Section 68 - Allocation of amounts in consideration for property, services or restrictive covenants

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 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.

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 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.

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.

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".

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".

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.

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.

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.)

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.

$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.

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 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.

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.

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."

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."