Pepsi-Cola Canada Ltd. v. The Queen, 79 DTC 5387, [1979] CTC 454 (FCA)

Heald, J:—I agree with the conclusion of MacKay, DJ that the payment of $100,000 was for goodwill and that the appellant was entitled to treat it as capital and not as income. I also agree with his reasons for arriving at that conclusion.

In view of that conclusion, it is not in my view necessary to decide on the appellant’s alternative submission as to the payment of $100,000 being an ex gratia payment and I would make no finding on that submission.

I would accordingly also allow the appeal, set aside the judgment of the Trial Court and direct that the notice of reassessment be vacated. I would also award the appellant its costs in this Court and in the Trial Division.

MacKay, DJ:—The issue in this appeal is whether a payment of $100,000 made by Schwepps Powell Ltd (the successor to Schwepps Canada Ltd) to the appellant company in the taxation year 1970 was an income or a capital receipt for taxation purposes in the hands of the appellant.

The facts giving rise to the payment are as follows.

The business of the appellant is that of manufacturing, bottling, marketing and distributing soft drinks throughout Canada. From 1952 to 1970 under renewable agreements with Schwepps Canada and its successor Schwepps Powell the appellant was appointed exclusive agent for the bottling and sale of Schwepps products for a territory that included greater Montreal.

From 1952 to the end of 1969 sales of Schwepps products in the Montreal area increased from 100,000 to 400,000 cases.

Commencing in 1968 negotiations were entered into with a view to terminating the agreement, Schwepps having decided to establish its own manufacturing and bottling plant in Montreal and take over the selling and distribution of its products in the Montreal area. For this reason the agreement for the period August 1, 1969 to August 1, 1970 contained a provision giving Schwepps the right to terminate the agreement on 30 days notice.

Commencing in November 1968 a series of letters were exchanged between the appellant and Schwepps. These letters all referred to a payment to be made by Schwepps to the appellant of $100,000 for goodwill. In some of the letters there was also reference to payment of $135,000 for bottles. There is no suggestion in any of the letters that the payment of $100,000 was to be for any other purpose than payment for goodwill.

The last of these letters dated April 1, 1970 is as follows:

Mr C B Powell ril 1, 1970 President

Cadbury Schwepps Powell Limited

1245 Sherbrooke Street West

MONTREAL 109, PQ.

Dear Mr Powell:

I thought it best to drop you a note confirming our agreement of this morning. As part of our agreement, the payment for goodwill was to be made immediately rather than a portion deferred until December 1970 and you indicated your cheque in the full amount of $235,000 would be available in the next few days. Due to poor mail situation, I would appreciate your informing me when the cheque is ready and we will pick it up by messenger.

Goodwill re Montreal territory	$100,000
Payment for Returnable Glass in our Montreal Bottling Plant
and in the Montreal territory	$135,000

I certainly enjoyed meeting with you this morning and will look forward to seeing you again in the near future.

Sincerely,

On April 8, 1970 the following document (Ex 17) was signed by one Butcher, a controller and a vice president of the appellant, and a cheque for $235,000, which included the $100,000 was handed to him.

RECEIPT AND SATISFACTION

To: Schwepps Powell Limited,

1245 Sherbrooke Street West,

Montreal 109, Quebec

This will acknowledge receipt of the sum of $100,000 as full payment and satisfaction for all costs, expenses, and loss of income incurred or to be incurred by us as a result of the termination of our Sub-Bottler Agreement with respect to the Montreal territory entered into with you.

Montreal, this	day of	1970. (signed April 8th)
		PEPSI-COLA CANADA LIMITED
		(Signed)

The evidence of Butcher in reference to this document and the circumstances leading up to his signing it was as follows:

MR COUZIN: Q. The next one, Item 17, which will be Exhibit 17, is a document entitled “Receipt and satisfaction’’, and it is signed by Pepsi Cola Canada Limited, and is that your signature?

A. That is my signature.

Q. Is that the receipt?

A. That is the receipt.

HIS LORDSHIP: Exhibit 17.

— EXHIBIT NO 17: Receipt and satisfaction signed by Pepsi Cola Canada Limited.

MR COUZIN: Q. Was this receipt prepared by you?

A. No. It wasn’t prepared by our office, or myself.

Q. Had it been prepared when you arrived at the Schwepps offices, or was it prepared while you were there?

A. No, it had been prepared when I arrived.

Q. Do you know who prepared it?

A. No. I don’t know personally.

HIS LORDSHIP: It was ready when you arrived, or was it prepared while you were there?

THE WITNESS: It was ready when I arrived, sorry.

MR COUZIN: Q. Had you ever discussed the language of any such receipt with anyone at the Schwepps organization?

A. Prior to going down to pick up the cheque, no, never.

HIS LORDSHIP: Was there any discussion between you and Mr Powell as to the words used in the document?

THE WITNESS: Yes. I didn’t particularly like them at all and didn’t, in fact, agree to them to any extent.

HIS LORDSHIP: Did you discuss that with Mr Powell?

THE WITNESS: Yes.

HIS LORDSHIP: What, if anything, was said between you?

THE WITNESS: Well, during the course—it was a very brief meeting. It became apparent to me that unless I signed this document, I wasn't going to get my money.

HIS LORDSHIP: Why did that become apparent to you?

THE WITNESS: From the tone of the conversation.

HIS LORDSHIP: The words must have had some meaning or some effect, too. Was there a dispute as to the wording of the document or disagreement?

THE WITNESS: Yes, I believe there was a dispute as such. As far as I was concerned, the $100,000 was for goodwill. Nothing else had ever been mentioned.

HIS LORDSHIP: Was that set? Was that discussed?

THE WITNESS: Yes, it was.

HIS LORDSHIP: Tell me what you said and Mr Powell said. You don’t see any objection to that?

MR AINSLIE: I’m not objecting, My Lord.

HIS LORDSHIP: I agree with you that this is a signed document. Tell me what was said between you and Mr Powell.

THE WITNESS: As I recall, I mentioned words to the effect that it was goodwill. We had previously agreed to goodwill. Nothing else had been mentioned and he said, “Well, this is the same type of thing. We need a receipt. We would like you to sign this before you get the money.”

HIS LORDSHIP: I take it from what you said that there must have been some words in here that you didn't like?

You said, “I said words to the effect that it was goodwil and nothing else”?

THE WITNESS: Yes.

HIS LORDSHIP: I take it that was because of the words that were used in the document? Is that why you said that?

THE WITNESS: That’s right. Goodwill is never mentioned in this document.

The only cross examination as to Exhibit 17 was as follows:

Q. Now, if I can direct your attention to Exhibit 17, this is the receipt and satisfaction and as I understood your evidence, you indicated you were unhappy with the terms of the recipt and satisfaction as drafted?

A. That is correct.

Q. Did you make any specific suggestion to Mr Powell as to any specific change that could be made to that receipt?

A. I think the comment I made was that it didn’t contain anything to do with goodwill which had been previously agreed to.

Q. Did you specifically ask that there should be included any other words? Any additional words?

A. I asked if such a receipt was necessary at all, as I recall.

Q. Is that all you asked?

A. Yes.

The credibility of this witness not having been questioned I am of the opinion that his evidence taken together with the letters to which I have referred make it clear that the terms of the document Ex 17 signed by Butcher were not the terms of the agreement that the parties had in fact made. The payment of $100,000 was for goodwill and nothing else.

The good name and reputation built up by a business is goodwill: evidenced in this case by the increase in the sales of Schwepps products between 1952 and 1969, (Cumberland Investments Limited v The Queen, [1973] CTC 821 at 829; 74 DTC 6001 at 6013).

For the purpose of effecting the transfer of its established good-will to Schwepps the appellant gave Schwepps the names of its customers of Schwepps products whom the appellant had cultivated and notified the customers by letter of the changeover.

In concluding his reasons the trial Judge said:

The Plaintiff contends the words in Ex 17 should be disregarded; they do not represent the true nature of the transaction, which was a payment for goodwill only.

I cannot accept that submission.

There must be, in my view, reasonable evidence from which the court can conclude, in this case, the payment was otherwise than on account of income, as designated in Ex 17. The evidence before me is slim, and, indeed, incomplete.

He also criticized the failure of the appellant to call as a witness one Emerson who was the president of the appellant and who had written some of the letters to which I have referred but who before the case came on for trial had moved to the United States. He then continued:

... cases of this kind are largely dependent on their own particular facts. Here, the few facts before me are, to my mind, against the taxpayer’s contention. Mr Butcher’s evidence, and the letters of November 29 and December 6, 1968, are insufficient to warrant the conclusion or inference that the $100,000 was for goodwill, or, at least, not on account of income.

The plaintiff’s further contention the payment was an ex gratia one, and therefore not taxable, is not, on the pleadings, open to it.

I find myself unable to agree with the conclusion reached by the trial judge. The only witness called at the hearing was Butcher for the appellant. His evidence was not contradicted nor was his credibility called into question.

There was evidence to support a finding that there was goodwill attaching to the appellant’s business as a distributor of Schwepps products that the sufficient to provide consideration for the payment of the $100,000.

In my view the only reasonable inference to be drawn from the evidence is that the terms of the receipt (Ex 17) did not reflect or contain the terms of the agreement that the parties had made. It follows in my view that the proper inference to be drawn is that the payment of $100,000 was for goodwill and the appellant was entitled to treat it as capital and not income.

As to the appellants alternative submission that it was an ex gratia payment I agree with the trial judge that on the pleadings this argument is not open to the appellant.

I would allow the appeal, set aside the judgment of the trial Court and direct that the notice of reassessment be vacated.

The appellant to have its costs in this Court and in the trial division.