The Section 68 Reasonableness Standard After TransAlta

This article examines the case law and administrative practice surrounding section 68 of the Income Tax Act, culminating in the recent Federal Court of Appeal decision in TransAlta Corporation v. Canada. Particular attention is paid to how courts have defined and valued goodwill, and their interpretation of the reasonableness standard at the core of section 68. The author concludes that TransAlta provides the most articulate and principled interpretation of section 68 to date, and that the Federal Court of Appeal appropriately balanced the competing principles of predictability and fairness from the taxpayer's perspective, on the one hand, and the need for judicial discretion to curb inappropriate tax avoidance, on the other. The court achieved this by rejecting a legalistic test that would have required the exercise of significant judicial discretion, in favour of a test that is consistent with reasonably exercised business judgment. The author concludes with suggestions as to how the principles in TransAlta may apply to future section 68 cases.