Ernest a Hachey, Russell G Northrup v. Minister of National Revenue, [1978] CTC 3117, [1978] DTC 1794

Roland St-Onge:—The appeals of Messrs Ernest Hachey and Russell Northrup came before me on August 31, 1978, at the City of Saint John, New Brunswick and were heard on common evidence. The issues are first, whether the appellants transferred goodwill to their company when they incorporated the latter in the month of April 1971, and second, whether the appellants received benefits from their company within the meaning of subsection 8(1) of the old Income Tax Act and subsection 15(1) of the new Income Tax Act for the 1971, 1972 and 1973 taxation years.

The appellants are professional engineers who have been practising since 1950.

In August 1970 they formed a partnership and eight months later, they incorporated a company under the name of Northrup, Hachey & Associates Ltd and transferred goodwill to said company for the sum of $54,000.

Heard as witness, Mr Hachey stated that the experience he had and the contracts that they were getting from three levels of government for the building of bridges and schools were assets to the company and, for these reasons, the appellant felt that some goodwill was transferable to the company.

Upon cross-examination, he also stated that when he left his former employer, he had a salary of $18,000 a year, that the eight-month partnership did not necessitate the hiring of any employees and the company was incorporated because they were negotiating substantial projects.

Mr Touchie, a chartered accountant, testified that the partnership had a transferable goodwill because of the substantial project the applicants were negotiating. To appraise the goodwill, he used a net income of the partnership being some $18,000 and multiplied it by three to arrive at the figure of $54,000.

Upon cross-examination, he also said that he generally used a period of five years to appraise a business, and although the partnership was in existence for only eight months, this period was sufficient to appraise the goodwill because “it’s all he had to use to appraise the said goodwill”. When Mr Hachey asked him why the company was incorporated, his answer was “to save taxes”.

Mr Moore, an employee of the Department of National Revenue, filed a written appraisal of the goodwill as of April 1, 1971.

According to him the goodwill is personal, not commercial, not transferable and cannot be divorced from the individual who creates it.

Counsel for respondent argued that the goodwill was personal and had no commercial value. Consequently, the money that the appellants received in the 1971, 1972 and 1973 taxation years was considered as benefits from their company within the meaning of subsection 8(1) of the old Act and subsection 15(1) of the new Act. She referred the Board to eleven cases which are listed below:

H W Losey v MNR, [1957] CTC 146; 57 DTG 1098;

Nelson T Adair v MNR, [1962] CTC 324: 62 DTC 357:

H E Croteau v MNR, [1964] CTC 299; 64 DTC 643;

J Young v MNR, 38 Tax ABC 73; 65 DTC 243:

R E Larsen v MNR, [1970] Tax ABC 267; 70 DTC 1171:

W H Crandall v MNR, [1974] CTC 2289; 74 DTC 1205;

David S Thomas v MNR, 14 Tax ABC 97; 75 DTC 37:

W C McDonell v MNR, 9 Tax ABC 362:

J Lecompte et al v MNR, [1976] CTC 2127; 76 DTC 1104:

R Ducharme v MNR, [1978] CTC 2562; 78 DTC 1414;

G H Couture v MNR, [1978] CTC 2687; 78 DTC 1511.

According to the evidence adduced, it is obvious that the goodwill in the case at bar is purely personal and has no commercial value.

The partnership did not have any employee and did not last long enough to create a goodwill which could be valued.

If the appellants had disappeared shortly after the incorporation of the company, the goodwill would have disappeared with them.

There is nothing in the evidence adduced to show that the appellants had something to transfer to the company except their skill, which is usually renumerated by a salary. Herein, the goodwill is so personal and intangible that it cannot be valued and the Board understands very well why Mr Touchie had so much difficulty in trying to explain how he had arrived at a figure of $54,000 for goodwill.

lt was much easier for Mr Moore to fix a nil value figure since what was transferred cannot be regarded as a commercial asset.

The only thing that the appellants had in 1971 was their skill. They had no organization and, because of their skill, they kept their clients and this asset is not transferable to a company—it belongs to the individual.

For these reasons, the appeals are dismissed.

Appeals dismissed.