Ovens v. R., [1996] 2 CTC 2442 (Informal Procedure)

Taylor J.T.C.C.: — These are appeals heard on common evidence by agreement of the parties, at Toronto, Ontario on December 12, 1996 against income tax assessments for the year 1991 in the Abbey matter, and 1989 and 1992 in the Ovens matter. It may have appeared to the parties that the two issues should be dealt with on common evidence, and indeed what they represent is the disallowance by the Respondent in each case of an amount of $20,000 claimed as expenses - marketing, advertising, and support services, in connection with setting up accounting practices. In my view, however, after hearing the cases, the circumstances are sufficiently dissimilar that each appeal should be looked at separately at least. When the agreements relative to the $20,000 amounts above were filed with the Court at the hearing there were differences, both in content and in context. That of Ovens was shown as a “Franchise Agreement” between Leadley, Gunning & Culp Corp. as Franchisor, and Fred D. Ovens as Franchisee; whereas that of Abbey was a “Local Partnership Agreement” between Culp and Partners Inc. and Garry Arthur Abbey, and Leadley, Gunning and Culp Corp., and Garry Abbey Bookkeeping and Accounting Practice. The dispute between the parties is best demonstrated by the filings with the Court.

FRED OVENS

Notice of Appeal:

C. MATERIAL FACTS

1. In August 28, 1991, the Appellant entered into a franchise agreement with Leadley, Gunning & Culp Corp. (“LGC Corp.”).

2. The term of the franchise is 10 years. The Appellant has the right to renew the franchise for succeeding 10- year terms on meeting conditions.

3. Under the terms of the franchise agreement, LGC Corp. granted the Appellant the right to use the business systems and trade marks.

4. Under the terms of the franchise agreement, LGC Corp. was responsible to deliver certain training, advertising, marketing services to the Appellant.

5. Pursuant to s. 6.01 of the franchise agreement between LGC Corp. and the Appellant, LGC Corp. was required to provide a number of services at the inception of the franchise.

6. In addition to the initial fee paid by the Appellant, he is required to pay a monthly royalty fee.

7. Pursuant to s. 3.01 of the Franchise Agreement, the Appellant paid a $40,000.00 fee to LGC Corp.

8. There was no allocation in the Franchise Agreement of how the $40,000.00 fee was to be allocated.

9. The Appellant has been informed that of the $40,000.00 fee LGC Corp. allocates $20,000.00 to initial expenses such as provision of services in s. 6 of the Franchise Agreement. The Balance is allocated to the trade marks associated with the franchise.

10. In preparing his tax return for the 1992 taxation year, the Appellant deducted the sum of $20,000.00 in respect of the initial services for marketing, advertising and other initial support services (the “Initial Services Fee”).

11. In completing the 1992 tax return of the Appellant, the Appellant deducted capital costs allowance in respect of the franchise fee of $20,000.00.

12. In preparing the 1992 tax return, the Appellant claimed a non-capital loss and deducted this loss in the 1989 taxation year of the Appellant.

13. By Notice of Reassessment, the Minister denied the Appellant’s deduction of the $20,000.00 Initial Services Fee.

14. By Notice of Reassessment, the Minister reassessed the Appellant and denied the deduction of capital cost allowance and stated that the outlay for the acquisition of the franchise was an eligible capital expenditure.

15. By Notice of Reassessment, the Minister denied the loss carryback of the Appellant.

16. The Appellant duly objected to the aforesaid Notice of Reassessment.

17. By Notification of Confirmation dated December 14, 1994 the Minister confirmed that the $20,000.00 Initial Services Fee claimed by the Appellant was not deductible and was categorized as an eligible capital expenditure within the meaning of paragraph 14(5)(b) of the Income Tax Act (the “Act”).

18. By notice of confirmation dated December 14, 1994, the Minister confirmed that the outlay with respect to the acquisition of the franchise was an eligible capital expenditure within the meaning of paragraph 14(5)(b) of the Income Tax Act.

19. By notice of confirmation dated December 14, 1994, the Minister confirmed that there was no non-capital loss in 1992 that was deductible in computing the taxable income for the 1989 taxation year of the Appellant.

20. The Appellant states that the Minister made no other findings of fact or determinations if law which have been communicated to the Appellant.

D. ISSUES TO BE DECIDED

21. Is the $20,000.00 allocation of the Initial Services Fee properly deductible in the 1992 taxation year of the Appellant or is the outlay an eligible capital expenditure?

22. Whether or not the outlay to acquire the franchise is an eligible capital expenditure or a capital outlay to which a capital cost allowance applies?

23. Is there a non-capital loss for the 1992 taxation year?

24. Can the non-capital loss for the 1992 taxation year be deducted in the computation of taxable income for the 1989 taxation year?

E. STATUTORY PROVISIONS

25. Section 68, paragraph 18(l)(b), paragraph 14(5)(b), paragraph 20(1 )(a), paragraph 20(1 )(b), paragraph 111(1 )(a).

F. REASONS

26. The Appellant submits that of the $40,000.00 initial fee payable to LGC Corp., $20,000.00 represents a reasonable license fee for the use of the trade marks and knowhow, and $20,000.00 represents the fair market value of the services rendered to the Appellant by LGC Corp. in the first year of the franchise.

27. The Appellant submits that it is proper to deduct the $20,000.00 in respect of services rendered for the 1992 taxation year, as there is no enduring benefit, and the outlay is not capital in nature.

28. The Appellant submits that he properly has deducted the sum of $20,000.00 Initial Services Fee in his 1992 taxation year which results in a non-capital loss in the 1992 year.

29. The Appellant states that the 1992 non-capital loss is properly carried back to the 1989 taxation year.

30. The Appellant submits that the portion of the fee for the franchise and trade marks is not for an unlimited number of years and is properly included in Class 14 and is not an eligible capital expenditure.

G. RELIEF SOUGHT

31. The Appellant requests that:

i. his appeal be allowed and the Reassessment of tax be referred back to the Minister for reconsideration and reassessment on the basis that:

— The Initial Services Fee of $20,000.00 is deductible in the 1992 taxation year of the Appellant;

— The non-capital loss of the Appellant in the 1992 taxation year is properly deductible in computing income for the 1989 taxation year of the Appellant;

— Capital cost allowance of $1,400.00 be deductible in the computation of the Appellant’s income for the 1992 taxation year.

Reply to Notice of Appeal:

A. STATEMENT OF FACTS

1. He admits paragraphs A., B., C.l, C.3, C.5, C.6, C.7, C.8, C.13, C.14, C.15, C.16, C.17, C.18 and C.19 of the Notice of Appeal.

2. With respect to paragraph C.2 of the Notice of Appeal, he admits that the initial term of the franchise agreement is 10 years and that the Appellant has the right to renew the franchise for succeeding 10 year periods but states that the Appellant is not required by the franchise agreement to pay another franchise fee for such renewal.

3. With respect to paragraph C.10 of the Notice of Appeal, he admits that in computing income for his 1992 taxation year the Appellant deducted $20,000.00 as current expenses but states that this amount was part of the initial $40,000.00 franchise fee and that no amount of the $40,000.00 was paid by the Appellant on account of current expenses.

4, With respect to paragraph C. 11 of the Notice of Appeal, he admits that in computing income for the 1992 taxation year the Appellant allocated $20,000.00 of the $40,000.00 franchise fee as class 14 property and deducted $1,000.00 capital cost allowance in respect thereof but states that this amount was part of the initial $40,000.00 franchise fee paid and that no amount of the franchise fee was class 14 asset. He states further that the entire $40,000.00 is an eligible capital expenditure and therefore pursuant to subsection 14(5) and paragraph 20(1 )(b) of the Income Tax Act (the “Act”) the Appellant’s cumulative eligible capital deductible in the 1992 taxation year is $2,100.00.

5. With respect to paragraph C.12 of the Notice of Appeal, he admits that the Appellant claimed a non-capital loss for the 1992 taxation year in the amount of $12,573.00 and carried back the said loss to the 1989 taxation year. He states however the Appellant had no non-capital loss in the 1992 taxation year and therefore there was no amount available for carry back in computing taxable income for the 1989 taxation year.

6. He otherwise denies any other allegations of fact that may be contained in the Notice of Appeal.

7. In computing income for the 1992 taxation year, the Appellant deducted $20,000.00 of the $40,000.00 franchise fee as current expenses as detailed below (collectively referred to hereinafter as the “Amounts”):

CURRENT EXPENSES AMOUNTS

Professional development expenses $10,000.00

8. As well, in computing income for the 1992 taxation year, the Appellant allocated $20,000.00 of the $40,000.00 franchise fee as a class 14 property and claimed capital cost allowance in respect thereof in the amount of $1,000.00.

Marketing expenses	$ 5,000.00
Client support expenses	$ 5.000,00
TOTAL	$20,000.00

9. The Appellant reported a non-capital loss in the amount of $12,573.00 for the 1992 taxation year (the “Non-Capital Loss”).

10. In computing taxable income for the 1989 taxation year, the Appellant deducted the Non-Capital Loss.

11. The Minister of National (the “Minister”) assessed the Appellant for the 1989 and 1992 taxation years Notices thereof mailed on June 27, 1990 and March 17, 1993, respectively.

12. The Minister reassessed the Appellant for the 1989 taxation year Notice thereof mailed on April 30, 1993 to allow the Non-Capital Loss carry back.

13. The Minister further reassessed the Appellant for the 1989 taxation year Notice thereof mailed on May 17, 1994 to disallow the Non-Capital Loss carry back.

14. The Minister reassessed the Appellant for the 1992 taxation year by Notice of Reassessment mailed on May 17, 1994 to:

(a) disallow the Amounts as current expenses;

(b) disallow the treatment of $20,000.00 of franchise fee as class 14 property and thereby disallowing capital cost allowance deduction in the amount of $1,000.00;

(c) treat the entire franchise fee of $40,000.00 as an eligible capital expenditure, thereby allowing a deduction in the amount of $2,100.00 as cumulative eligible capital pursuant to subsection 14(5) and paragraph 20( 1 )(b) of the Income Tax Act (the “Act”).

15. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the facts admitted and stated hereinbefore;

(b) on August 28, 1991, the Appellant entered into a franchise agreement

with Leadley, Gunning & Culp International (the “Agreement”);

(c) the business of the franchise was to provide accounting and tax services;

(d) under the Agreement, a one time franchise fee of $40,000.00 (the “Franchise Fee”) was paid by the Appellant;

(e) there was no allocation or breakdown of the Franchise Fee in the Agreement;

(f) under the Agreement, the term of the Agreement was for 10 years and the Appellant had the right to renew it for succeeding ten (10) year periods, however, no additional payment of the franchise fee was required on renewal;

(g) renewals are indefinite and at the discretion of the Appellant;

(h) in computing income for the 1992 taxation year, the Appellant deducted $20,000.00 of the Franchise Fee as current expenses (the Amounts) and allocated $20,000.00 of the Franchise fee as class 14 property and deducted capital cost allowance in respect thereof in the amount of $1,000.00;

(i) the entire franchise fee of $40,000.00 is an eligible capital expenditure within meaning of subsection 14(5) of the Act;

(j) at December 31, 1992, the Appellant’s cumulative eligible capital with respect to the Franchise Fee was $27,900.00, the calculation thereof is more particularly described in Schedule I attached hereto;

(k) no portion of the Franchise Fee was class 14 property;

(l) the Amounts were not outlays or expenses deductible in computing income in the 1992 taxation year other than as permitted by paragraph 20(1 )(b) of the Act with respect to eligible capital property referred to in subparagraph (i) above; and

(m) there was no non-capital loss in the 1992 taxation year available to the Appellant for carry back to his 1989 taxation year.

B. ISSUES TO BE DECIDED

16. The issues are:

a. whether the entire franchise fee of $40,000.00 is an eligible capital expenditure or

b. if the entire franchise fee of $40,000.00 is not an eligible capital expenditure, than whether:

(1) the Appellant properly allocated $20,000.00 of the Franchise Fee as

class 14 asset (and deducted capital cost allowance of $1,000.00);

(2) the Appellant properly deducted $20,000.00 of the Franchise Fee as the Amounts and

(3) the resulting non-capital loss in the amount of $12,572.00 in the 1992 taxation year is deductible in computing taxable income in the 1989 taxation year pursuant to paragraph 111(1 )(a) of the Act.

C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT

17. He relies on subsections 14(5) and 111(8) and on paragraphs 18(l)(a), 18(l)(b), 20(1 )(b) and 11 l(l)(a) of the Act and on subsection 1100(9), on paragraph 1100(l)(c) and on schedule II of the Income Tax Regulations (the “Regulations”) as amended for the 1989 and 1992 taxation years.

18. He submits that the Minister properly characterized the entire $40,000.00 Franchise Fee as an eligible capital expenditure in the 1992 taxation year, such that the Appellant was entitled to a deduction for cumulative eligible capital in the amount of $2,100.00 in accordance with paragraph 20(1 )(b) and subsection 14(5) of the Act.

19. He submits that as none of the Franchise Fee was an outlay on account of current expenditures, the Minister properly disallowed the Amounts in accordance With paragraph 18( 1 )(a) of the Act.

20. He submits that as none of the Franchise Fee was class 14 property, the Minister properly disallowed the deduction of $1,000.00 claimed by the Appellant as capital cost in respect of class 14 and properly allowed cumulative eligible capital deduction of $2,100.00 in accordance with 20(1 )(a) and subsection 14(5) of the Act.

21. He submits that as there was no non-capital loss in the 1992 taxation year, there was therefore no non-capital loss available from 1992 to apply in computing the taxable income for the 1989 taxation year in accordance with paragraph 111(1 )(a) and subsection 111(8) of the Act.

Mr. Ovens was a Certified General Accountant changing careers from corporate accounting as an employee, who wished to engage in the practice of public accounting and after considering other avenues decided on this route. He gave testimony that he concluded using what was described in the Franchise Agreement as the “Leadley System” would allow him to establish himself as part of a larger group in a reasonable period of time, and provide him with an available source of assistance and advice if and when needed. The “Leadley System” was described in the Agreement as follows:

(e) “The Leadley System" means the plan, method and system presently formulated, created and developed by the Franchisor with respect to the Business and which the Franchisee has the right to use as the same may be modified from time to time by the Franchisor and includes but is not limited to the following distinguishing characteristics:

(i) the distinguishing and unique characteristics relating to the basic image, design, appearance, colour scheme and patterns of stationery, manuals, forms, letters, exhibits and logo;

(ii) the information sheets, bulletins, directives, notices, rules of operation, advertising and promotional campaigns and the business and management procedures and policies of the Franchisor.

The total agreement consists of some 44 pages, but in my view the portion of that document critical to this matter reads:

SECTION 2 GRANT

Grant

2.01 Subject to the terms and conditions set forth in this agreement, the Franchisor hereby grants to the Franchisee and the Franchisee hereby accepts from the Franchisor, for the terms of this agreement as set out in Section 4 hereof, the non-exclusive right:

(a) to use The Leadley System in connection with the Business, indicating to the public that the Business is operated in accordance with The Leadley System, and

(b) to use the Trademark in connection with the Business.

The Franchisee shall use the right solely and exclusively in connection with the Business. The Franchisee shall conduct the Business in accordance with all rules, regulations and procedures prescribed or promulgated by the Franchisor from time to time.

Additional Licenses

2.02 Notwithstanding anything contained in this agreement, the Franchisee hereby acknowledges and agrees that the non-exclusive right granted it herein is granted to it for use solely by it, and such grant shall not in any way hinder or prevent the Franchisor from itself carrying on business using The Leadley System or any part or parts thereof and/or the Trademark, or from granting additional rights as it in its sole discretion may determine, to any other person, corporation or entity to use The Leadley System or any part or parts thereof and/or the Trademark.

SECTION 3 FRANCHISE FEE AND ROYALTY FEE

Amount of Franchise and Royalty Fee (No Gross Billings at Inception)

3.01 For the right granted to the Franchisee by the Franchisor pursuant to this Agreement, where at the time of execution of this Agreement, the Franchisee does not have any Gross Billings at Inception, the Franchisee hereby agrees to pay to the Franchisor the following:

(a) a non-refundable franchise fee of $40,000; and

(b) an annual, continuing royalty fee of Ten (10%) per cent of Gross Revenue.

Amount of Franchise and Royalty Fee (With Gross Billings at Inception)

3.02 For the right granted to the Franchisee by the Franchisor pursuant to this Agreement, where at the time of execution of this Agreement, the Franchisee has Gross Billings at Inception, the Franchisee hereby agrees to pay to the Franchisor the following:

(b) an annual, continuing royalty fee of Ten (10%) percent of Gross Revenue in excess of Gross Billings at Inception; and,

(c) an annual continuing royalty fee of Five (5%) percent of Gross Billings at Inception.

Payment of Franchise Fee

3.03 With respect to the non-refundable Franchise Fee payable by the Franchisee as referred to in Sections 3.01 (a) and 3.02 (a) hereof, the total amount of such fee shall be paid to the Franchisor upon the execution of this agreement by the parties hereto. The Franchisee and the Guarantor hereby acknowledge that notwithstanding any termination of this agreement, the sole consideration entitling the Franchisor to the payment of the said Franchise Fee is the original grant of the right granted pursuant to this agreement.

Mr. Ovens stated that he had received about two weeks training - largely computer related, and orientation regarding the “Leadley System”. He believed it had been of assistance to him.

Garry A.Abbey

Notice of Appeal

C. MATERIAL FACTS

1. On July 19, 1991, the Appellant entered into a partnership agreement with CULP AND PARTNERS INC. (“Culp”).

2. Under the terms of the partnership agreement, Culp granted the Appellant the right to use the business systems and trade marks.

3. Under terms of the partnership agreement, Culp was responsible to deliver certain training, advertising, marketing services to the Appellant.

4. Pursuant to s. 2.2 of the partnership agreement between Culp and the Appellant, Culp was required to provide a number of services at the inception of the partnership.

5. In addition to the initial fee paid by the Appellant, he is required to pay a monthly royalty fee.

6. Pursuant to s. 8.1 of the partnership agreement, the Appellant paid a $40,000.00 fee to Culp.

7. The Appellant has been informed that of the $40,000.00 fee, Culp allocates $20,000.00 to initial expenses such as provision of services in s. 2.2 of the partnership agreement. The balance is allocated to the trade marks associated with the franchise.

8. In preparing his tax return for the 1991 taxation year, the Appellant deducted the sum of $20,000.00 in respect of the initial services for marketing, advertising and other initial support services (the “Initial Services Fee”).

9. By Notice of Reassessment, the Minister denied the Appellant’s deduction of the $20,000.00 Initial Services Fee.

10. The Appellant duly objected to the aforesaid Notice of Reassessment.

11. By Notification of Confirmation dated December 14, 1994 the Minister confirmed that the $20,000.00 Initial Services Fee claimed by the Appellant was not deductible and was categorized as an eligible capital expenditure within the meaning of paragraph 14(5)(b) of the Income Tax Act (the “Act”).

12. The Appellant states that the Minister made no other findings of fact or

determinations of law which have been communicated to the Appellant.

D. ISSUES TO BE DECIDED

13. Is the $20,000.00 allocation of the Initial Services Fee properly deductible in the 1992 taxation year of the Appellant or is the outlay an eligible capital expenditure?

E. STATUTORY PROVISIONS

14. Section 68, paragraph 14(5)(b)

F. REASONS

15. The Appellant submits that of the $40,000.00 initial fee payable to Culp, $20,000.00 represents a reasonable license fee for the use of the trade marks and knowhow, and $20,000.00 represents the fair market value of the services rendered to the Appellant by Culp in the first year of the partnership.

16. The Appellant submits that it is proper to deduct the $20,000.00 in respect of services rendered for the 1991 taxation year, as there is no enduring benefit, and the outlay is not capital in nature.

17. The Appellant submits that he properly has deducted the sum of $20,000.00 Initial Service Fee in his 1991 taxation year.

18. The Appellant submits that the portion of the fee for the partnership and trade marks is not for an unlimited number of years and is properly included in Class 14 and is not an eligible capital expenditure.

G. RELIEF SOUGHT

19. The Appellant requests that:

i. his appeal be allowed and the reassessment of tax be referred back to the Minister for reconsideration and reassessment on the basis that the Initial Services Fee of $20,000.00 is deductible in the 1991 taxation year of the Appellant;

Reply to Notice of Appeal

A. STATEMENTS OF FACTS

1. He admits paragraphs C.l, C.2, C.9, C.10 and C.l 1 of the Notice of Appeal.

2. With respect to paragraph C.4 of the Notice of Appeal, he admits that pursuant to s. 2.2 of the partnership agreement between Culp and the Appellant, Culp was required to provide a number of services but states that these services were to be provided on an “as required basis” not only at the inception.

3. With respect to paragraph C.6 of the Notice of Appeal, he admits that pursuant to s. 8.1 of the partnership agreement, the Appellant paid $40,000 to Culp but states that this entire amount was paid to purchase goodwill.

4. With respect to paragraph C.8 of the Notice of Appeal, he admits that in computing income for the 1991 taxation year the Appellant deducted the sum of $20,000.00 but states that this amount is part of the $40,000.00 goodwill paid for by the Appellant which is an eligible capital expenditure in accordance with subsection 14(5) of the Income Tax Act (the “Act”).

5. He denies any other allegations of fact that may be contained in the Notice of Appeal.

6. In computing income for the 1991 taxation year, the Appellant deducted $20,000.00 of the $40,000.00 paid by the Appellant for goodwill as current expenses as detailed below (collectively referred to hereinafter as the “Amounts”):

Current expenses: Amounts

Professional development expenses: $10,000.00

Marketing expenses: $ 5,000.00

Client support expenses: $ 5,000.00

TOTAL: $20,000.00

7. The Minister of National Revenue (the “Minister”) assessed the Appellant for the 1991 taxation year Notice thereof mailed July 21, 1992.

8. The Minister reassessed the Appellant for the 1991 taxation year Notice thereof mailed on May 2, 1992 to disallow the Amounts and treated the Amounts as eligible capital expenditure in accordance with subsection 14(5) of the Act and allowed a deduction thereof in the amount of $1,050.00 pursuant to paragraph 20(1 )(b) of the Act.

9. In so reassessing the Appellant, the Minister made the following assumptions of fact:

(a) the facts admitted and stated hereinbefore;

(b) on July 19, 1991, the Appellant entered into a partnership agreement with Culp and Partner Inc. and Leadley, Gunning & Culp Corp. and Garry Abbey Bookkeeping & Accounting Practice (the “Agreement”);

(c) the partnership was in the business of delivering accounting and tax services;

(d) under the Agreement, the Appellant purchased goodwill for $40,000.00;

(e) in computing income for the 1991 taxation year, the Appellant reported no income from the partnership;

(f) in computing income for the 1991 taxation year, the Appellant deducted $20,000.00 (the Amounts) of the $40,000.00 goodwill as current expenses;

(g) in computing income for the 1991 taxation year, the Appellant treated $20,000.00 of the $40,000.00 goodwill as an eligible capital expenditure and deducted cumulative eligible capital in respect thereof in the amount of $1,050.00;

(h) the entire $40,000.00 paid for goodwill is eligible capital expenditure within meaning of subsection 14(5) of the Act;

(i) at December 31, 1992, the Appellant’s cumulative eligible capital with respect to the $40,000.00 goodwill was $27,90000, the calculation thereof is more particularly described in Schedule I attached hereto;

(j) the Amounts were not outlays or expenses deductible in computing income for the 1991 taxation year other than as permitted by paragraph 20(1 )(b) of the Act with respect to eligible capital property referred to in subparagraph (h) above.

B. ISSUES TO BE DECIDED

10. The issues are:

a. whether the entire $40,000.00 paid for goodwill per the Agreement is eligible capital expenditure or just $20,000.00 is goodwill; and

b. if only $20,000.00 of $40,000.00 goodwill per the Agreement is eligible capital expenditure, than whether, the Appellant is entitled to deduct the Amounts as current expenses.

C. STATUTORY PROVISIONS, GROUNDS RELIED ON AND RELIEF SOUGHT

11. He relies on subsection 14(5) and paragraphs 18(1 )(b) and 20(1 )(b) of the Act as amended for the 1989 and 1992 taxation years.

12. He submits that the entire amount of $40,000.00 was an eligible capital expenditure in the 1991 taxation year, such that the appellant was entitled to a deduction for cumulative eligible capital in the amount of $2,100.00 in accordance with paragraph 20(1 )(b) and subsection 14(5) of the Act.

13. He submits that as none of the Goodwill amount of $40,000.00 was an outlay on account of current expenditures, the Minister properly disallowed the Amounts in accordance with paragraph 18( 1 )(a) of the Act.

Mr. Abbey had been a bank executive, again wishing to change careers - he heard of this opportunity from a friend, but accounting even bookkeeping, was not his major area of expertise. He had no recognized accounting designation or degree. It was because of this lack of professionally accepted training that he was not qualified to enter into the same kind of franchise agreement as Mr. Ovens, as he understood it. Rather his was an arrangement where he would have some source of help, and indeed he received about one week of initial training and some extra days thereafter. Mr. Abbey’s agreement which is some 22 pages long, also refer to the “Leadley System”, and the preamble deals with it, in this way:

WHEREAS Culp and the Local Partner (hereinafter referred to as the “Partners”) have agreed to practice as a bookkeeping/accounting office at the City of Paris, in the Province of Ontario under the firm name of Garry Abbey, affiliated with Leadley, Gunning & Culp International in partnership upon the terms hereinafter set forth in this Partnership Agreement;

AND WHEREAS LGC has developed a unique system (hereinafter referred to as the “Leadley System”) for the development and business management of accounting practices;

AND WHEREAS the distinguishing features of the Leadley System include, but are not limited to, unique business methods and procedures, specially designed marketing, specific business promotional methods, identification schemes, management programs, standards, specifications and proprietary marks;

AND WHEREAS LGC carries on its business under the trade names “Leadley, Gunning & Culp Corp.” and “Leadley, Gunning & Culp International” and other proprietary identifying characteristics used in relation to and in connection with its business and has the right to use and license others to use the trade marks “Leadley, Gunning & Culp International”, “Leadley, Jason”, “Culp International”, “Culp & Partners”, “Gunning & Partners”, “Lawry & Partners” and “The Leadley System”;

AND WHEREAS by reason of a uniform and successful business format and system, LGC and Leadley have has [sic] established an excellent business reputation, created a substantial demand for accounting and financial services and built up valuable goodwill;

The financial arrangements are detailed:

6. CAPITAL OF THE FIRM

6.1 Original Capital:

An individual capital account shall be maintained for each Partner. Culp shall contribute a capital account of not less than TEN ($10.00) dollars and the Local Partner shall contribute not less than FORTY THOUSAND ($40,000.00) dollars to its capital account on the date of execution of this agreement.

6.2 Additional Capital and Payments of Capital:

If at any time hereafter and from time to time further capital is required for carrying on the business of the Partnership such capital shall be advanced by the Local Partner.

A further important clause reads:

8. PURCHASE OF GOODWILL

8.1 The parties hereto acknowledge that the Local Partnership referred to herein shall purchase Goodwill from Culp for the sum of $40,000.00. If pursuant to paragraph 10.4 herein the Local Partner is forced to withdraw from the Local Partnership prior to the first annual anniversary of the commencement of this Partnership then the Local Partner shall receive for his interest in the Local Partnership the greater of $40,000 and the amount determined pursuant to paragraph 11 hereof. Such payment shall be made 90 days after the date of termination of this agreement.

Counsel for the Appellants in argument dealt with the situation of both Appellants:

The sole question in front of you is whether or not these agreements, the franchise agreement or the partnership agreement, that when the taxpayers prepared their returns, they could unbundle this $40,000 payment and say $20,000 was for expenses of services they received and the other $20,000 should be allocated either to goodwill or franchise fee. And it would be my proposition to you that the taxpayers did that when they prepared their tax returns. And if the Minister doesn’t like it, the Minister can take umbrage with it under section 68 which allows the Minister to reallocate where there is a sum where they disagree.

[...]

My submission are very clearly that the taxpayers purchased certain rights and certain services.

[...]

So the sole issue, the sole issue, is allocation. The sole issue. When a taxpayer pays $40,000, can they sit back and say, “What have I made this payment for? Have I made it solely for goodwill as the agreement states or solely for a franchise fee?” Now, in the case of the franchise fee, it says franchise fee. It also says under the franchise group that there’s a whole bunch of services to be provided and a whole bunch of services were provided and were received.

Where is the capital asset there? It’s my submission that in that case the taxpayer can look back at the situation and say, this payment can be allocated into what it really was, a purchase of certain services and a purchase of certain amounts. The fact that the corporation imposed an agreement that the taxpayer couldn’t vary, Mr. Ovens stated he had a lawyer, they couldn’t vary the agreement. It was imposed. He had to sign it, either take the franchise that way or don’t take it.

Counsel for the Respondent noted:

Your Honour, it’s the Respondent’s position that the taxpayers - what they were doing here is retroactive tax planning. They had made an agreement to purchase a franchise fee of $40,000 and that is how the agreement should stand.

The evidence shows that this agreement did not breakdown the $40,000 into different fees, such as professional training, marketing fees or client support. And it was only until on or about March 6th, 1992 that the taxpayers decided to report this income on a different basis; that is, 20,000 being current expense being deductible.

[...]

The Respondent also states that the agreement should be taken on its face, that the intention of the parties was that $40,000 was to be paid for a franchise fee and you can’t alter the agreement.

[...]

And that is what happened in this case, the $40,000 was intended as goodwill at the time and all the submissions that Mr. Ovens and Mr. Abbey’s made showing, no, no, this was something different, cannot be taken into — these submissions cannot be taken into account. The agreements speak for them-

And that’s exactly what the Appellants are seeking to do in this case. They’re seeking to call what was made as an eligible capital expenditure of $40,000 into current expenses.

Analysis and Conclusion:

I fail to follow the significance of the reliance by Counsel for the Appellants to Section 68 of the Act and he provided little enlightment on that point. Neither did he provide jurisprudence which might have supported his contention, in my view. The parties to these agreements - both Appellants and the opposite contractors - “Leadley” group, must take ownership and responsibility for the agreements accepted and signed. It is not for the Court to disturb the clear wording contained therein. It would appear to me that Counsel for the Respondent has stated the case in clear and succinct terms. I would accept the general thrust of the testimony of both Appellants that they had little, if any, input to the agreements, but that is irrelevant against the interests of this third party - Revenue Canada - in the implementation and interpretation of the agreements, which are perfectly clear. The Court does not make a value judgement regarding any training or assistance provided to the Appellants, nor the relative economics of the $40,000.00 fees paid by them. The testimony appeared to indicate that they were satisfied with the overall arrangements in each case. Perhaps they might be more pleased if the tax arrangements they have claimed could be included, but their degree of satisfaction is not the point at issue. I do not agree that these contracts can be “unbundled” merely for the purpose of a belated prospect of income tax advantage. There was no indication at the trial that new agreements had been or would be executed, which might attempt to provide bilaterally for recognition of the claimed tax advantages.

The appeals are dismissed.

Appeals dismissed.