Section 167.1

The taxpayer was charged HST on his purchase of a dental practice and, after changing accountants, applied for a rebate of the HST (presumably on the basis that the purchase was exempt under inter alia ETA ss. 141.1(1)(b), 200(3) and 167.1).) Although his rebate application was made well after the two-year limitation in s. 261(3), he unsuccessfully argued that under the common law principle of discoverability, the two-year period did not start running until he discovered his overpayment on his change in accountants. Wong J added, obiter (para. 25):

No evidence was introduced to show that the joint election was made with respect to subsection 167(1) for the tax-free supply of the Vendor’s business assets. Therefore, since no election appears to have been made, this transaction was subject to GST/HST and the tax in issue was likely not paid in error.

The taxpayer was a Mercedes dealer, licensed through Daimler-Chrysler UK ("DCUK"). DCUK exercised its rights under its dealer agreements to terminate the agreements. This would normally require 24 months' notice, but could be 12 months in limited circumstances. The dealers and DCUK disputed which period applied, and eventually arrived at a settlement in which dealers would receive a "territory release payment" ("TRP") for surrendering the dealership after 24, 18, or 12 months, with a higher TRP for an earlier termination. The taxpayer elected to take the earliest termination and highest TRP, which was paid by a third party ("Leadley") that took over the taxpayer's dealership.

Under UK tax law, an amount paid for goodwill would qualify for "roll-over relief," but an amount paid for the surrender of a right (such as the right to be a Mercedes dealer) would give rise to capital gains treatment.

The Upper Tribunal found (reversing the First-tier Tribunal) that, although the basic TRP (i.e. for a 24-month termination) could be attributed to goodwill, the additional amount for early termination could not. It stated that the "natural inference" was that, in receiving a higher TRP because of early termination, "Mertrux was being paid to forgo the opportunity to continue to earn profits as a dealer, as it was entitled to under the Dealer Agreement, as varied by the [settlement]" (para. 20).

Contrary to the First-Tier Tribunal's finding, the characterization of the payments from Leadley's perspective (who had no reason to pay compensation for the loss of the dealership) was irrelevant. The Tribunal stated (at para. 22):

In any case, it is inherently unlikely that Leadley paid the whole of the TRP for goodwill of Mertrux. The reality is surely that it paid the TRP because DCUK required it to as a condition of becoming a dealer. From Leadley's point of view, the TRP will have been the price of obtaining a dealership from DCUK.