Goodwill, Trademarks and Customer Lists


Gifford v. Canada, 2004 DTC 6120, 2004 SCC 15, [2004] 1 S.C.R. 411

The acquisition by the taxpayer, who was employed as a broker by an investment dealer, of the customer lists of a departing employee of the same firm, was found to be made on capital account for purposes of s. 8(1)(f)(v). The purchase "significantly expanded Mr. Gifford's client network, the structure within which he earned his employment income" and the payment was intended to secure a lasting advantage.

Tomenson Inc. v. The Queen, 86 DTC 6267, [1986] 1 CTC 525 (FCTD), aff'd 88 DTC 6095, [1988] 1 CTC (FCA)

The taxpayer acquired a capital asset when it purchased the customer lists of an insolvent insurance agencies practice and obtained the right to collect outstanding receivables in consideration of agreeing to pay 30% of the net commissions derived from the new customers over a 4 year period to the trustee in bankruptcy. Although the taxpayer did not obtain exclusive rights to deal with the customers, the taxpayer anticipated obtaining continuing revenues from its acquisitions over a 3 or 4 year period, and the hiring of key personnel from the agencies helped ensure the continued value of its acquisition.

The Queen v. Sunstrum, 78 DTC 6300, [1978] CTC 421 (FCTD)

The purchase of the client lists of an insurance and tax consulting business for a price based on a multiple of estimated commission earnings was a capital expenditure. The lists were expected to be of lasting and substantial value, partly in light of the oral promises of the vendor to facilitate various aspects of the transfer of the goodwill of the business.

The Queen v. Baine, Johnstone & Co. Ltd., 77 DTC 5394, [1977] CTC 556 (FCTD)

The purchase by an insurance company of customer lists was held to entail the purchase of business goodwill, and therefore was a capital expenditure, in light of the importance attached to the assurance of the vendor that he would not be competing with the purchaser for the files sold or for future business (in the case of one purchase) and (in the case of the purchase of customer lists from a law firm) a provision against competition by them for 10 years and their undertaking to act as liason between the insureds and the purchaser for an indefinite period.

Cumberland Investments Ltd. v. The Queen, 75 DTC 5309, [1975] CTC 439 (FCA)

The taxpayer, which carried on the business of supervising general insurance agents, agreed to pay $150,000, payable over six years, for the purchase of sub-agency accounts of a competitor in the same business. Although the shareholder of the vendor company was not personally bound by a restrictive covenant, his circumstances effectively precluded him from going back into business as a general agent. In finding that the expenditures were capital expenditures, Thurlow J. stated (p. 5310):

"The outlay of $150,000 and the follow-up procedure carried out to establish the necessary relationships with the former MacInnes agents were calculated to achieve ... the absorption by the appellant of the supervising insurance agency business of W.R. MacInnes & Co. and at the same time the effective elimination of that concern and its owner as a competitor. The expenditure was thus, in my view, incurred to work an immediate and substantial expansion of the appellant's business and to expand and enhance the goodwill attaching thereto ..."

Canada Starch Co. Ltd. v. MNR, 68 DTC 5320, [1968] CTC 467 (Ex Ct)

Expenditures incurred by the taxpayer in developing a trademark, including costs of market research and a lump sum of $15,000 paid to another company for the latter's agreement to withdraw its opposition to the taxpayer's application for registration of the trademark, were on income account. Trademarks, like other facets of the goodwill of a business, result from the current operations of the business, and this characterization is not changed where huge sums must be spent on market surveys before a decision is made as to what product to market, or where additional expenditures must be made in order to obtain the advantages of registration. (Jackett P. noted, however, that the acquisition of a trademark of somebody else is on capital account.)

Butler v. MNR, 67 DTC 5019, [1967] CTC 7 (Ex Ct)

On the purchase by an accounting firm of an accounting and bookkeeping practice, $8,001 was allocated to goodwill and $16,600 was allocated to client lists. Gibson J. found that the full amount was anent the purchase of goodwill and therefore was a non-deductible capital expenditure.

Dominion Dairies Ltd. v. MNR, 66 DTC 5028, [1966] CTC 1 (Ex Ct)

The taxpayer purchased the assets of a small dairy for a purchase price of which $344,000 was allocated to customer lists and goodwill. The taxpayer subsequently allocated $209,600 specifically to customer lists, an amount which was calculated on the basis that it cost $10 to have its own salesman canvass and obtain a retail customer of milk and $30 for a wholesale customer. The taxpayer also obtained a three-year non-compete covenant from the vendor.

Gibson J. found that the full $344,000 was attributable to the purchase of goodwill, which at law was a capital asset and that it was not possible to deduct any portion of this sum.

Southam Business Publications Ltd. v. MNR, 66 DTC 5215, [1966] CTC 265 (Ex. Ct.), briefly aff'd 67 DTC 5150 (SCC)

The taxpayer purchased the Financial Times as a going concern for $75,000, of which $50,000 was allocated in the agreement of purchase and sale to the vendor's circulation list. Noël J., in rejecting a submission that the $50,000 payment was deductible on income account, found that the advantages obtained "were of a continuing and not of a transient nature" (p. 5222) in light of the fact that 70% of the subscribers were retained by the purchaser and went on (at p. 5223) to apply the principle that "in the case of the purchase of a business as a going concern, when the expenditure (if it is not clearly for the purchase of stock in trade) is always a capital outlay".

Seaboard Advertising Co. Ltd. v. MNR, 65 DTC 5188, [1965] CTC 310 (Ex. Ct.)

Of the $230,000 which the taxpayer paid for the acquisition of substantially all the outdoor advertising display business of its principal competitor, $100,000 was allocated to the purchase of contracts with unexpired terms ranging from under one year to five years. Noël J., in finding that no part of the amount paid for the contracts was deductible, first noted (p. 5193) that:

"The object and effect of the payment of [the $230,000] was clearly to obtain for the appellant a substantial and lasting advantage of being in a position through its business life to ensure and retain as virtual monopoly of the market as well as an endurable (which does not mean perpetual) advantage or benefit in the long-term contracts obtained."

In response to a submission that there essentially should be no difference between acquiring contracts in the course of operations, and purchasing them from a third party, Noël J. stated (p. 5193) that where such contracts:

"are acquired by an expenditure made in the process of purchasing a business with the consequent procurement of endurable benefits ... such an expenditure must be considered not as part of the cost of carrying on a business, but as part of the cost in acquiring a business."

See Also

Les Gestions Pierre St-Cyr inc. v. The Queen, 2010 DTC 1196 [at 3490], 2010 TCC 146

The taxpayer supplied remote monitoring services directly to its own customers and also to customers of third parties (installers) who had installed and maintained the alarm systems in question. In finding that the acquisition of the contracts of the installers' customers on the acquisition of the businesses of the various installers were capital expenditures, Angers, J. stated (at para. 28) "that purchases enabled the Appellant to have direct relationships with 1,300 additional subscribers and to encourage them to renew their contracts with it" and (at para. 29) that "it is difficult to conclude that the Appellant's sole aim was to keep its revenues stream at the same level by purchasing the contracts with the customers".

Farm Business Consultants Inc. v. The Queen, 95 DTC 200, [1994] 2 CTC 2450 (TCC), briefly aff'd 96 DTC 6085 (FCA)

Weekly payments which the taxpayer made for a period of five years to the vendors of a business it had purchased whose aggregate amount was equal to $26.64 for each customer of the business, which purportedly were made pursuant to a consulting agreement with the vendors, were found to be non-deductible only to the extent permitted by the eligible capital property rules, given that the consulting agreement was never intended to be acted upon.

Miramar Shoe Imports Limited v. Minister of National Revenue, 91 DTC 317, [1991] 1 CTC 2124 (TCC)

The taxpayer, which like other shoe importers was prohibited from purchasing shoe import quotas, accomplished effectively the same thing by buying all the shares of another shoe importer ("TKT") and using TKT's import quota for its remaining life of 2 1/2 years. The taxpayer was entitled to deduct the portion of the purchase price for the shares of TKT which it allocated to the value of the shoe import quota.

Today’s Business Products Limited v. Minister of National Revenue, 91 DTC 148, [1991] 1 CTC 2142 (TCC)

On the purchase of the business of the competitor, the taxpayer agreed to pay to the vendors a percentage of all sales to previous customers of the purchased business made over the five years after closing. A portion of these commissions were deductible in the light of fact that the value of services provided by the vendors to the purchaser, particularly in respect of maintaining a computer data processing system, were more valuable than the charges for those services and in light of the fact that there was no customer loyalty associated with the purchased business.

Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd., [1964] A.C. 948 (PC)

The sum of £1,384,569 paid by the taxpayer to another copper mining company in order to compensate the other company for its agreement to abandon production of copper for one year (thereby permitting the taxpayer to expand its production for the year, rather than sharing in an industry-wide cut-back in production) did not result in an enduring benefit or an accretion to its income-earning structure and, accordingly, was fully deductible.

John Smith and Son v. Moore (1921), 12 TC 266 (HL)

The taxpayer acquired a business of purchasing and selling coal from his father's estate for a purchase price that included a sum of £30,000 allocated to forward contracts for the purchase of coal at specified prices which had become quite valuable as a result of the outbreak of World War I. The contracts were characterized as part of the fixed capital of the business, i.e., the means by which the taxpayer was able to trade in coal. Accordingly, the amount paid for those contracts was a capital expenditure.

City of London Contract Corp., Ltd. v. Styles (1887), 2 TC 239 (C.A.)

The taxpayer was incorporated to purchase as a going concern a business of contracting for public works. The purchased business consisted entirely of partially executed or wholly unexecuted contracts and related rights. It was held that the purchase price paid by the taxpayer was capital which the taxpayer had paid to embark on the business and accordingly was a capital expenditure.

Administrative Policy

28 September 2010 External T.I. 2010-0372461E5 F - Exploitation d'une entreprise à perte

per Canada Starch, a payment made to preserve goodwill or a business is not a capital expenditure

An individual, a pharmacist, operates a pharmacy at a profit but also, as part of the same business, has a commercial department which sells other products generating a loss, but with that commercial division helping to generate revenues for the pharmacy department. If he drops the pharmacy department down into a newly-incorporated corporation ("Pharmaco") and sells the commercial department to an arm's length corporation ("Opco B"), with Pharmaco agreeing to pay Opco B annual amounts equal to a percentage of Opco B's sales in consideration for Opco B agreeing to continue to carry on the acquired business (the commercial department), would such payments be deductible?

In its response, as summarized by it, CRA indicated that such payments would not be capital expenditures, stating:

According to the principles set out in Canada Starch Co Ltd v MNR, a payment made to preserve a business does not create assets.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 3 - Paragraph 3(a) - Business Source/Reasonable Expectation of Profit reasonable expectation of profit test not applied where no personal element 158