/ THORSON, P.:—This is an appeal from the decision of the Income Tax Appeal Board, sub nom. No. 295 v. M.N.R. (1955), 14 Tax A.B.C. 81, dated November 10, 1955, dismissing the appellant’s appeals against his income tax assessments for 1949, 1950,1951 and 1952.
The salient facts may be stated briefly. The appellant is the president and principal shareholder of Alliance Advertising & Applied Arts, Inc., a Quebec corporation. Prior to February 1, 1948, he had been employed by several companies as an advertising salesman on a commission basis but on that date he started in business for himself under the name of Alliance Advertising & Applied Arts, Regd., hereinafter called the registered proprietorship. He carried on business under that name until August 31, 1949. At the beginning of the business of the registered proprietorship he did all the selling himself but later, as the business grew, he took on two salesmen, J. E. Stansbury and
D. M. Christie, who worked for him on a commission basis. Shortly after the end of August, 1949, he decided to incorporate a company and sell his business to it. The company :was incorporated under the laws of Quebec on September 27, 1949, under the name of Alliance Advertising & Applied Arts, Inc., hereinafter called the corporation. Immediately thereafter, that is to say, on September 28, 1949, he entered into an agreement with the corporation whereby he sold to it all the assets of the business which he had operated as the registered proprietorship for the consideration of $85,000 which was to be paid to him by the corporation as follows, namely, the first $10,000 by the issuance to him of 545 fully paid and non assessable no par common shares of the capital stock of the corporation, and the remaining $75,000 by the creation, in the books of the corporation, of an account payable to him, at the rate of $24,000 per year, by monthly instalments of $2,000.
Immediately on the execution of the agreement the corporation issued the 545 shares to the appellant and on its taking over the business he became its president at a salary of $100 per week. Several other persons, including his salesmen, Mr. Stansbury and Mr. Ritchie, became shareholders in the corporation paying $100 per share for the shares purchased by them, that price having been fixed by the appellant. Almost immediately after the incorporation the corporation began to make payments on account of the $75,000 referred to in the agreement and continued to make them from time to time. The totals thus paid to him in the years in dispute were as follows, namely, $3,326.23 in 1949, $7,145.00 in 1950, $5,861.04 in 1951 and $6,106.95 in 1952. The appellant did not include these amounts in his reports of taxable income for the said years but when the Minister reassessed him, as appears from the notices of reassessments, dated June 8, 1954, the said amounts were respectively added to the amounts reported by him. He appealed against the assessments but the Minister confirmed them, whereupon he appealed to the Income Tax Appeal Board which dismissed his appeal. It is from this decision of the Board that the appeal to this Court is brought.
The issue in the appeal is whether Section 8(1) of the Jncome Tax Act, Statutes of Canada, 1948, chapter 52, makes the payments in question taxable income in the appellant’s hands. The section provides as follows:
“8. (1) Where, in a taxation year,
(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,
(b) funds or property of a corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder, or
(ce) a benefit or advantage has been conferred on a shareholder by a corporation.;
otherwise than
(i) in the reduction of capital, the redemption of shares or the winding up, discontinuance or reorganization of its business,
(ii) by payment of a stock dividend, or
(iii) by conferring on all holders of common shares in the capital of the corporation a right to buy additional common shares therein,
the amount or value thereof shall be included in computing the income of the shareholder for the year.”
Much of the time of the hearing of the appeal was taken up with evidence relating to the value of the goodwill of the business of the registered proprietorship, the assets of which were sold
by the appellant to the corporation for $85,000. A good deal of this evidence was unsatisfactory. This was partly due to confusion as to what the goodwill of the appellant’s business really was, which led to excessive estimates of its value and rendered some of the opinions of the experts worthless.
Under the circumstances, it is desirable to refer to the evidence bearing on the appellant’s reasons for incorporation and how the consideration of $85,000 for the assets of the registered proprietorship was arrived at. The appellant said that one of his reasons
for incorporation was to take advantage of the limited liability, of a corporation. Other reasons were that his business was get- - ting too large for one man to handle and it was advisable to
have directors and that his two salesmen wished to become shareholders in the enterprise and it was desirable to meet their wishes since they had a good following of customers. I do not see any reason why I should not accept the appellant’s evidence as to the reasons that led him to the incorporation.
The amount for which the appellant sold the assets of the registered proprietorship to the corporation was fixed by the appellant after several interviews with Mr. H. Lebrock, a public accountant who acted as auditor for him and the corporation, and Mr. M. La jeunesse, an advocate who put through the incorporation. The value of the fixed assets of the registered partnership consisting of cash, accounts receivable, work in progress, motor vehicles, a building and furniture and fixtures, less accounts payable and accrued taxes was easy to determine and was fixed at $8,737.52. This amount is not in dispute.
But the determination of the value of goodwill of the appellant’s business was a different matter. The amount placed on the books of the corporation for it was $76,262.48 but this was merely the result of a mathematical computation, being the difference between $8,737.52, the agreed value of the fixed assets, and $85,000, the amount of the consideration for which the appellant sold the assets of his business to the corporation. The agreement did not specify any amount for the goodwill.
The manner in which the amount of $85,000 was arrived at was described by the appellant and Mr. Lebrock. The appellant’s profit for the first year of the registered proprietorship ending on February 28, 1949, was $2,610.85 but for the six months’ period ending on August 31, 1949, it had risen to $7,331.17. The appellant said that the business prospects indicated that he might go up to $100,000 to $120,000 per year in sales and that the profits would accelerate. Mr. Lebrock knew the profit made by the registered proprietorship for the six months’ period ending on August 31, 1949, and projected it forward to an estimated profit of $15,000 per year. He then multiplied this amount by 4 and suggested $60,000 as the value to be placed on the goodwill, that is to say, the estimated profit of the business for four years. It was as simple as that! He-said that he had explained to the appellant that it would be logical to ask for the equivalent of the next 4 or 5 years’ profits as the value of the goodwill in addition to the value of the fixed assets and that the appellant had acceded to the suggestion except that he decided upon 5 years’ profit instead of 4 thus making the asking price for the goodwill $75,000 instead of $60,000. The appellant’s evidence is to the same effect. He said that they had considered the facts, the past performance of the registered proprietorship and the potentialities of future business and arrived at $75,000 as a fair figure for the goodwill. He thought that the fixed assets were worth $10,000 in round figures. The total made up the figure of $85,000.
Opinion evidence of the value of the goodwill of the appellant’s business was given by Mr. Lebrock and Mr. Arthur Gilmour for the appellant and Mr. B. Pomerlan for the respondent. I have already referred to Mr. Lebrock’s estimate of $60,000, arrived at by the simple process of multiplying an estimated annual profit of $15,000 by 4 and the appellant’s addition of another year’s profit. Mr. Gilmour arrived at the figure of $81,263 as the asking price. for the goodwill as at August 31, 1949, based on an estimated annual profit and its capitalization at 10 per cent less the value of the fixed assets, the details of how his estimate was reached being set out in Exhibit 11. On the other hand, Mr. Pomerlan, the senior valuator of the valuation unit of the Department at Ottawa, considered that there was no element of goodwill in the appellant’s business, that it was highly personal to him and not transferable and that his connection of customers had no value. But after a series of questions he conceded that the appellant’s connection of customers gave him and a purchaser from him an advantage and reluctantly put a valuation of $1,000 on this advantage.
It is obvious from the sharp divergency of opinion that the witnesses could not have been thinking of the same thing. Under the circumstances, it is desirable to ascertain the meaning of the term goodwill. This is not free from difficulty. Lindley on Partnership, 10th ed., at page 523, states that "‘the term goodwill can hardly be said to have any precise signification’’. The New English Dictionary defines goodwill in the commercial sense of the term as follows:
"b. Comm. The privilege, granted by the seller of a business to the purchaser, of trading as his recognized successor; the possession of a ready formed ‘connexion’ of customers, considered as an element in the saleable value of a business, additional to the value of the plant, stock-in-trade, book-debts, etc.”
As early as 1810 Lord Eldon in Cruttwell v. Lye (1810), 17 Ves. Jun. 339 at3436, said of the goodwill of the business which was the subject of sale in the case before him:
“The goodwill, . .. is nothing more than the probability, that the old customers will resort to the old place.”
And it is somewhat in that sense that Cripps on Compensation, 8th ed., p. 185, defines goodwill as ‘‘the probability of the continuance of a business connection”.
But the later cases indicate that Lord Eldon’s definition was too narrow. Thus in Trego v. Hunt, [1896] A.C. 7, Lord Her- schell emphasized that it was the connection with its customers that made the goodwill of a business. At page 17, he said :
“It is the connection thus formed, together with the circumstances, whether of habit or otherwise, which tend to make it permanent that constitutes the goodwill of a business. It is this which constitutes the difference between a business just started, which has no goodwill attached to it, and one which has. acquired a, goodwill. The former has to seek out his customers from among the community as best he can. The latter has a custom ready made.”
And Lord Macnaghten said, at page 23:
“What ‘goodwill’ means must depend on the character and nature of the business to which it is attached. Generally speaking, it means much more than what Lord Eldon took it to mean in the particular case actually before him in Crutt- well v. Lye (1810), 17 Ves. Jun. 335 at 346, where he says: ‘the goodwill which has been the subject of sale is nothing more than the probability that the old customers will resort to the old place’’. Often it happens that the goodwill is the very sap and life of the business, without which the business would yield little or no fruit. It is the whole advantage, whatever it may be, of the reputation and connection of the firm I which may have been built up by years of honest work or ' gained by lavish expenditure of money.”
I respectfully express the opinion that the last sentence of what I have cited more accurately sets out the meaning of goodwill than the sentence which precedes it.
And in C.I.R. v. Muller & Co s Margarine, Limited, [1901] A.C. 217, another House of Lords decision, Lord Macnaghten said, at page 223:
"What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start. ‘ ‘
That the goodwill of a business is an item of property that can be the subject of sale is beyond dispute : vide Wedderburn v. Wedderburn (1856), 22 Beav. 84 at 104; Trego v. Hunt, [1896] A.C. 7; In re David and Matthews, [1899] 1 Ch. 378; CI.R. v. Muller & Co s Margarine Limited, [1901] A.C. 217: Perpetual Executors and Trustees Association of Australia Ltd. v. Commissioner of Taxes of the Commonwealth of Australia, [1954] A.C. 114.
But the value of the goodwill of a business is what a purchaser would be willing to give for the chance of being able to keep the connection of which it consists: vide Austen v. Boys (1858), 11 De G. & J. 626 at 635; Lindley on Partnership, 10th ed., p. 523. And whether the goodwill of a business has a saleable value is a question of fact to be determined in each case: vide Hill v. Fearis, [1905] 1 Ch. 466. But two things are clear. One is that the sale of the goodwill of a business does not include , a covenant by the vendor that he will not compete against the
purchaser. If the purchaser wishes the benefit of such a covenant he must provide for it apart from the goodwill. And it is also clear that the sale of the goodwill of a business does not carry with it a right to the personal services or the business ability of the former proprietor of the business.
In this view of goodwill and its value it is manifest that the value of the goodwill of the appellant’s business when he sold it to the corporation was very small. It consisted of the business connection which he had with the customers whose names were set out in the "‘list of accounts” filed as Exhibit 1. They were purchasers of advertising in the Montreal area but the appellant did not have any fixed contracts with or retainers from them. Many of them distributed their advertising among the various salesmen who called on them to solicit orders. Some of the concerns on the list were customers of Mr. Stansbury or Mr. Christie. While this business connection which the appellant had was an asset its transferable value could not be otherwise than very small. The appellant had been in business only about 18 months. Moreover, the connection which he had was largely personal to himself and his two salesmen. There was nothing exclusive or permanent about it. That this was so was proved by the fact that when the two salesmen left the corporation early in 1951 to better themselves the corporation lost 50 per cent of its sales.
The estimates of the value of the goodwill of the appellant’s business made by Mr. Lebrock and Mr. Gilmour were based on an assumed capacity of the business to produce profits in excess ‘ of what the amount of the capital represented by the fixed assets might produce. This, as Mr. Lebrock put it, was contingent on the continued activity of the appellant in the business. Mr. Lebrock and Mr. Gilmour did not attempt to estimate the value of the goodwill by itself. Their estimates must, therefore, be rejected as erroneous. Under the circumstances, I need not consider Mr. Gilmour’s interesting evidence of the various methods adopted by accountants in estimating the value of the goodwill of a business. In my opinion, it had no bearing on the kind of goodwill here under consideration. Indeed, it was conceded, in effect, that there was no formula known to accounting that would apply to the calculation of the value of the kind of goodwill that the appellant possessed.
Mr. Lebrock was not able to express an opinion on what a prudent purchaser would have been willing to pay for the business by itself but his view was that if the appellant dropped out of it the value of the goodwill would have dropped to nothing. And Mr. Gilmour said that where the earnings of a business are dependent on personal effort the value of the goodwill disappears with the disappearance of the owner. And he admitted, in effect, that the value of the goodwill of the appellant’s business without the appellant would have been a very minor amount.
The appellant is thus left without any credible evidence on his behalf of the value of the goodwill of his business and there remains only the amount of $1,000 which Mr. Pomerlan reluctantly conceded. The evidence does not support a larger amount than this. That being so, it is within the $10,000 which the corporation paid to the appellant by the issuance of shares to him.
It follows that the remaining $75,000 represents an amount which the corporation agreed to pay to the appellant for which he had not given any value to it. Thus the payments made by the corporation to him on account of the said $75,000 in the years in question were all ‘‘benefits or advantages’’ conferred on him by the corporation within the meaning of Section 8(1) (c) of the Act and, therefore, subject to tax. The appellant has, in my opinion, failed to discharge the onus that was his ‘‘to demolish the basic fact on which the taxation rested’’ and they must stand : vide Johnson v. M.N.R., [1948] S.C.R. 486 at 489; [1948] C.T.C. 195.
Since I have found that the items in dispute were taxable income within the meaning of Section 8(1) (c) of the Act I need not consider whether they were payments within the meaning of Section 8(l)(a) or not and I do not express any opinion on the subject. Nor need I consider whether any other section of the Act applies.
The result will be that since the appellant has not shown any error in the assessments to which he objected they must stand and his appeal herein must be dismissed with costs.
Judgment accordingly.