[2012] 2 F.C.R. D-8
Income Tax
Income Calculation
Appeal, cross-appeal from Tax Court of Canada (T.C.C.) decision (2010 TCC 375) that goodwill can exist in regulated industry, sold in present case with appellant’s regulated electricity transmission business—However, T.C.C. also concluding that potential for leverage, potential tax allowance benefit not representing goodwill but tangible assets sold; substituting own allocation therefor, deducting from goodwill amount—Appellant selling regulated electricity transmission business at 1.31 times net regulated book value of tangible assets—Parties allocating bulk of 31 percent premium, representing $190 824 476, to goodwill—Constituting standard allocation for regulated industries—Minister of National Revenue reassessing appellant under Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 68 by reallocating entire goodwill amount to tangible assets—Main issues whether concept of goodwill existing in regulated industry; whether T.C.C. wrongly concluding that leverage, tax allowance not part of goodwill herein, that allocation agreed to unreasonable under Act, s. 68—Goodwill requiring three characteristics: (1) intangible asset; (2) arising from expectation of future earnings, returns or other benefits in excess of expectations existing in comparable business; (3) inseparable from business to which belonging—While T.C.C. right to conclude Minister erring when determining goodwill not existing in regulated industry, T.C.C. erring in finding that leverage, tax allowance not part of goodwill—Potential for leverage in transmission business constituting intangible asset, holding all characteristics of goodwill—Potential tax allowance benefit neither part of appellant’s goodwill nor tangible assets but rather constituting intangible asset of buyers—T.C.C. not justified in deducting amount assessed for tax allowance from goodwill allocation—Not unreasonable herein for parties to allocate tax allowance to goodwill for purposes of Act, s. 68—Under Act, s. 68, amount reasonably regarded as consideration for disposition of particular property if reasonable business person, with business considerations in mind, would have allocated that amount to that particular property—Long-standing regulatory, industry practices, auditing, valuation standards relevant to present case—T.C.C. misapplying Act, s. 68 test herein—If correct test applied, T.C.C. would have been compelled to find agreed allocation of $190 824 476 to goodwill reasonable given compliance with industry, regulatory norms, consistency with standard accounting principles in regulated businesses—Appeal allowed, cross-appeal dismissed.
TransAlta Corporation v. Canada (A-350-10, 2012 FCA 20, Mainville J.A., judgment dated January 20, 2012, 35 pp.)