Words and Phrases - "goodwill"
9 November 2005 Internal T.I. 2005-0154301I7 F - Choix concernant les immobilisations admissibles
On a sale of a residential care facility, the taxpayer allocated substantially all of the sale price to operating agreements with the Quebec Ministry, and took the position that the election under s. 14(1.01) (which at the time had provided that the election could be made regarding eligible capital property other than goodwill) was available as the operating agreements represented ECP other than goodwill. Before noting that the distinction would cease to matter as a result of a proposed retroactive amendment to s. 14(1.01), the Directorate accepted that the agreements represented goodwill stating:
[A] private institution under contract must also sign an operating agreement with the MSSS [Quebec Ministry] under which the institution undertakes to provide services as a CHSLD [care facility] … . In return, the MSSS provides the necessary funding for the operation of the institution.
… [T]he operating agreements constitute goodwill … since the acquisition of one or more operating agreements by a purchaser can only be made if the Minister … has approved the assignment of the underlying licence. In other words, the transfer of operating agreements by one institution under contract to another must be preceded by the transfer of the underlying licence. Thus, since the transfer of the operating agreements cannot be made without the transfer of the business to the new purchaser, we are of the view that the operating agreements constitute goodwill … .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 14 - Subsection 14(1.01) | cost of property acquired can be nil | 113 |
28 January 2021 Internal T.I. 2019-0817641I7 - Acquisition of rights to pension surplus
A portion of the purchase price paid for the acquisition of a business of the Seller by the Purchaser was allocated to the actuarial surplus in a defined benefit pension plan (the “Plan”) for which the Seller was the sponsor and employer, with the Purchaser being assigned the Seller’s obligations under the Plan. The plan permitted the employer to use actuarial surplus to reduce contributions, or to be returned to the employer to the extent allowed by the Act and pension law. Any surplus assets were to be returned to the employer on winding-up the Plan. These potential entitlements passed to the Purchaser as the new sponsor.
- In finding that the amount allocated to the actuarial surplus was a capital expenditure that did not qualify as an eligible capital expenditure (ECE) (and would not have qualified as the cost of a Class 14.1 property) had the acquisition occurred after 2016, the Directorate indicated that:
- Having regard for the exclusion from ECE (or Class 14.1) for an amount that is not deductible by virtue of a specific provision other than s. 18(1)(b), such amount was excluded by s. 18(1)(e), which prohibited the deduction for a reserve (“described by the courts as something set aside that can be relied upon for future use”) given that “any actuarial surplus in this case can be applied as a contribution holiday to relieve the Purchaser from its future contribution obligations”
- Furthermore, there the exclusion under s. 78(4) would also apply because it prohibits the deduction of an amount for pension benefits which will be paid more than six months after the current taxation year, including (in this context) the use of surplus to cover the employer’s current service costs.
- The exclusion for “an amount that is the cost of … an interest in a trust” also applied since the Purchaser acquired an equitable interest in the Plan, i.e., there it could potentially take a contribution holiday, receive a return of contributions on a winding-up of the Plan, and potentially receive the surplus in other circumstances.
- Regarding the specific exclusion in Class 14.1 of “goodwill,” this was defined in TransAlta as “an unidentified intangible asset,” whereas the surplus here instead “was supported by actuarial estimates and was objectively quantifiable,” “represents real value that can be applied to offset the employer’s contribution obligations for a number of years” and “[u]nlike goodwill … can be separated from the employer’s business if, as in this case, the plan terms permit surplus to be returned to the employer when the appropriate regulatory procedures are followed” and, thus, “was not an unidentified intangible.”
- The surplus amount would also not be deemed goodwill under s. 13(35) because of failure of the condition in s. 13(35)(a) (it would represent the cost of a property, e.g., the right to apply actuarial surplus to contribution obligations under a defined benefit pension plan) and failure of the condition in s. 13(35)(c) (it was not otherwise deductible because of s. 18(1)(e) or 78(4)).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(e) | purchased actuarial surplus was a reserve | 195 |
| Tax Topics - Income Tax Act - Section 78 - Subsection 78(4) | s. 78(4) exclusion would apply to the purchase of actuarial surplus | 191 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(35) | purchased actuarial surplus was not deemed goodwill under s. 13(35) | 222 |
Healius Ltd v Commissioner of Taxation, [2019] FCA 2011, rev'd [2020] FCAFC 173
The taxpayer was an Australian public company that provided (including, relevantly, through a subsidiary trust (“Idameneo”) whose results were consolidated for tax purposes with its own medical centre facilities and services to doctors in consideration for 50% of the fees generated by them. In order to induce a doctor to join one of the medical centres operated by it, it would typically pay a lump sum in the range of $300,000 to $500,000 to the doctor in consideration for the doctor’s promise to conduct his or her practice from the medical centre for a specified period (generally around five years) and not to provide medical services to anyone within a radius of, say, 7km of the medical centre or the doctor’s own former practice at that practice’s previous location within that period. In the four-year period, the taxpayer entered into 505 such agreements.
In finding that such payments were not outgoings of ‘capital or of a capital nature’ within the meaning of s 8-1(2)(a) of the Income Tax Assessment Act 1997 (Cth), so that they were deductible when incurred, Perram J found that:
- “the payments of the lump sums are to be seen as recurrent and ongoing as Idameneo consistently tried to engage doctors to meet its ongoing demand for them. It did so 505 times in the relevant period…” (para. 55)
- “I accept, of course, that the enduring nature of an outgoing is a very relevant matter … but I do not think that the five year term obtained under the contracts here was of such a nature. At the end of the five year period, the doctor was free to go and the evidence disclosed several examples where Idameneo had had to make further payments to keep a doctor whose five year term had expired working in one of its medical centres" (para. 70)
- "the Commissioner’s submission that by paying the lump sums Idameneo acquired the practices of the doctors or their goodwill ... [was] not consistent with ... ‘what the payments were really for’" (para. 62)
- “the character of the outgoings was as a payment to win a customer” (para. 72)
- “This is analogous to the position of the petrol company in BP Australia where Lord Pearce at 405 had referred to the fact that ‘[t]he benefit was to be used in the continuous and recurrent struggle to get orders and sell petrol’.”
Commissioner of Taxation v Sharpcan Pty Ltd, [2019] HCA 36
Due to a regulatory change, a hotel owner which had been sharing in the revenues generated from 18 gaming machines on its premises was required to bid for 18 assignable gaming machine licences (“GMEs”) in order to be able to continue with the 18 machines, as a result of which it was allocated 18 GMEs that permitted it to operate gaming machines at its premises for 10 years.
After finding that the $600,300 payable in annual instalments to the state government for the allocation of the 18 GMEs was a capital expenditure, the Court went on to find that the expenditure was not deductible under s. 40-880 of the Income Tax Assessment Act 1997(Cth) as expenditure incurred to preserve but not enhance the value of goodwill in relation to a legal or equitable right whose value was solely attributable to its effect on goodwill, stating (at para. 52):
The majority erred in considering the effect on the goodwill of the integrated hotel business and … in conflating goodwill with the going concern value of the business. Here the GMEs were assets which could be individually identified and quantified in the accounts of the Trustee's business, which had a value quite apart from any contribution that they may have made to goodwill. That value resided in their capacity to generate gaming income and the fact that they could be sold and transferred to other venue operators, albeit subject to some restrictions and qualifications.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Contract Purchases or Prepayments | 10-year gaming licences required to maintain existing gaming revenues were purchased on capital account | 350 |
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Concessions and Licences | periodic payments under 30-year government concession were currently deductible | 206 |
| Tax Topics - General Concepts - Purpose/Intention | purpose distinguished from motive | 237 |
Commissioner of State Revenue v Placer Dome Inc., [2018] HCA 59
Whether the acquisition by Barrick Gold Corporation ("Barrick") of another Canadian public company, namely, Placer Dome Inc. ("Placer") triggered Western Australia land transfer tax (“stamp duty”) of A$55 million on the unencumbered value of "the land and chattels situated in Western Australia” of an Australian subsidiary of Placer Dome turned on whether Placer was a "listed land-holder corporation" for Stamp Act purposes. This turned on whether, on a global consolidated basis, the value of all of Placer's land (defined to include mining tenements and improvements) equalled or exceeded 60% of the value of all its property.
The price Barrick paid to acquire Placer (grossed up for liabilities) was $15.346 billion. The post-acquisition balance sheet of Placer valued its identifiable assets at $8.84 billion including $5.694 billion for its land assets, and recognized goodwill of $6.506 billion, being the excess of the cost over the fair value of the specifically identified tangible and intangible assets.
In rejecting the proposition that sufficient value could thus be assigned to the goodwill to avoid a conclusion that Placer was a listed land-holder corporation, the plurality stated (at paras. 78, 87, 141 and 143):
The accounting approach in Murry [(1998) 193 CLR 605] was described as "the difference between the present value of the predicted earnings of the business and the fair value of its identifiable net assets". That methodology is not the same as comparing the fair value of Placer's identifiable net assets to the purchase price of the business, the accounting approach adopted by Barrick. ...
Murry did not broaden the legal concept of goodwill to include sources which did not generate or add value (or earnings) to the business by attracting custom. The "typical sources" of goodwill acknowledged in Murry were "typical sources" because "they motivate service or provide competitive prices that attract customers" (emphasis added). And Murry and the decision which preceded it, Box [(1952) 86 CLR 387], recognised that in the modern world, patronage – in the sense of customers through the door – was no longer the sole means of generating or adding value (or earnings) to a business by attracting custom. But, in both decisions, the recognition that there were other sources of goodwill was itself considered in terms of the ability of those other sources to attract custom. ...
[A]t the acquisition date, there were no sources of goodwill that could explain the $6 billion gap which was attributed by Barrick to goodwill. That unexplained gap suggests that the DCF calculations used by Barrick's valuers to value Placer's land, its principal asset, were wrong. … [T]he danger identified by the majority in Murry of attributing a value to goodwill which actually inheres in an asset was readily apparent. …
At the acquisition date, Placer was a land rich company which had no material property comprising legal goodwill. … [italics in original]
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Fair Market Value - Other | discounted cash flow valuation undervalued resource lands and residual valuation overstated goodwill | 342 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property | protean nature of property concept | 491 |
Lupien v. The Queen, 2016 TCC 2
A lacquer-manufacturing corporation (“Antoni”) indirectly owned by the taxpayer’s brother imported one of its product lines from an Italian company pursuant to an exclusive distribution agreement with it, and used the services of the taxpayer’s company (“LCR”) to distribute those products in Canada and the U.S. and provide after-sales service. Shortly before the sale of all the assets of Antoni to an arm’s length purchaser (“Chemcraft”), Antoni purchased all the assets of LCR. Lamarre ACJ affirmed the Minister’s finding that as the purchased LCR assets did not include any valuable goodwill (notwithstanding that LCR earned a significant portion of the combined profits), s. 160 applied to this purchase (and to a subsequent dividend paid by LCR to the taxpayer) on the basis that Antoni, which was a tax debtor, had paid more that the purchased assets’ fair market value.
In so finding, she noted that although goodwill “is a residual category of property which can encompass various diverse elements” (para. 90, TaxInterpretations translation), there was no evidence of a distributorship agreement with LCR that could not be terminated on short notice or that the LCR name, which was acquired by Chemcraft, was of any value to it, and that the asset sale agreement between LCR and Antoni had not listed goodwill as a transferred asset
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) | double application of s. 160 re asset sale for excess consideration | 92 |
Transalta Corporation v. Canada, 2012 DTC 5040 [at at 6757], 2012 FCA 20
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.
The Queen v. Demco Management Ltd., 85 DTC 5603, [1986] 1 CTC 92 (FCA)
Mahoney, J. stated that a definition of the goodwill of a private hospital "should bear in mind that the basis of its worth was its power to attract custom."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 68 | 54 |