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.