafter
set
forth,
the
parties
hereto
agree
as
follows:
1.
Purchase
and
Sale
of
the
Seller's
Business
and
Assets
Subject
to
the
terms
and
conditions
hereof,
the
Seller
hereby
agrees
to
sell,
assign,
transfer
and
deliver
to
the
Buyer
as
a
going
concern
at
the
Closing
(as
hereinafter
defined),
free
and
clear
of
all
encumbrances,
charges,
liens,
security
interests
and
privileges,
all
the
properties,
rights,
assets
(current
and
other)
and
business
owned
by
the
Seller
at
March
31,
1980
with
the
exception
of
cash
funds,
cash
in
banks,
bank
certificates
and
organization
expenses
owned
by
the
Seller
at
March
31,
1980.
The
properties,
rights,
assets
and
business
of
the
Seller
being
purchased
by
the
Buyer
are
herein
collectively
referred
to
as
the
“Purchased
Assets”
and
such
business
as
a
going
concern
is
herein
referred
to
as
the
“Purchased
Business”.
Without
limiting
the
generality
of
the
foregoing,
the
Purchased
Assets
shall
include:
(a)
any
and
all
copyrights,
patents,
trade
names,
trademarks
(registered
or
unregistered)
(including,
without
limitation,
the
names
“Quinte
Technial
Products”
and
“Quintech”),
licences,
franchises
and
all
other
industrial
property
rights
and
privileges
held
or
used
by
the
Seller;
(b)
all
leasehold
and
other
interests
in
land
used
in
or
in
connection
with
the
business
of
the
Seller,
including
all
buildings,
structures,
improvements
and
appurtenances
situate
thereon
and
forming
part
thereof,
whether
moveable
or
immoveable;
(c)
all
plant
and
equipment,
fixtures
and
other
assets
used
in
connection
with
the
business
of
the
Seller;
(d)
all
inventory
of
the
Seller;
(e)
the
full
benefit
of
all
leases
of
real
property,
leases
of
buildings
and
leases
of
equipment,
commitments,
excluding
contracts
of
employment
(save
as
expressly
dealt
with
hereinafter),
to
which
the
Seller
is
entitled,
whether
or
not
reduced
to
writing,
and
including
those
leases
of
real
property,
buildings
and
those
leases
or
equipment
as
set
out
in
Schedule
“A”
hereto;
(f)
all
accounts
receivable
of
the
Seller;
(g)
all
customer
lists,
accounts,
books
and
records
of
the
Seller
other
than
those
corporate
books
and
records
specifically
required
by
the
Seller
for
corporate
and
tax
purposes
(the
“Seller’s
Records”)
provided
copies
or
extracts
from
the
Seller’s
Records
will
be
made
available
to
the
Buyer
upon
request;
(h)
all
unfilled
orders
and
backlog;
all
drawings,
promotional
materials,
sales
samples,
purchasing
records,
customer
correspondence,
art
work
and
negatives
and
all
jigs,
moulds,
dies
and
other
tooling;
(i)
all
other
property,
moveable
and
immoveable,
real
or
personal,
tangible
or
intangible,
and
all
other
assets
and
rights
of
or
connected
with
the
business
of
the
Seller
owned
by
the
Seller
or
to
which
the
Seller
is
entitled,
including
without
limitation,
securities,
agencies,
licences
and
permits,
fidelity
and
contract
bonds,
causes
of
action,
judgments,
claims
and
demands
of
whatsoever
nature.
Section
3
of
the
Agreement
reads:
3.
Purchase
Price
for
Purchased
Assets
The
aggregate
purchase
price
to
be
paid
by
the
Buyer
to
the
Seller
for
the
Purchased
Assets
shall
be:
the
Net
Value
of
the
Purchased
Assets
as
at
the
Effective
Date
of
Closing
which
shall
be
deemed
to
be:
(i)
$5,000
or
such
other
amount
as
the
Buyer
and
Seller
shall
agree
represents
the
fair
market
value
of
the
fixed
assets
of
the
Seller;
(ii)
the
book
value
of
the
accounts
receivable
of
the
Seller
as
at
the
Effective
Date
of
Closing
provided
that
an
adequate
reserve
shall
have
been
taken
by
the
Seller
for
bad
or
doubtful
accounts
(the
“Bad
Debt
Reserve”)
in
accordance
with
generally
accepted
accounting
principles;
(iii)
the
book
value
of
the
inventory
of
the
Seller
as
at
the
Effective
Date
of
Closing
provided
that
an
adequate
reserve
shall
have
been
taken
by
the
Seller
for
obsolete,
damaged
and
slow
moving
inventory
(the
“Inventory
Reserve”)
and
that
such
inventory
has
been
recorded
on
the
books
of
the
Seller
at
the
lowest
of
cost,
replacement
cost
or
net
realizable
value
in
accordance
with
generally
accepted
accounting
principles;
and
(iv)
$900
for
the
balance
of
the
Purchased
Assets.
4.
Formulae
for
Valuation
of
Certain
Purchased
Assets
For
the
purposes
of
this
agreement
the
Seller
and
the
Buyer
agree
that
the
purchase
price
for
accounts
receivable
and
inventory
which
are
included
in
the
Purchased
Assets
shall
be
allocated
as
follows:
(a)
accounts
receivable
shall
be
valued
at
the
amount
shown
on
the
books
of
the
Seller
at
the
end
of
the
day
immediately
prior
to
the
Effective
Date
of
Closing
provided
that
the
Accounts
Receivable
Reserve
is
adequate
and
the
Seller
and
the
buyer
hereby
agree
to
execute
and
file
the
necessary
election
under
Section
22
of
the
Income
Tax
Act;
and
(b)
inventory
shall
be
valued
at
the
lowest
of
cost,
replacement
cost
or
net
realizable
value
thereof
as
at
the
end
of
the
day
immediately
prior
to
the
Effective
Date
of
Closing
provided
that
the
Inventory
Reserve
is
adequate
and
the
Buyer
and
the
Seller
hereby
agree
to
execute
and
file
the
necessary
election
under
Section
23
of
the
Income
Tax
Act;
The
Seller
agrees
to
do
all
acts
and
execute
all
documents,
forms
and
elections
and
file
copies
of
all
documents
as
may
be
required
to
give
effect
to
the
valuation
formulae
set
forth
in
this
paragraph
4,
including
those
required
under
the
applicable
sections
of
the
Income
Tax
Act
(Canada)
as
amended
from
time
to
time.
5.
The
Purchase
Price
shall
be
satisfied
by
the
assumption
by
the
Buyer
of
the
Assumed
Liabilities
as
and
from
the
Effective
Date
of
Closing
and
by
the
payment
of
the
balance,
if
any,
in
cash
or
by
certified
cheque.
Section
8
of
the
Agreement
reads:
8.
General
Conduct
of
Business
Pending
Closing
From
the
date
hereof
until
Closing
the
Seller
covenants
with
the
Buyer
that:
(a)
it
will
operate
the
Purchased
Business
in
the
usual
and
ordinary
manner
as
heretofore
except
that
it
shall
diligently
carry
on
the
Purchased
Business
so
far
as
possible
in
compliance
with
the
requests
of
the
Buyer
and
will
keep
the
Buyer
reasonably
informed
of
the
conduct
of
the
Purchased
Business;
(b)
it
will
make
such
expenditures
on
repairs,
maintenance
and
replacement
as
are
necessary
so
as
to
keep
the
Purchased
Assets
in
good
and
efficient
operating
condition
and
it
will
keep
the
Buyer
promptly
and
fully
informed
if
any
repairs,
maintenance
or
replacement
are
desirable
and
no
single
expenditure
on
repairs,
maintenance,
replacement
or
purchases
(other
than
normal
production
material
requirements)
in
excess
of
$1,000
may
be
made
without
the
consent
of
the
Buyer,
such
consent
not
to
be
unreasonably
withheld;
(c)
it
will
give
the
Buyer,
the
Buyer's
counsel,
auditors,
officers,
employees,
internal
accountants
and
other
representatives
reasonable
access
to
the
business
of
the
Seller
and
to
such
books,
records
and
information
as
relate
to
the
Purchased
Assets
and
their
operation
or
profitability,
at
all
reasonable
times;
(d)
it
will
give
the
Buyer
reasonable
access
to
all
of
the
Employees
and
will
use
all
reasonable
endeavours
to
maintain
intact
its
present
staff
of
Employees
operating
the
Purchased
Business
to
the
Closing
and
no
increase
in
remuneration
payable
will
be
made
individually
to
any
Employee
or
generally
to
Employees
as
a
group;
and
(e)
it
will
use
its
best
efforts
to
retain
for
the
Buyer
the
customers
and
goodwill
of
the
business
of
the
Seller.
Section
12
of
the
Agreement
contained
the
following
clauses:
12.
Closing
Conditions
for
Benefit
of
Buyer
(d)
Brian
Milroy
and
Robin
A.
Duggan
and
the
Buyer
shall
have
entered
into
employment
contracts
substantially
in
the
form
annexed
hereto
as
Schedules
“H”
and
“\”
respectively,
and
Brian
Milroy,
Robin
A.
Duggan,
Norman
C.
Wilson
and
James
L.
Stewart,
shall
have
entered
into
non-competition
covenants
with
the
Buyer
substantially
in
the
appropriate
form
of
Schedule
“J”
annexed
hereto;
(e)
the
Seller
shall
have
entered
into
a
non-competition
covenant
with
the
Buyer
substantially
in
the
form
annexed
here
to
as
Schedule
“K”;
(f)
each
of
Brian
Milroy,
Robin
A.
Duggan,
Norman
C.
Wilson,
James
L.
Stewart,
Don
Chinnery
and
Arthur
R.
Heath
and
any
other
officer,
director
or
shareholder
of
the
Seller
shall
have
executed
an
unconditional
release
in
favour
of
the
Buyer
in
form
and
content
reasonably
satisfactory
to
the
Buyer
and
its
counsel
in
respect
to
all
claims
against
the
Purchased
Business
and
the
Purchased
Assets
save
for
his
rights
under
any
employment
contract
referred
to
in
subparagraph
(d)
hereto;
(Schedules
referred
to
from
Section
12
have
not
been
reproduced
in
this
decision.)
and
under
section
15
headed
“Post
Closing”
we
read:
(e)
The
Buyer
shall
pay
to
the
Seller
a
royalty
(the
“Royalty”)
of
3
/2%
of
the
Net
Sales
of
the
products
of
the
purchased
Business
in
consideration
of
the
provision
by
the
Seller
to
the
buyer
on
an
exclusive
basis
of
the
Seller's
expertise,
know-how,
technique
and
experience
in
matters
related
to
the
Purchased
Business
.
.
.
The
basic
premise
for
the
appeal
put
forward
by
the
parties
was:
By
the
respondent
—
.
..
regardless
of
the
wording
of
the
contract,
that
the
percentage
of
sales
in
fact
formed
part
of
the
purchase
price
.
.
.
.
..
under
the
contract
Buck
Engineering
acquired
certain
rights
and
acquired
certain
property,
and
payment
for
those
rights
and
properties
were
paid
a
certain
amount,
10
or
11
thousand
dollars,
plus
what
was
referred
to
as
a
“royalty”,
and
I'm
prepared
to
concede
that
that
so-called
“royalty”
in
effect
formed
part
of
the
purchase
price
of
all
of
the
rights
and
property
that
was
acquired
under
the
contract.
.
..
the
property
was
purchased
for,
in
effect,
a
fixed
sum,
that
is
the
10
or
11
thousand
dollars;
that
was
an
ascertainable
sum
as
of
the
date
of
the
closing
of
the
deal
—
plus
a
percentage
of
profits,
that’s
all
I’m
saying.
And
in
effect
that
is
the
purchase
price
for
all
the
rights
accrued
under
the
contract.
In
response
thereto,
counsel
for
the
appellant
noted:
.
..
even
accepting
that
the
“royalty”,
for
want
of
a
better
word,
does
form
part
of
the
purchase
price
for
the
assets,
what
are
the
tax
implications
of
that?
So
rather
than
having
to
argue
over
what
the
contract
says
or
what
the
deal
was,
the
dispute
between
the
parties
now
focuses
on
what
the
tax
consequences
of
the
deal
is,
recognizing
that
the
deal
included
that
the
royalty
was
really
part
of
the
purchase
price.
During
testimony
on
behalf
of
the
appellant,
the
“process”
or
“program”
which
the
appellant
had
developed
was
described
to
the
Court,
and
without
attempting
to
put
too
fine
a
line
around
it,
in
general
it
consisted
of
a
modular
system,
useful
and
applicable
to
instructional
and
educational
environments,
(including
functions
which
were
part
of
industrial
or
commercial
operations).
The
appellant
company
had
been
involved
with
electrical
technological
equipment,
and
its
efforts
over
several
years
had
resulted
in
the
provision
to
schools
and
colleges
—
and
now
one
application
to
industry
—
of
this
training
system.
After
the
“Three-Mile
Island”
nuclear
power
plant
breakdown,
there
appeared
to
be
a
substantial
demand
arising
for
application
and
extension
of
the
basic
system
available
from
the
appellant
—
including
such
possible
sales
in
the
United
States.
It
was
the
conclusion
of
the
management
of
the
appellant
corporation
that
it
did
not
have
the
marketing
and
distribution
capability
to
fully
exploit
this
potential
—
and
as
a
result
discussions
entered
into
with
Buck
Engineering
Co.
Inc.
(“Buck”)
brought
about
the
agreement
noted
above.
Buck
did
have
the
marketing
and
distribution
skills
and
organization.
I
gained
the
clear
impression
that
the
retention
and
devotion
of
the
“Key
People”
was
an
essential
ingredient
for
Buck
in
reaching
the
Agreement.
It
was
also
clear
that
there
was
nothing
“exclusive”
or
“unique”
about
the
program
or
process
—
there
were
no
viable
“patents”
or
“copyrights”
with
a
determinable
value
to
Buck.
Simply
put,
the
“process”
could
be
duplicated,
or
redeveloped
—
at
a
cost
of
time
and
dollars
assuredly
—
but
quite
possible
nevertheless.
Analysis
The
opening
clause
of
the
Agreement
(above)
in
my
view
does
not
make
a
clear
distinction
between
the
“business”
and
the
“assets”
to
be
acquired
so
that
one
can
easily
identify
the
two
separate
components
included
in
the
“aggregate
consideration”.
A
clause
in
the
Agreement
lists
the
“Purchased
Assets”,
but
the
“Purchased
Business”
is
merely
described
as
“such
business
as
a
going
concern”
(Section
(1)).
Later
on
(see
section
3
from
Agreement
above)
the
“Purchase
Price
of
the
Purchased
Assets”
is
explained,
(eventually
about
$11,000)
—
paid
distinctly
and
separately
from
the
amount
at
issue
in
this
appeal.
No
place
does
one
find
a
similar
section
dealing
with
the
“Purchase
Price”
for
the
“Purchased
Business”.
In
the
conduct
of
the
case
counsel
appeared
to
agree
that
the
“so-called”
royalty
payment
at
issue
—
$110,170.46
represented
the
payment
for
the
“Purchased
Business”.
Under
the
“Post
Closing”
section
15
of
the
formula
and
rationale
for
the
“royalty”
we
read:
“in
consideration
of
the
provision
by
the
Seller
to
the
Buyer
on
an
exclusive
basis
of
the
Seller's
expertise,
know-how,
technique
and
experience
.
..
.”
No
reference
was
made
prior
to
this
point
of
“the
Seller's
expertise,
know-how,
technique,
and
experience
.
.
.
,”
as
saleable
assets
of
the
appellant
corporation.
Indeed
it
is
difficult
to
imagine
how,
if
they
existed
at
all,
they
remained
outside
the
parameters
of
clauses
(a),
(b),
(e),
(g),
(h)
and
(i)
(particularly
(i))
of
section
1
of
the
Agreement
(above)
for
which
it
would
appear
the
payment
was
$900.
There
was
no
testimony
or
evidence
presented
at
the
hearing
which
would
indicate
the
existence
—
in
the
corporation,
separate
from
its
employees
—
of
“expertise,
know-how,
technique
and
experience”
and
there
was
certainly
no
indication
that
if
it
existed,
that
it
had
any
calculable
value
in
the
corporation
or
that
it
could
be
sold
by
the
appellant.
It
strikes
me
that
the
very
most
the
appellant
corporation
could
assure
the
Buyer
regarding
such
“expertise,
know-how,
technique
and
experience”,
is
that
it
was
individually
and/or
collectively
held
by
the
“Key
Employees”
whose
employment
contracts
and
noncompetition
agreements
already
were
covered
under
section
12
of
the
Agreement
(above).
In
argument
each
counsel
placed
his
own
interpretation
on
that
for
which
the
“royalty”
was
paid
—
both
having
agreed
that
the
term
“royalty”
was
inapplicable
from
an
income
tax
viewpoint.
For
Mr.
Moss
the
interpretation
was:
.
.
.
that
what
the
Appellant
conveyed
to
Buck
Engineering
in
this
case
was
a
concept,
a
system,
a
process
for
modular
instrumentation
systems,
and
that’s
what
forms
the
substance
of
the
transaction
.
.
.
.
.
.
The
reason
the
purchase
price,
the
"royalty"
for
want
of
a
better
word,
was
calculated
the
way
it
was,
as
Mr.
Schluter
and
Mr.
Wilson
testified,
was
as
a
result
of
the
fact
they
didn't
know
how
to
value
the
"know-how"
that
was
being
conveyed,
so
they
saw
this
as
the
fairest
way
of
calculating
the
purchase
price.
From
the
respondent
the
following:
.
.
.
that
effectively
what
he
was
buying
was
a
product;
that
he
was
uncertain
as
to
whether
there
was
any
copyright
in
that
product
or
whether
there
were
any
patents
available
on
that
product;
but
I
would
suggest,
it
was
clear
that
without
the
benefit
of
the
non-competitive
clauses,
the
value
of
what
was
received
would
be
negligible,
and
in
fact
what
the
purchaser,
Buck
Engineering,
was
concerned
with
was
availability
of
marketing
this
product
without
competition
in
the
time
frame
that
he
foresaw
at
the
time.
In
other
word,
he
may
not
have
been
protected
from
what
he
referred
to
as
"copyists",
but
what
was
of
essential
importance
to
Buck
Engineering
was
that
they
have
immediate
access
to
the
market
without
competition.
And
I
suggest
that
bears
very
much
an
analogous
relationship
to
the
purchase
of
a
franchise,
if
they
build
and
market
a
product
without
interference
from
competition,
in
particular
competition
from
the
vendors
to
this
transaction.
As
I
see
it,
Mr.
Moss
essentially
asserted
that
the
payment
at
issue
was
made
for
“Seller's
expertise,
know-how,
technique
and
experience
in
matters
related
to
the
Purchased
Business’’.
(Section
15
of
Agreement
(above)),
and
he
described
these
in
general
as
“know-how”.
Mr.
Shipley,
on
the
other
hand,
related
the
royalty
back
to
the
non-competition
clauses
of
the
employees
in
Section
12
of
the
Agreement
(above).
The
argument
of
counsel
for
the
appellant
proceeded
along
two
lines.
First
an
effort
to
establish
that
the
amount
at
issue
could
be
a
capital
amount,
even
though
paid
according
to
a
formula.
According
to
counsel
this
would
then
place
it
under
paragraph
14(5)(b)
of
the
Income
Tax
Act.
The
second
thrust
was
to
emphasize
that
paragraph
14(5)(b)
of
the
Income
Tax
Act
dealt
with
“business”
as
contrasted
with
“property”.
To
show
his
first
point
counsel
relied
in
large
measure
on
Canadian
Industries
Limited
v.
The
Queen,
[1980]
C.T.C.
222;
80
D.T.C.
6163
(F.C.A.),
and
therein
the
particular
reference
to
Evans
Medical
Supplies
Ltd.
v.
Moriarity,
37
T.C.
540.
Mr.
Moss
selected
therefrom
certain
passages
which
could
support
his
argument
that
“know-how”
is
equivalent
to
“secret
process”,
and
that
it
therefore
should
be
considered
on
“capital”
account.
I
would
point
out
that
at
the
minimum
that
opinion
is
divided
in
the
Evans
(supra)
case.
One
of
the
very
critical
references
to
comments
of
Lord
Denning
is
provided
on
page
230
(D.T.C.
6169)
of
the
Canadian
Industries
Limited
(supra)
judgment
and
it
should
not
be
ignored:
Lord
Denning
held
that
there
had
not
been
a
sale
of
secret
processes,
since
the
company
retained
the
right
to
use
the
processes,
and
that
what
the
transaction
amounted
to
was
the
supply
of
""know-how"".
He
said
“know-how""
could
not
be
sold
as
a
capital
sum,
it
could
only
be
used
by
a
company
or
taught
to
others
for
profit.
Acknowledging
that
there
might
be
a
sale
of
secret
processes
for
a
sum
that
would
be
a
capital
receipt,
he
said
at
589:
“Even
with
a
company
which
owns
secret
processes,
the
supply
of
"know-how"
is
not
like
the
sale
of
goodwill
or
a
secret
process,
for
such
a
sale
imports
that
the
seller
cannot
thereafter
avail
himself
of
the
special
knowledge
with
which
he
has
parted:
see
Trego
v.
Hunt,
[1896]
A.C.
7,
at
24-5;
and
it
may
then
rightly
be
regarded
as
the
sale
of
capital
asset:
see
Handly
Page
v.
Butterworth,
19
T.C.
328.
But
the
supplier
of
"know-how"
always
remains
entitled
to
use
it
himself,
as
was
the
case
here.
And
one
could
add
the
comments
attributed
to
Lord
Simmons
to
be
found
at
230
(D.T.C.
6170):
.
.
.
He
added:
""The
decision
did
not
establish,
or
purport
to
establish,
a
principle
that
whenever,
and
however,
often,
a
company
communicates
what
is
called
"know-how"
to
a
third
party
and
receives
what
is
called
a
lump
sum
for
it,
that
sum
is
for
tax
purposes
a
capital
receipt.
The
circumstances
may
lead,
as
in
my
opinion
they
lead
in
the
present
case,
to
the
opposite
conclusion"".
I
am
not
persuaded
that
“know-how”
in
this
appeal
is
synonymous
with
“secret
process”,
certainly
not
with
“patent”
or
“copyright”,
and
therefore
it
is
at
least
arguable
that
the
property
(if
“know-how”
is
called
property)
should
be
anything
other
than
“capital”.
Certainly
it
cannot
be
said
that
the
noted
jurisprudence
assures
that
it
would
be
“capital”.
With
regard
to
counsel's
efforts
to
overcome
the
“percentage”
nature
of
the
payment
at
issue,
he
relied
generally
on
Catherine
Spooner
v.
M.N.R.,
[1928-34]
C.T.C.
178;
1
D.T.C.
211
(S.C.C.),
Catherine
Spooner
v.
M.N.R.,
[1928-34]
C.T.C.
184;
1
D.T.C.
258
(P.C.).
It
was
properly
brought
out
by
counsel
for
the
appellant,
in
argument
in
this
case,
that
the
question
of
“use
of
or
production
from”
did
not,
and
indeed
could
not
arise
in
Spooner
(supra),
as
later
detailed
in
paragraph
12(1)(g)
of
the
Act.
I
accept
the
contention
of
Mr.
Moss
that
under
some
given
set
of
circumstances
it
could
be
argued
that
an
amount
not
dissimilar
to
that
at
issue
here
could
be
“capital”,
notwithstanding
its
characterization
as
“know-how”,
and
its
receipt
according
to
some
formula.
However
it
has
not
been
shown
in
this
appeal
that
the
amount
at
issue
($110,170.46)
is
“capital”,
to
the
exclusion
of
other
possibilities,
and
even
if
so
could
be
classified,
I
fail
to
see
how
that
fact
alone
(capital)
would
provide
an
escape
from
the
application
of
paragraph
12(1)(g)
of
the
Act,
which
is
really
at
issue.
I
have
reviewed
counsel's
second
point
(above),
the
fact
that
only
the
term
“business”
(not
“property”)
is
found
in
paragraph
14(5)(b)
of
the
Act,
whereas
only
the
term
“property”
(not
“business”)
is
found
in
paragraph
12(1)(g)
of
the
Act.
According
to
counsel,
since
the
operation
in
question
(that
of
the
appellant
company)
was
a
“business”,
paragraph
12(1
)(g)
of
the
Act
should
not
apply.
I
find
no
merit
in
that
argument,
since,
even
by
counsel's
own
contentions,
the
“transaction”
(see
paragraph
14(5)(b)
of
the
Act)
would
have
been
the
sale
of
“property”
of
some
kind
(called
“know-how”
by
counsel),
and
in
my
view
there
is
nothing
in
the
terms
of
paragraph
12(1)(g)
and
14(5)(b)
of
the
Act
which
make
them
mutually
exclusive.
The
“property”
which
was
the
subject
of
a
“business”
transaction
under
14(5)(b)
of
the
Act
could
readily
become
the
subject
of
further
review
as
“property”
under
paragraph
12(1
)(g)
of
the
Act.
Turning
then
to
the
“non-competition”
feature
stressed
by
the
respondent
in
this
matter
it
does
not
appear
sufficient
in
itself
to
be
seriously
considered
as
that
for
which
the
payment
at
issue
was
made.
Even
if
the
Buyer
had
such
“non-competition”
agreements
from
the
“Key
Employees”,
that
would
not
ensure
for
the
buyer
that
the
“process”,
“concept”,
“design”,
or
whatever
the
product
developed
by
the
appellant
might
be
called,
could
be
provided
under
proper
circumstances
for
its
own
market.
The
Buyer
not
only
required
“non-competition”
clauses,
the
Buyer
also
required
the
services
and
efforts
and
dedication
of
the
“Key
Employees”
which
is
arguably
the
real
“know-how”,
as
opposed
to
the
“know-how”
allegedly
residing
in
the
corporation
itself.
Obviously
while
each
of
the
separate
arguments
of
counsel
has
some
merit,
I
have
some
difficulty
because
both
—
the
retention
of
the
“Key
Employees''
with
their
“know-how”
in
the
operation,
as
well
as
the
“noncompetition”
agreements
appear
to
be
only
two
factors
in
the
purchase.
In
my
view
that
which
the
Buyer
regarded
as
essential
in
the
“Purchase”
was
best
described
in
section
1
of
the
Agreement
(above)
—
“such
business
as
a
going
concern
is
hereby
referred
to
as
the
'Purchased
Business'”.
That
for
which
the
Buyer
was
prepared
to
pay
a
“royalty”
was
the
operation
as
a
“going
concern”,
and
that
includes
as
far
as
I
am
concerned
all
the
aspects
of
the
“going
business”,
including
the
“know-how”
and
the
“noncompetition”
features.
The
question
then
becomes
whether
a
“going
business”,
could
fit
under
the
terms
of
paragraph
14(5)(b)
of
the
Act
as
contended
by
the
appellant,
or
is
caught
by
the
provisions
of
paragraph
12(1
)(g)
of
the
Act,
as
contended
by
the
respondent.
A
“business”
can
be
bought
and
sold,
and
that
is
what
happened
as
I
see
it
in
this
case.
That
referred
to
as
the
“business”
or
the
“going
concern”
in
this
matter
may
have
contained
certain
illusory
elements
such
as
the
“Seller's
expertise,
know-how,
technique
and
experience”.
I
am
satisfied
however
that
it
was
the
“profit
making
structure”,
which
the
Buyer
wished
to
acquire
intact
and
functioning.
I
have
no
difficulty
conceiving
of
that
“profit
making
structure”
as
a
property
—
intangible
to
be
sure
—
but
a
property
nevertheless.
The
question
then
becomes
whether
receipt
of
the
$110,170.46
was
“dependent
upon
the
use
of
or
production
from
“the
business
as
a
going
concern”
(the
property).
It
seems
axiomatic
that
the
very
purpose
of
the
purchase
by
Buck
of
the
“business
as
a
going
concern”
was
to
use
it
to
produce
income
for
itself,
from
which
income
Buck
intended
to
pay
the
appellant.
Buck
did
not
close
the
operation
down,
nor
sell
the
operation
or
its
assets
—
Buck
simply
continued
to
run
it,
uninterrupted.
One
of
the
points
raised
in
the
notice
of
appeal
(supra)
was:
.
.
.
We
know,
and
so
does
Revenue
Canada,
that
the
purchaser
has
treated
this
acquisition
as
eligible
capital
expenditure.
Therefore,
given
the
specific
link
in
the
law,
the
same
treatment
must
be
accorded
the
vendor.
The
Court
does
not
know
however
whether
the
amount
at
issue
was
treated
by
the
purchaser
as
an
“eligible
capital
expenditure”,
therefore
possibly
falling
under
paragraph
14(5)(b)
of
the
Act,
but
it
is
irrelevant
to
a
determination
of
this
appeal
in
any
event.
The
fact
that
a
purchaser
of
an
“eligible
capital
expenditure”
may
only
be
permitted
under
certain
circumstances,
to
deduct
50
per
cent
of
a
cost
for
income
tax
purposes
does
not
limit
the
Minister
to
that
same
percentage
in
bringing
into
income
the
“mirror-image”
receipt,
as
I
understand
the
law
under
the
provisions
of
paragraph
12(1
)(g)
of
the
Act
come
into
play.
I
would
make
reference
to
the
recent
case
of
Raymond
Brosseau
v.
M.N.R.,
[1986]
1
C.T.C.
2558;
86
D.T.C.
1412,
in
which
a
portion
of
the
$125,000
at
issue
in
that
appeal,
was
treated
as
escaping
the
provisions
of
paragraph
12(1)(g),
of
the
Act
while
the
balance
fell
under
that
section.
That
case,
Brosseau
(supra)
appears
to
me
to
adequately
outline
the
application
of
paragraph
12(1
)(g)
of
the
Act.
Summary
It
has
not
been
shown
that
the
amount
of
$110,170.46
received
by
the
appellant
corporation
for
the
sale
of
its
business
as
a
going
concern
should
escape
the
provisions
of
paragraph
12(1
)(g)
of
the
Act.
Such
items
as
“goodwill”,
“know-how”,
“process”,
“concept”,
list
of
clients”,
etc.,
could
fall
in
such
a
category,
even
if
the
property
itself
is
rather
amorphous,
perhaps
even
difficult
to
circumscribe,
define,
or
calculate.
The
property
in
question
in
this
matter
had
a
direct
relationship
as
the
source
of
the
payment
received
for
the
sale
of
the
property,
the
application
of
paragraph
12(1
)(g)
of
the
Act
would
appear
to
be
mandated.
In
Brosseau
(supra)
the
“list
of
clients”
may
have
been
the
only
element
required
to
provide
the
basis
for
continuation
of
the
income
stream
—
the
source
of
business,
once
the
guaranteed
payment
of
$100,000
had
been
reached.
In
the
instant
appeal,
there
appear
to
have
been
several
elements
required
to
constitute
“the
business
as
a
going
concern”
—
but
the
principle
of
“use
of
or
production
from”
remains
the
same.
Paragraph
12(1)(g)
of
the
Act
applies
to
the
amount
of
$110,170.46
at
issue,
and
it
qualifies
as
“income”.
The
appeal
is
dismissed.
Appeal
dismissed.
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