Section 68


Transalta Corporation v. Canada, 2012 DTC 5040 [at 6757], 2012 FCA 20

parties' allocation to goodwill respected

A partnership bought the assets of an electric company at a price that was $190 million in excess of the regulated book value (the amount on which the electric company was allowed to earn a return) and allocated such excess to goodwill. The Minister argued that, because goodwill is what allows a better-than-normal return on an asset, and the asset return was regulated, there could be no goodwill. The Minister reallocated the premium principally to depreciable assets.

The trial judge disallowed the portion of this goodwill amount attributable to tax advantages and leverage opportunities, reasoning that these benefits related instead to the value of the tangible assets.

The Court of Appeal allowed the allocation of the entire excess amount to goodwill. Mainville J.A. stated (at paras. 5-6):

Whereas business goodwill was formerly considered to pertain to good name, reputation and connection principally with respect to customer relations, the concept has now taken on a broader meaning influenced by economic, accounting and valuation theories.

Goodwill has three characteristics: (a) it must be an intangible; (b) it must arise from the expectation of future earnings, returns or other benefits in excess of what would be expected in a comparable business; (c) it must be inseparable from the business to which it belongs and cannot normally be sold apart from the sale of the business as a going concern. If these three characteristics are present, it can reasonably be assumed that goodwill has been found.

Respecting the weight to be given to the parties' allocation, he stated (at para. 75, 78, after citing Gabco):

[A]n amount can reasonably be regarded as being consideration for the disposition of a particular property if a reasonable business person, with business considerations in mind, would have allocated that amount to that particular property....That the parties to an arm's length transaction have agreed on an allocation is an important factor to consider, but an agreed allocation which does not meet the reasonableness test may still be challenged under section 68.

Schwartz v. Canada, 96 DTC 6103, [1996] 1 SCR 254

The taxpayer received $360,000 (plus costs) in settlement of his claim for damages following the repudiation by a company ("Dynacare") of its agreement to employ him as a senior vice-president.

La Forest J. found that in the absence of any evidence tending to establish what portion of the $360,000 was allocated to compensation for loss of future employment, on the one hand, and compensation for embarrassment, anxiety and inconvenience, on the other hand, no part of the amount could be found to be taxable under s. 3(a) as income from the employment contract.

H. Baur Investments Ltd. v. The Queen, 90 DTC 6371 (FCTD)

The Court refused to depart from a supplementary agreement as to the allocation of purchase price between land, building and equipment in a sale of an apartment building property by the taxpayer in light of the consideration the taxpayer had given to making a counter-proposal as to the allocation and the similarity that such allocation bore to the allocation on the purchase seven years previously by the taxpayer of the property.

The Queen v. Golden et al., 86 DTC 6138, [1986] 1 CTC 274, [1986] 1 S.C.R. 209

The phrase "the disposition of any property" means the sale of a particular item or items of property and "the expression 'something else' must be given the widest meaning reasonably assignable, which would include different items and classes of property as well as the rarer class of non-property." The court accordingly rejected the taxpayers' argument that s. 68 could not apply to re-allocate an aggregate consideration of $5,850,000 among various classes of property including land, building and equipment which the taxpayers sold. However, the taxpayers' allocation of $5,100,000 to land and $750,000 to depreciable property was determined to be reasonable.

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property "property" includes a contract right, or potentially covenant to deliver knowhow 72
Tax Topics - Statutory Interpretation - Context 25

The Queen v. Demco Management Ltd., 85 DTC 5603, [1986] 1 CTC 92 (FCA)

It was held by Mahoney, J.A. that for the purpose of computing the capital gain from the disposition of a hospital there was no requirement that separate valuation day values be established for non-depreciable, depreciable and eligible capital properties comprised in the business entity by allocating an overall value among them.

Salt v. The Queen, 84 DTC 6395, [1984] CTC 414 (FCTD)

Proceeds of disposition of two lots were allocated between the two lots by using the average price per square foot since "there was no feature of topography or elevation of [the two lots] which would dictate a basis other than the application of an average price per square foot to the whole area".

Millers Credit Jewellers Ltd. v. The Queen, 84 DTC 6205, [1984] CTC 218 (FCTD)

Although a building on expropriated land was worthless to the expropriating municipality, a portion of the proceeds (equal to the building's undepreciated capital cost) was allocated to the building because "it is inconceivable that an expropriating authority would disregard the existence of, and fail to compensate for improvements upon the land it expropriates merely because it will have no use for them".

Golden v. The Queen, 83 DTC 5138, [1983] CTC 112 (FCA), aff'd supra.

Given the reciprocal effect of a s. 68 allocation, the determination under S.68 is not to be approached from the viewpoint of the vendor only. The allocation agreed to by arm's-length parties is entitled to be given considerable weight.

Elworthy v. The Queen, 82 DTC 6067, [1982] CTC 62 (FCTD)

The allocation between bare land and building was affected by B.C. legislation which prohibited tearing down the building, which otherwise would have been the economical thing to do. The bulk of the total consideration was allocated to the building.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Land 62

A.G. Canada v. Matador Inc., 80 DTC 6022, [1980] CTC 51 (FCA)

It was held that an allocation of the sale price of land including building, where the sale agreement was silent on the question of allocation, should be made "on the basis" of (a) the fair market value of the bare land and (b) the amount by which the fair market value of the land was increased by reason of the presence of the building. (See also Matador Inc. v. MNR, 80 DTC 1117, [1980] CTC 2105 (T.R.B.), where the above instructions were applied.)

Roywood Investments Ltd. v. The Queen, 79 DTC 5451, [1980] CTC 19 (FCTD), aff'd 81 DTC 5148, [1981] CTC 206 (FCA)

In determining what portion of a purchase price was paid for a building, the Court may consider the evidence of accountants and real estate valuators. Evidence of a chartered accountant was accepted to the effect that since the building was an impediment to the best use of the land, under generally accepted accounting principles all the purchase price should be allocated to the bare land.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(c) 68
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) land with building was acquired only for purpose of generating capital gain 48

The Queen, v. Leclerc, 79 DTC 5440, [1979] CTC 527 (FCTD)

$429,000 of the aggregate purchase price of $650,000 was allocated to building, notwithstanding that the deed of sale, following some negotiation on this point by the parties, allocated only $350,000 to the building. It was stated that while the written agreement must be given considerable weight, appropriate weight must also be given to other indicia of relative value - here, the valuation of the Board of Revision of the City of Montreal.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Evidence 69

R. v. Malloney’s Studio Ltd., 79 DTC 5124, [1979] CTC 206, [1979] 2 S.C.R. 326

S.20(6)(g) of the old Act did not apply to the taxpayer's sale of premises pursuant to an agreement which provided that the lands should be "clear of all buildings" on the closing date. First, it could not be said that the equitable ownership of the building was transferred to the purchaser at the time of entering into the agreement of purchase and sale (and prior to the time of its demolition) because the building was not made the subject of the contract. Second, it could not be said for any other reason that the sale involved both the sale of depreciable property and "something else". The contract demonstrably related only to the sale of vacant land. Third, the final words of s. 20(6)(g) contemplate that the subject properties are disposed of "to" a person, and here the demolition of the building did not entail its acquisition by the purchaser.

The Queen v. Jessiman Brothers Cartage Ltd., 78 DTC 6205, [1978] CTC 274 (FCTD)

The taxpayer, which previously had transported mail for Canada Post in the Winnipeg area, sold its fleet of 60 trucks to Canada Post for $91,675. It argued that since the trade-in value of the trucks was only $57,722, the difference should be regarded as being for a "nothing" such as goodwill. It was held, however, that the difference reflected the unique suitability of the fleet for use in Canada Post's operations, and the entire amount accordingly was consideration for the trucks.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 178 - Subsection 178(2) 16

The Queen v. Moulds, 78 DTC 6068, [1978] CTC 146 (FCA)

The taxpayer acquired land with two small apartment buildings on it in 1961 because he conidered the site to be suitable for the construction of a medical office building. In 1964 he sold the land, for a price stipulated to be only for the land, to a company that had been incorporated by him and other doctors to erect the medical building. Since the taxpayer did not ask for more than the value the land had to the purchasing group, the allocation by him of none of the purchase price to the two buildings which were subsequently demolished was upheld.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Estoppel 103

Dominion Stores Ltd. v. MNR, 66 DTC 5111, [1966] CTC 97 (Ex Ct)

In finding that the taxpayer in fact received an amount in respect of the issuance by it of "free" trading stamps on the purchase of groceries by its customers, Cattanach J. stated (p. 5116):

"When two articles are sold together for one price without a price being put upon each separately, it does not follow that one article is free and that the price is attributable exclusively to the other article."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) portion of sales allocated to trading stamps 128

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

The taxpayer paid $230,000 for the acquisition of substantially all the business of its competitor, including $100,000 which was allocated to customer contracts. In finding that the character of the expenditure made for the customer contracts should not be analyzed separately from the larger transaction, Noël J. stated (p. 5193):

"A correct appraisal of the agreement entered into by the appellant with [the Vendor], is that by this transaction a business as a going concern was bought as an enduring asset rather than a purchase of severable disparate parts."

See Also

Wagner v. The Queen, 2012 DTC 1234 [at 3645], 2012 TCC 8

An agreement of a corporation ("Château Dollard") owned equally by the three individual taxpayers to sell its assets for $13,750,000 was replaced by an agreement of the taxpayers to sell their shares to the same purchaser for a selling price that was reduced by the sum of $4,678,000. This sum instead was stated to be paid to them in consideration for their entering into a non-competition agreement with the purchaser. $1,050,000 paid by the taxpayers to the purchaser was stipulated as consideration for the purchaser converting the purchase arrangement to a share purchase. The taxpayers treated their proceeds from the disposition of their shares as $7,144,584 (i.e., the proceeds were reduced both by their $1,050,000 payment and also by the amounts allocated to their non-competition agreements, which they treated as non-taxable receipts.)

In finding that no weight should be given to the parties' agreed allocation, Favreau J indicated that they were not dealing at at arm's length in agreeing to this allocation as the purchaser was sharing through the $1,050,000 payment in the anticipated tax benefit to the taxpayers of the restructured transaction. He stated (at para. 43):

[T]he parties were working together and had a common interest, that is, that of minimizing as much as possible the tax consequences of the transaction and to divide among them the tax saving on the projected income.

There was no evidence that the $1,050,000 payment was a disposition expense, and the amounts allocated to the non-competition agreement were patently unreasonable. In finding that the the full $13,750,000 received was proceeds of disposition of the taxpayers' shares , Favreau J referred (at para. 49) to the Glegg principle that:

there is no need to turn to paragraph 68(a)...where the entire amount of consideration received or receivable by a taxpayer from a person can reasonably be regarded as consideration for the disposition of a particular property, namely the shares sold... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) common interest in sharing tax saving 108

FLSmidth Ltd. v. The Queen, 2012 DTC 1052 [at 2745], 2012 TCC 3, aff'd 2013 DTC 5118 [at 6147], 2013 FCA 160

Paris J rejected the taxpayer's submission (to the effect that the phrase "can reasonably be regarded" in s. 20(12) did not permit the Minister to look to the economic substance of arrangements given that it did not also contain the language, contained in ss. 16(1) and 68, authorizing the Minister to go beyond the "form or legal effect" of the arrangements), stating (at para. 63):

The words "irrespective of . . . the form or legal effect thereof" found in subsection 16(1) and "irrespective of the form or legal effect of the contract or agreement" found in section 68 do not modify the phrase "can reasonably be regarded" but instead relate to the deeming provision which follows in each case which deems certain types of income to have been received by the taxpayer. There is no such deeming provision in subsection 20(12).

Robert Glegg Investment Inc. v. The Queen, 2008 DTC 2466, 2008 TCC 20, aff'd , 2009 DTC, 2008 FCA 332

The taxpayer, which sold its shares of a company ("Glegg Industries") at the same price as that received by the minority shareholders of Glegg Industries, argued that a considerable portion of the sales proceeds received by it were properly allocable to a non-competition agreement given by its shareholder (Mr. Glegg). In rejecting this submission, C. Miller, J. noted that the taxpayer was not a party to the non compete, and that the only thing it had to sell was its shares.

He also noted that s. 68 can be relied upon to allocate between two types of property, so that there is no requirement that the taxpayer have provided, in part, services.

Staltari v. The Queen, 95 DTC 506 (TCC)

Beaubier TCJ. affirmed the Minister's reassessment treating all but $15,000 of a $115,000 sum purportedly paid to an arm's length dismissed employee as the price for the purchase for cancellation of his shares of the employer, as a retiring allowance given that there was no evidence to show that the employee had no chance of succeeding in his wrongful dismissal claim against the employer.

Spies v. The Queen, 94 DTC 1964 (TCC)

All the proceeds received by the taxpayer in connection with the sale of his land to TransCanada Pipelines Limited ("TCP") were to be characterized in that manner notwithstanding that prior to reaching an agreement for the sale, the taxpayer had sought TCP's agreement to instead pay him business interruption compensation in respect of TCP's plan to run gas pipelines under the surface of his property (rather than purchasing his land). Bowman TCJ. stated (p. 1967):

"There is a world of difference between being compensated for a loss of profits in an ongoing business ... and being paid the consideration for the sale of a capital asset where the price may take into account the income producing potential of the property."

Inshore Investments Ltd. v. The Queen, 92 DTC 6162 (FCTD)

A written agreement between the taxpayer (a venture capital corporation) and another corporation ("Taiga") provided for the sale by the taxpayer of shares and debentures of Taiga back to Taiga and for the payment to the taxpayer of $250,000 "on account of special management services which the [taxpayer] acknowledges had been performed by [Taiga]". The taxpayer was not permitted to resile from this characterization of the $250,000 as a taxable fee for services given that the agreement had been signed after negotiation with the benefit of legal counsel, and in light of evidence that the taxpayer in fact had provided significant management services to Taiga. "The Court does not know if the services in question are worth $250,000, but that was agreed to by the parties" (p. 6166).

Leonard v. MNR, 91 DTC 545 (TCC)

The taxpayers were successful in allocating a higher portion of the purchase price to livestock and the cost of milk quotas, and a lower portion to land, than was reflected in the agreement of a purchase and sale which had been negotiated with the vendors, given expert evidence as to the respective market values of those properties and the absence of serious negotiations over the allocation.

Administrative Policy

S3-F4-C1 - General Discussion of Capital Cost Allowance

Categories covered

1.80 … As it pertains to depreciable property, the provisions of section 68 can apply to consideration for:

  • both depreciable and non-depreciable property;
  • depreciable properties included in two or more prescribed classes; or
  • depreciable property and something other than property, such as services, or a restrictive covenant as defined in subsection 56.4(1).

Allocation to building

1.84 Where a building is not demolished immediately after being purchased, the facts of each case will determine whether any part of the price was in respect of the building and whether the property was depreciable property. In addition to the fair market value of the properties involved, the CRA will consider other factors, such as:

  • the length of time prior to demolition and whether the building was income-producing;
  • any maintenance or repairs made to the building;
  • the amount of income earned;
  • renewal of leases, if any, and the length of the renewal; and
  • the costs of breaking leases, if any.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense 556
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A 791
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property 218
Tax Topics - Income Tax Act - Section 16.1 - Subsection 16.1(1) 275
Tax Topics - Income Tax Act - Section 13 - Subsection 13(28) 254
Tax Topics - Income Tax Act - Section 13 - Subsection 13(27) 222
Tax Topics - Income Tax Act - Section 13 - Subsection 13(29) 155
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2) 212
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2) 351
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(3) 70
Tax Topics - Income Tax Act - Section 18 - Subsection 18(3.1) 166
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.5) 207
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) 65
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(b) 230
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(1) - Paragraph 1102(1)(c) 170
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e) 65
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) 152
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(a) 75
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.1) - Paragraph 13(21.1)(b) 212
Tax Topics - Income Tax Act - Section 13 - Subsection 13(1) 431
Tax Topics - Income Tax Act - Section 8 - Subsection 8(2) 75
Tax Topics - Income Tax Act - Section 20 - Subsection 20(16.1) 152
Tax Topics - Income Tax Act - Section 13 - Subsection 13(9) 229
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) 321
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 8 237
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5) 317
Tax Topics - Income Tax Act - Section 13 - Subsection 13(6) 221

18 July 2011 External T.I. 2010-0370561E5 F - Location avec option d'achat

where lease is coupled with bargain purchase option, a portion of the rents must be allocated to option proceeds

Where there is a real estate lease with a purchase option, is a portion of the rent paid under a lease with a bargain purchase option allocated to the option? CRA responded:

Where the landlord receives a payment during the term of a lease with a bargain purchase option … the landlord must allocate a portion of that amount to the lease and another portion to the purchase option, where that option has a value. …

[A] method of allocating a payment between the lease and the proceeds of disposition of the option that unduly defers the inclusion of the rent in the lessor's income will not give an accurate picture of profit.

The CRA has not issued guidelines to determine the amount to be allocated to a bargain purchase option, and … does not intend to issue such guidelines.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 49 - Subsection 49(1) where lease is coupled with bargain purchase option, a portion of the rents must be allocated to option proceeds 164
Tax Topics - General Concepts - Substance lease is a lease in the absence of sham 92

92 C.R. - Q.9

Paragraph 6 of IT-96R5 (respecting circumstances in which it is not necessary to allocate consideration to a conversion feature) applies where a non-separable conversion feature entitles the security holder to convert into a security of the issuing corporation or to exchange for a security of another corporation.

September 1991 Memorandum (Tax Window, No. 10, p. 16, ¶1479)

Where various assets are sold for a single price without a contractual allocation of the price among the assets sold, and the parties make identical allocations of the proceeds, RC will normally accept the allocation provided it is reasonable. Where each party makes a different allocation, RC will determine if either allocation is reasonable.

89 C.M.TC - Q.3

s. 68 continues to have application to the issue of allocation between two properties.

88 C.R. - F.Q.12

Where there is no agreed allocation, each taxpayer should prorate the purchase price based on relative fair market values.

80 C.R. - Q.16

RC will look beyond the written allocation of arm's length parties where the parties do no follow the agreed allocation, where the total selling price being allocated is not the fair market value of the assets, or where the agreed allocation is unreasonable and can only be explained by a party's tax motivation.

80 C.R. - Q.41

In MURB offerings, it is reasonable to regard down payments of cash and promissory notes and mortgage draws as being applied first to goods and services as they are brought or rendered, and as only being applied to future goods or services to the extent of the balance.

IT-220R2 "Capital Cost Allowance - Proceeds of Disposition of Depreciable Property"

Detailed discussion under heading "Combined Consideration".

IT-96R "Options Granted by Corporations to Acquire Shares, Bonds or Debentures"

[para. 9] In the case of a security with a conversion feature which is not severable from the security and cannot be separately traded, no part of the issue price can be allocated to the conversion feature.

IT-304R "Capital Cost Allowance - Condominiums"

Where a unit or strata lot is purchased, an allocation is required to be made between the cost of the undivided interest in the land and the interest in the building.

Paragraph 68(c)


Michael Coburn, "Practical Strategies for Dealing with the Restrictive Covenant Provisions", 2014 Conference Report (Canadian Tax Foundation), 8:1-29

Burden on CRA of establishing unreasonableness/reasonableness of nil allocation (pp.17-19)

Effectively, the courts have created a test where the CRA will be considered to have failed to meet the reasonable tests in section 68 if the CRA cannot demonstrate that the taxpayer made an unreasonable allocation….

…[T]he threshold for establishing unreasonableness is high. Specifically, the Federal Court of Appeal in Transalta… cited with approval the reasonableness standard set out in Gabco… […68 DTC 5210.]

[Transalta suggests that] the strategy of minimizing the impact of section 56.4 by allocating nil or nominal proceeds to the grant of a restrictive covenant… would succeed even where a safe harbour did not apply if it could be demonstrated that a reasonable business man would agree to a nil or nominal allocation of proceeds.

…[T]here would appear to be significant support for the position that two reasonable business persons would agree to allocate nil or nominal consideration to a restrictive covenant.

Jack Bernstein, "Canadian Intangibles, Noncompete Payments, and Allocations of Purchase Price", Practitioner's Corner, Tax Notes International, 26 March 2012, p. 1011

High-level overview.