Goodwill, Trademarks and Customer Lists

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.

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 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 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.

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 ..."

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.)

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.

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.

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".

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."