R. Bruce Graham Limited v. Minister of National Revenue, [1986] 1 CTC 2326, 86 DTC 1256

Kempo, T.C.J.

Part I — Issue

This appeal is with respect to the appellant’s 1981 taxation year and concerns its expenditure in that year of the amount of $94,389 for the purchase of a list of customers from Shell Oil Company (“Shell”).

There was no issue raised that the expenditure was other than for the purpose of gaining or producing income within the meaning of paragraph 18(1 )(a) of the Income Tax Act (the “Act”). Rather, the Minister has consid ered the purchase of the customer list to be that of a capital outlay within the meaning of paragraph 18(1 )(b) of the Act and, on reassessment, allowed the appellant a deduction in the sum of $4,720 pursuant to paragraph 20(1)(b) of the Act in this respect. This was done on the basis that the customer list purchase was an eligible capital expenditure within the meaning of paragraph 14(5)(b) of the Act. The appellant, on the other hand, characterized the expenditure as fully deductible in the year on its revenue account pursuant to paragraph 18(1 )(a) of the Act.

Part II — Decision

For the reasons given hereafter, the appellant’s appeal for its 1981 taxation year is dismissed.

Part III — Reasons for Decision

A. Facts and Evidence

Since 1971 the appellant has been a non-exclusive supplier of Shell petroleum products to its own customers in or about a geographical area in Ontario encompassing Mitchell, Stratford, St. Marys, Thamesford, Ingersoll as well as their surrounding areas, all as shown on a map — Exhibit A-2. The petroleum products were normally picked up by the appellant for resale in this territory at Shell’s nearest bulk plant in London, Ontario.

Since commencing this business, that is for the 10 years prior to entering into the transaction in issue, the appellant had been continuously operating under declining market conditions. According to the appellant’s president, Mr. Bruce Graham, who was the only individual that testified at the hearing, this was due to numerous events. Some of these included drastic price increases for crude oil as a result of the actions of the OPEC cartel, followed by governmental urgings and inducements to Canadians to conserve and cut-back on their use of petroleum fuel products. Consumers were urged and given incentives to switch to natural gas or electricity. In the ensuing shrinking market the appellant’s main competitors were not only the utility companies but all of the other major oil companies and unbranded marketers. Union Gas and Ontario Hydro were aggressively soliciting and urging the fuel oil segment of the market to switch, and the other oil companies such as Imperial, Texaco, Gulf, etc. from time to time engaged in price wars and/or customer raiding.

The appellant employed two methods to meet the competition and to keep their hold on the market. One was by personal sales solicitations by its own personnel and the other was by purchasing competitors' customer lists as they became available.

In 1974, 270 accounts in the City of Stratford were purchased by the appellant from Shell for $28,455 which averaged roughly $100 per customer. These were primarily domestic furnace-oil users. This outlay had been fully expensed by the appellant against revenues, and this treatment had been countenanced by the Minister in 1975 after a review.

Two years later, in July of 1976, an additional nine accounts were purchased from Shell for $1,970. The explanation for the larger per-customer price was that they were commercial users. And again, a few months later, a 227 customer list of Shell furnace-oil users in the City of Stratford was purchased for $21,760. The price was once more at roughly $100 per customer. However, unlike the others, this purchase was not from Shell itself but rather was in respect of the customers of one Ken Fiebig in the sales district of Stratford. These two 1976 transactions were similarly fully expensed against revenue.

With respect to the adjoining sales district of Ingersoll, Shell had engaged the services of Layton Fuels Limited (“Layton”) to act as its commission agent in the servicing of a list of Shell customers in that district. Layton had acquired and used its own specially equipped tanker-trucks, and they received a commission from Shell for each litre of product delivered.

Mr. Graham said that in mid-1980 he became aware that Mr. Layton was leaving the business so he began negotiations with Shell to purchase the customer list that would be available. At the same time, and in order to update the appellant’s fleet and equipment, he negotiated with Layton for the purchase of its assets, to which reference will be made later. It was understood by Mr. Graham that once Layton had terminated its commission agency relationship with Shell, Shell would have then withdrawn all of its business from Layton. Put another way, Mr. Graham said that Shell would not have sold the Layton list to the appellant had Layton continued to be their commission agent. And while the appellant’s reseller agency contract allowed it to service a territory, it was nonetheless at all times non-exclusive in that Shell had retained the right to enter the territory and solicit any non-aligned customer. There was no question but that Shell was eliminated as a competitor with respect to any customer list that had been purchased by the appellant.

Mr. Graham further testified that there was a considerable difference between the functioning of a commission agent (like Layton) and a reseller agent (like the appellant). The former never purchased or owned the Shell product sold, and therefore had no control over the pricing; this was the concern of Shell which also collected its own accounts from the customer. On the other hand, a reseller agent purchased the product from a Shell bulk plant, negotiated the resale price with its own retail customer and had to pay Shell for the wholesale supply of products to it.

While the potential for territorial competition with Shell existed, no evidence was tendered that it amounted to more than a mere right or possibility. Mr. Graham stressed that a purchase of a list of accounts from Shell did not eliminate Shell, nor could a purchase of this nature be considered as buying the business of Shell. In my view, the latter point is obvious; the former is a matter of degree.

In any event, and returning to the sequence of events, the appellant's written agreement with Layton Fuels to purchase their three fully equipped tanker-trucks and one half-ton pickup, together with office furniture, equipment and fixtures for the sum of $64,000 was dated April 23, 1981 (Tab 12 of Exhibit A-1). Mr. Graham testified that the purchase was not related to or dependent upon the successful outcome of his negotiations with Shell for the customer list but rather was a good deal and would have been made irrespective of the outcome. He said that the appellant's fleet needed replacement and up-dating, and to have done so by acquiring new vehicles would have cost a great deal more.

At this juncture, and while I have no reason to doubt the bona fides of Mr. Graham’s evidence in this respect, it is my view that the presence of other evidentiary factors in this case point away from the Layton transaction being viewed in isolation. First the agreement to purchase, by its covering solicitor’s letter (Tab 11 of Exhibit A-1), was draft-dated April 23. It was shown to have been executed July 6, it was subject to a specified condition of financing satisfactory to the appellant by July 31, and the closing date was to be August 21. Time was stated to have been of the essence. The formal Bill of Sale was dated August 19 and executed August 20. Secondly, all during this time Mr. Graham and/or his solicitor had been in constant contact with Shell as to the purchase of the client list, and over covering letter from Shell dated August 4 they received the various closing sale documents which were subsequently executed on or about August 17. Thirdly, along with the customer list, Shell gave the appellant a two-year lease of its bulk plant facilities and equipment in Ingersoll that had been formerly occupied by Layton Fuels. The appellant advertised this expansion by radio thus:

After 55 years in business, Graham Oil, located in St. Marys and Stratford, is pleased to announce their expansion into the Ingersoll area. Graham Oil, 421 Bell Street, Ingersoll, is carrying on the fine tradition of personal service offered by Layton Fuels and Quoit Heating and Plumbing. Graham Oil has a complete line of Shell products with friendly personal service.

Fourthly, these events were happening in an economic environment in which it was said that the appellant’s net income was dropping, its market was shrinking, they had to act quickly on follow-up to hold customers and that its very survival was at stake.

Accordingly it is reasonable to infer that both transactions were at least being sought and pursued concurrently. Although they were not legally tied together, the agreement with Shell, to all intents and purposes, was in-the-pocket before Layton's closing date of August 21. Additionally, Layton's territory was adjacent to that of the appellant's and, along with the taking over of Layton's facilities, it enabled the appellant to effectually package the area notwithstanding the need to deal legally with two separate entities. This is what was gained, having due regard to business and commercial realities, and in my view it stretches credulity to say that each was wholly fortuitous, or that each segment should be viewed in isolation from the whole.

The fact that the appellant reported the Layton vehicle acquisition as a Capital expenditure and the Shell customer list on account of revenue is of little or no assistance. Mr. Graham stressed in his evidence his perception of the differences between the fuel business and the insurance brokerage business as he has been a partner in an insurance brokerage agency since 1978. A good broker, he said, would represent eight to ten insurance companies from which competitive pricing may be obtained. In the fuel business there is usually one supplier and one price. The former offers what is commonly perceived as a “service" of six to twelve months duration with good holding-over attributes, while the latter offers a commodity to be purchased by the customer averaging six weeks in duration with price playing the primary part as to customer continuum. In the insurance field one can buy out an agency competitor, but in the fuel industry a reseller agent can not buy out its supplier-competitor. He did not suggest that a reseller agent's business could not be bought or sold as a going concern.

The appellant entered into five separate agreements with Shell. Of less importance in this appeal are the two concerning the appellant’s general assignment of book debts in favour of Shell and its agreement to assist Shell in the collection of the outstanding accounts receivable pertaining to the customer list. The former was to act as collateral security for any debts the appellant might owe to Shell. The latter was accomplished by assignment of accounts receivable which was to last for 90 days following execution of the agreement after which it was to have been reassigned to Shell. All moneys collected by the appellant pursuant to the assignment were turned over to Shell within 30 days of collection. The purpose of the whole matter was adequately described as an accommodation to Shell. Mr. Graham explained that the only benefit derived therefrom by the appellant was its ability to use any funds so collected for the 30 days before the payment-over had to be made.

The customer-list purchase required an updating of the Shell Marketing Agreement, Exhibit A-7. The period of this agreement was ten years: August 17, 1981 to August 16, 1991. The additional territory incorporated therein was that of the Ingersoll territory marked in blue colour on the map, Exhibit A-2, supra. Under clause 3 of the Marketing Agreement the appellant agreed:

(a) To use [its] best effort to promote the sales of Shell’s products and at all times to maintain Shell’s goodwill and good name generally; and

(b) Not to handle, sell, deal in, advertise or dispense any gasoline or petroleum products or allied products other than those from time to time marketed and supplied by Shell.

Addendum 8(R) to this agreement was headed Reseller Franchise. Clause 1 gave the appellant the non-exclusive right to sell Shell products within the aforementioned area and forbade the sale of its products except under its own name. Addendas 12 and 13 were in respect of the aforementioned two-year lease of the premises, facilities and equipment formerly enjoyed by Layton. The rental for the first year was $1 per month, increasing to $833 per month for the second year. The lease was renewable for succeeding periods of one year each after expiry of the initial two-year period, and was terminable thereafter by either party on 30 days notice. Other addendas dealt with matters of pricing, indemnity/insurance, cartage rates, etc.

The appellant’s agreement with Shell to purchase its customer list appears at Tab 3 of Exhibit A-1 and reads as follows:

THIS AGREEMENT dated the 12th day of August, 1981.

BETWEEN:

SHELL CANADA LIMITED,

a corporation governed by the

laws of Canada

(hereinafter referred to as 'Shell')

— and —

R. BRUCE GRAHAM LIMITED,

a corporation governed by the laws

of Ontario with its head office at

88 Queen Street W., St. Marys, Ontario

(hereinafter referred to as ‘Purchaser’)

WHEREAS:

Shell has sold and delivered petroleum products to a number of customers in the sale district of Ingersoll;

AND WHEREAS the Purchaser wishes to purchase a list of those customers of Shell as set out in Schedule ‘A’, attached hereto, for the purpose of attempting to expand his present business into the Ingersoll area.

NOW THEREFORE WITNESSETH that in consideration of the mutual promises and covenants contained herein, and other good and valuable consideration, the parties to this agreement agree as follows:

1. Item to be Purchased

On the date of closing, Shell will convey, transfer and assign to the Purchaser all its rights, title, and interest in and to the list of customers as set out in Schedule "A” attached hereto, free and clear of all liens and encumbrances, and will execute and deliver all documents reasonably necessary to give effect to such conveyance, transfer and assignment, and to the provisions of this contract. Notwithstanding the delivery to the Purchaser and registration of any document, this contract will remain in full force and effect and will not be merged therein or superseded thereby. Purchaser agrees that no documents or notices thereof shall be registered by it in connection with this transaction.

2. Price

For the list of customers as set out in Schedule 'A’ attached hereto, the purchase price will be $94,388.72, subject to adjustment as hereinafter provided.

3. Computation of Purchase Price

The purchase price is computed in accordance with the dollar value per customer as shown in the following table.

	Number of	Dollar Value
Class of Customer	Customers Customers	per Customer
Fuel Oil
(Sched A-Part 1)	676	54.47
Farm Accounts
(Sched A-Part 2)	435	124.46
Commercial
(Discount Accounts)	16	214.18
4. Adjustment of Purchase Price

On the closing date, if the number of customers in a class is more or less than the number shown above, the purchase price will be increased or reduced respectively by the applicable “Dollar Value per Customer”.

5. Shell’s Covenants

Shell covenants that after completion of the sale, it will not restrict or in any way interfere with the Purchaser's use and enjoyment of the list of customers purchased hereunder. Furthermore, Shell covenants that it will no longer sell or deliver petroleum products to those customers as set out in the list in Schedule "A” attached hereto.

6. Records

During the period from the acceptance of this offer until the closing date, the Purchaser may, during normal business hours at Shell's office, inspect Shell's books, records and other data relating to the assets being sold hereunder, including the register of deliveries to customers and degree day data.

7. Title

Shell covenants that it now has and will have on the closing date a good and marketable title to the property to be sold hereunder, free from all encumbrances. The Purchaser will be allowed until the closing date to examine Shell's title, and if any defect is revealed which affects the title or value of the subject matter of this agreement, and which Shell is unable to [sic] unwilling to rectify to the Purchaser's reasonable satisfaction before the closing date, the Purchaser may by notice either terminate this contract or close the transaction and reduce the purchase price by the amount allocable to the asset affected by such defect.

8. Closing

This transaction will be completed on Monday, August 17, 1981. On that date the Purchaser will pay to Shell the purchase price as stated in this agreement, and Shell will deliver possession of the assets to be sold to the Purchaser.

9. Taxes

Any tax, duty, charge or fee now or hereafter levied by reason of the sale contemplated herein shall be paid by Purchaser in addition to the purchase price.

10. Notices

Notices hereunder shall be in writing, may be given to the Purchaser by personal service or to either the Purchaser or Shell by registered letter or telegram, and, in the latter instances, shall be deemed to be given 3 business days after the letter is deposited in the mail or the telegram is filed with the telegraph company, postage or charges prepaid, and addressed to the party for whom intended at such party’s address as first herein specified or at such other address as may be substituted therefor by proper notice hereunder.

11. Assignability

Neither this agreement, nor any claim against Shell arising directly or indirectly out of or in connection with this agreement shall be assignable by the Purchaser or by operation of law, without the prior consent of Shell.

12. Entirety

This document comprises the entire agreement between Shell and the Purchaser, and there are no agreements, understandings, conditions, warranties, or representations, oral or written, express or implied, concerning the subject matter or in consideration hereof, that are not merged herein or superseded hereby except any other document executed coincidental herewith or hereafter. Neither this agreement nor any subsequent amendment or supplement thereto shall be binding on Shell unless and until it is signed on Shell’s behalf by a representative duly authorized, and a copy thereof so signed is delivered to the Purchaser.

DATED this 17 day of August, 1981.

SHELL CANADA LIMITED

(signed)

(signed)

R. BRUCE GRAHAM LIMITED

(signed and sealed)

Concurrently with the above, Shell had an agreement with the appellant to repurchase the customer list. It appears at Tab 6 of Exhibit A-1, and reads as follows:

THIS AGREEMENT dated the 17th day of August, 1981.

BETWEEN:

SHELL CANADA LIMITED,

a corporation governed by the

laws of Canada

(‘Shell’)

— and —

R. BRUCE GRAHAM LIMITED,

a corporation governed by the laws

of Ontario with offices at

88 Queen Street W., St. Marys, Stratford, Ontario

(‘Agent’)

WHEREAS Shell has sold and Agent has purchased a list of customers by agreement of even date herewith;

WITNESSETH that, in consideration of other good and valuable consideration and the sum of $1.00 (receipt whereof is hereby acknowledged by each party) the parties agree as follows:

1. Definitions

For purposes of this agreement, the following terms shall have the following respective meanings;

"Agent’s List’ shall mean the list of customers for the purchase and sale of furnace oil, stove oil, gasoline and diesel fuel at any time or from time to time in which the Agent has agreed to supply such petroleum products.

‘Base Volume’ shall mean 6,500,000 litres.

"Territory’ means the area outlined in red in Schedule ‘A’.

2. Termination of Marketing Agreement

Any marketing agreement between Shell and Agent may be terminated by Shell forthwith by giving notice to Agent, if Agent breaches or fails to observe or perform any of the provisions of this agreement, if Agent becomes bankrupt or insolvent, if Agent is in default for 60 days or more in the payment of any indebtedness to Shell whether under this agreement or otherwise, if any principal of Agent is incarcerated, insane, permanently disabled or dies, if Agent’s interest under the agreement becomes invested, by any means, in any other person or corporation, if the Agent’s premises are abandoned; or if any change occurs in the ownership of any interest in Agent or in Agent’s directors, principal officers or employees without written consent of Shell in its discretion, or if at the end of any year the total volume of petroleum products sold to customers in the Territory for that year is less than a percentage as set out below of the Base Volume, unless an explanation of such reduction in volume is provided and is reasonably satisfactory in the sole discretion of Shell. Such percentage shall be 80% for the first year following the date hereof and reducing by 10% each year thereafter until 0% in the ninth year.

3. Repurchase of Accounts

For a period of ten years from the date hereof:

(a) If the Agent receives a bona fide offer from another person to purchase the Agent’s List or any portion thereof, which offer the Agent desires to accept, the Agent shall give to Shell a true copy of such offer and a notice in writing setting out his intention to accept such offer unless such list is purchased pursuant to this agreement, and the name and address of the offeror. Within sixty days following the giving of such notice and a copy of the offer, Shell may by notice in writing to the Agent elect to purchase from the Agent the list covered by such offer whereupon there shall be constituted between the Agent and Shell a binding agreement of purchase and sale with respect to such list on the following terms and conditions:

(i) the price per litre per annum shall be:

A. to the extent that the volume represented by such list is equal to or less than the lesser of the Base Volume and, after the first year, the volume of petroleum products sold by Agent to customers in the Territory in the preceding year:

(a) 1.76 cents on that portion of such volume which is not generally sold at a discount;

(b) 1.76 cents less the cpl discount on that portion of such volume which is normally sold at a discount; and

B. for the balance of the volume contained in such list the average amount per litre provided for in such offer; and

(ii) otherwise upon the same terms and conditions as provided in such offer.

(b) If Shell does not elect to purchase from the Agent the list covered by the offer referred to above and carry out the agreement resulting from such ac- ceptance in accordance with the terms thereof, then the Agent may sell such list owned by him to such offeror upon the terms set out in such offer.

4. Option to Repurchase Accounts

In the event of Shell terminating any marketing agreement forthwith for the reasons set out in paragraph 2, Shell shall have the option of purchasing Agent's List respecting the sale of petroleum products to customers in the Territory or any portion thereof at the purchase price determined pursuant to paragraph 3(a)(i)A and for the balance of the Agent's List, at a purchase price equal to fair market value.

5. Agent’s Covenant

In any sale pursuant to paragraphs 3 or 4, Agent covenants that after completion of the sale, it will not restrict or in any way interfere with Shell's use and enjoyment of such list nor will it sell or deliver petroleum products to the customers on such list.

6. Notices

Notices hereunder shall be in writing, may be given to Agent by personal service or to either Agent or Shell by registered letter or telegram, and, in the latter instances, shall be deemed given 3 business days after the letter is deposited in the mail or the telegram filed with the telegraph company, postage or charges prepaid, and addressed to the party for whom intended at such party's address as first herein specified or at such other address as may be substituted therefor by proper notice hereunder.

SHELL CANADA LIMITED

(signed)

(signed)

R. BRUCE GRAHAM LIMITED

(signed and sealed)

The Shell Marketing Agreement appointed the appellant a non-exclusive distributor of Shell products within the Stratford and the newly-acquired Ingersoll territory. The appellant's purchase agreement was not territorial. It was in respect of a list of customers, all of whom were located in the Ingersoll territory. However, Shell’s repurchase agreement was with respect to its right of first refusal at the formula price, not limited to territory or particular customers. It also gave Shell the right to terminate the Marketing Agreement on the occasion of, inter alia, low sales volume in the Ingersoll area with the right to repurchase at the formula price limited to those customers in the Ingersoll territory and for any of the reasons specified in clause 2, to repurchase at a price equal to fair market value not limited to territory or any particular customers.

Of significance, according to the appellant, was the possibility of termination of its Marketing Agreement with Shell because of its inability to perform up to the prescribed minimum volume sales in the Ingersoll territory. However, Mr. Graham acknowledged that at the time of making the agreement he had predicted a customer loss in the first year of up to approxi- mately 30 per cent; past experience had shown customer losses averaging 15 per cent per year. It was for this reason that follow up in the Ingersoll territory occurred immediately after the agreements were in place and that the aforementioned radio commercial had been aired. In order to retain its customers and to compete and survive in the industry, the appellant was called upon to provide the best service and price to very cost-conscious customers.

The evidence with respect to the financial matters of the appellant indicated a net income of $65,829 for its 1979 taxation year, $72,714 for its 1980 year and for the 1981 year, if the $94,389 paid for the customer list was excluded, the net income would have been $38,947. The appellant's year- end date was September 30. Therefore the latter figure presumably included an insignificant amount, if any, of sales arising from the customer list.

An analysis was done by the appellant of the loss of accounts and volume sales for two periods, 1981-82 and 1982-83. The loss of accounts was counted, and then calculated as a percentage for the respective time span and as a dollar figure based on the purchase price of the accounts. It was filed under tab 8 of Exhibit A-1 thusly:

There was a loss of 450 customers out of the original 1,126 by the end of the second year which, according to the schedule, was 23.7 per cent for the first year and 21 per cent for the second. As noted earlier, the appellant had contemplated the possibility of a loss in the first year of something like 30 per cent, and that 15 per cent was an average based on previous experience. It was also acknowledged that the commercial customers were the most price-sensitive and the most competitive in that the major oil companies were more apt to solicit them with large discounts. Therefore, it may be more meaningful to note that the annual loss was 22 per cent for the domestic heat customers and that it was 25 per cent and 18.5 per cent respectively for the wholesale (farm) customers. Accordingly, the loss of customers in terms of numbers and dollars was not too far off that which was both predictable and predicted. Mr. Graham said that since 1983 a loss of the domestic heat customers ranged at approximately 15 per cent annually. A similar type of analysis had been done by the appellant as to its Stratford territory for the 1980-1985 period and it disclosed a loss of domestic customers at five per cent per year.

The above evidence should be considered concurrently with the terms of the Shell repurchase agreement which allowed the appellant a drop in volume sales of 20 per cent for the first year and 10 per cent thereafter for the remaining nine years. Because the appellant had suffered losses in excess of the permitted amounts, it considers itself at continual risk that Shell would terminate the agreements.

Returning to the appellant’s purchase agreement, supra, Mr. Graham testified that the price was determined by actual volume sales per customer which was then multiplied by eight cents. The price was neither negotiable nor predicated on predictable customer losses. There was no price discount based on declining volume sales, or otherwise. This averaged out to approximately $100 per customer, which was the same as in 1974. However, Mr. Graham acknowledged that the price was that of fair market value, viz :

Q. Is it also correct that when you made the decision to pay that price, you considered the possibility and the probability of to what extent you would keep the customers and lose some?

A. Yes. But, I couldn’t affect that price because that was the fair market price at that time.

(T. 113, 11. 12-18)

He also acknowledged that he had the expectation of recouping the cost of the list from future years’ revenues.

Appellant’s Submissions

Counsel reviewed and put forth the usual criteria with respect to matters of the characterization of income versus capital expenditures. On the facts of this case it was urged that:

1. A business had not been purchased with its concurrent goodwill, either as to Shell or Layton. This would not have been possible as to either in any event.

2. Layton did not own the customer list. Only its vehicles and equipment had been purchased. Therefore, Layton's non-competition covenant had not been obtained nor was such necessary in any event.

3. It was an established practice of the appellant to acquire customer lists from which income was earned in order to survive the adverse economic environment and market under which it operated.

4. The customer list was not purchased with the view to enlargement or expansion of the business but rather with the view to survival.

5. Shell remained a territorial competitor. It could enforce a repurchase of the list due to the appellant’s inability to perform the required volume sales. The customer list lacked the usual capital attributes of permanence or endurance.

With respect to the jurisprudence, Halliday Fuels Limited v. M.N.R., 25 Tax A.B.C. 186; 60 D.T.C. 541 (T.A.B.) is almost on all fours with the case at bar and should be followed. The cases relied upon by the Minister, viz., The Queen v. Farquhar Bethune Insurance Limited, [1982] C.T.C. 282; 82 D.T.C. 6239 (F.C.A.), Burian v. The Queen, [1976] C.T.C. 725; 76 D.T.C. 6444 (F.C.T.D.), Cumberland Investments Limited v. The Queen, [1975] C.T.C. 439; 75 D.T.C. 5309 (F.C.A.) and Aliments CA-MO Foods Inc. v. The Queen, [1980] C.T.C. 75; 80 D.T.C. 6043 (F.C.T.D.) are distinguishable in that each was in respect of business acquisitions with the view to elimination of a competitor and because the nature of the insurance agency business is radically different from the appellant’s fuel business.

Analysis

The arguments of the appellant’s counsel as noted above and expanded upon at the hearing are innovative and very persuasive. However, and with respect, I am unable to agree with the assertion made by counsel in dialogue with the Court that the non-elimination of Shell as a competitor in this case is of such importance that it should be viewed as almost decisive of the matter. Indeed, Shell had been eliminated as a competitor with respect to the 1,126 customers in the Ingersoll area which in itself was an advantage or benefit that should not be discounted.

I would agree with the observation of counsel for the Minister that the acquisition of the customer list was an acquisition of an asset having significant characteristics of value and permanence. The agreements were for a 10-year period, with Shell’s right to repurchase those very accounts the appellant asserts are of minimum value or are without endurance. In this respect I doubt that Shell would concur entirely with that view. And it is difficult to say that the appellant, in its desperate attempt to survive, would have paid out $94,389 for something without significant value or permanence. However, while neither the size nor the object of the expenditure itself is determinative of the issue, they are important considerations to be taken into account.

In B.P. Australia Ltd. v. Commissioner of Taxation, [1966] A.C. 224, Lord Pearce stated, at 264-265:

The solution to the problem is not to be found by any rigid test or description. It has to be derived from many aspects of the whole set of circumstances some of which may point in one direction, some in the other. One consideration may point so clearly that it dominates other and vaguer indications in the contrary direction. It is a commonsense appreciation of all the guiding features which must provide the ultimate answer. Although the categories of capital and income expenditure are distinct and easily ascertainable in obvious cases that lie far from the boundary, the line of distinction is often hard to draw in border line cases; and conflicting considerations may produce a situation where the answer turns on questions of emphasis and degree.

Very recently Mr. Justice Estey, in the reasons for judgment of the Supreme Court of Canada in Johns-Manville Canada Inc. v. The Queen, [1985] 2 C.T.C. 111; 85 D.T.C. 5373, extensively reviewed the jurisprudence and appropriate principles of law to be considered and applied to the determination of the classification of an expenditure as being either expense or capital. On page 5377 he noted the pronouncement of Lord Pearce in B.P. Australia Ltd., supra, and cited Dixon, J. in Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation, (1946) 72 C.L.R. 634 at 648 wherein it was stated:

[The] answer depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process.

Mr. Justice McNair of the Federal Court, Trial Division in Angostura International Limited v. The Queen, [1985] 2 C.T.C. 170; 85 D.T.C. 5384 similarly reviewed some of the same authorities and at 178 (D.T.C. 5390) cited the pronouncement of Thurlow, A.C.J. in Oxford Shopping Centres Ltd. v. The Queen, [1980] C.T.C. 7 at 14; 79 D.T.C. 5458 at 5463:

It is the nature of the advantage to be gained which more than any other feature of the particular situation will point to the proper characterization of the expenditure as one of capital or of revenue expense . . .

Returning to the decision of Mr. Justice Estey in Johns-Manville, supra, at 125 (D.T.C. 5383) he noted the observations made by Lord Wilberforce in Tucker v. Granada Motorway Services, [1979] 2 All E.R. 801 at 804:

It is common in cases which raise the question whether a payment is to be treated as a revenue or as a Capital payment for indicia to point different ways. In the end the courts can do little better than form an opinion which way the balance lies. There are a number of tests which have been stated in reported cases which it is useful to apply, but we have been warned more than once not to seek automatically to apply to one case words or formulae which have been found useful in another. .. . Nevertheless reported cases are the best tools that we have, even if they may sometimes be blunt instruments.

In the case at bar, many of the appellant's arguments are reminiscent of those frequently made in the jurisprudence sought to be distinguished. But I would agree that the factual situation before me is somewhat unique. It does not fall full-square into the usual pattern of those cases involving the purchase or absorption of the business of a competitor. In Cumberland Investments, supra, at 441 (D.T.C. 5310) Thurlow, J. referred to the observation of Lord Pearce in B.P. Australia, supra, at 262:

Where a trader buys out a rival in order to secure his goodwill or to suppress it and so provide or maintain a clear field for his own enterprise over a substantial period, there is a definite prima facie pointer towards a capital payment.

As noted earlier, the reality of the appellant’s acquisition of the customer list from Shell was to effectively eliminate or suppress Shell’s competition qua the 1,126 customers located within a particular territory. Similarly, there is the fact that the payment is of the once and for all kind, with an expectation that it had acquired something that would not be short-lived.

One the other hand, a modifier to this prima facie pointer towards capital is the appellant’s need to obtain customer lists. That practice did have some of the elements or attributes of "recurring need" or “constant demand"; see Thurlow, J. in Cumberland Investments, supra, at 441 (D.T.C. 5311). Here, however, it is factually merely one of degree, and I find that this in itself is not so strong an indicator or pointer as to lead to an opposite result. Further, the lack of elimination of competition was also a matter of degree.

The observation of Dubé, J. in Aliments CA-Mo Foods Inc., supra, at 78-9 (D.T.C. 6045) is particularly apt:

So far as the purchase of a customer list is concerned, there is a long and nearly consistent line of authority holding that such an expense is on capital account, since it secures a “‘lasting benefit” and cannot really be considered as merely a Current expense incurred by the taxpayer in order to earn income.

In Burian v. The Queen, supra, two accountants practiced in partnership. One decided to give up the practice and sold his interest to an accounting firm which the remaining partner joined. The taxpayers argued, inter alia, that the accounting firm being sold was really out of business; its clients, because of the remaining partner's alliance with the acquiring firm, went to the new firm or elsewhere. They too sought to distinguish the authorities deciding that where there had been a purchase of a business and goodwill the expenditure was on account of capital. After reviewing the usual authorities on the matter, Collier, J. noted, at 730 (D.T.C. 6447):

The appellations “purchase of a business as a going concern”, “purchase of goodwill”, or purchase of a “list of customers” neither clarify the dispute nor provide the solution. . . .

In my opinion, when one views the “practical and commercial aspects”* of this purchase, the plaintiffs were in reality acquiring, or endeavouring to acquire, an opportunity for potential future custom or business — the trade of the client of C.F. Graves & Co. The purpose, to my mind, was to bring into the existing business a further asset or advantage with the expectation of lasting benefit. The transaction, as I view it, was to strengthen and expand the plaintiffs' business entity, the profit-yielding subject. It therefore affected the capital structure.. . . *See Noel, A.C.J. in The Queen v. F.H. Jones Tobacco Sales Co. Ltd., [1973] F.C. 825 at 834; [1973] C.T.C. 784 at 790; 73 D.T.C. 5577 at 5581.

The business and commercial reality of the case at bar indicate that the appellant was continuing Shell’s business in the Ingersoll territory, and that by purchasing the customer list it was obtaining a substantial advantage of being in a position to obtain the right to service these customers. In so doing it acquired what, in the circumstances of this case, I would label an endurable right notwithstanding its non-exclusivity. The appellant’s experience and marketing arrangements with Shell had been good and had persisted for over 10 years without cancellation. No reason has been advanced for the appellant to have considered or apprehended that the Ingersoll operation would have been dealt with differently.

I have considered the decision of Halliday Fuels v. M.N.R., supra, which is a decision of the then Tax Appeal Board in 1960. Its merit is with respect to its factual compatibility with the situation at hand. However, in view of the ante-dated authorities which are at a higher judicial level, the persuasiveness of the decision is doubtful.

For all of the above reasons I find that the $94,389 expenditure was on account of capital and that it has been properly treated by the Minister as an eligible capital expenditure. Accordingly the appeal is dismissed.

Appeal dismissed.