REASONS FOR JUDGMENT BY: ROTHSTEIN J.A.
CONCURRED IN BY: LÉTOURNEAU J.A.
MALONE J.A.
REASONS FOR JUDGMENT
ROTHSTEIN J.A.
INTRODUCTION
[1] This is an appeal from a judgment of the Tax Court (Nash v. Canada, [2005] 1 C.T.C. 2138) in which the main issue is the fair market value of groups of limited edition prints purchased by the respondents (taxpayers) and donated by them to charities and universities. Each of the taxpayers was entitled to a tax credit in respect of a donation based on the fair market value of the property donated. Each of them had claimed a tax credit based on the amount stated in the official tax receipt issued to them by the charity or university. The amounts stated in each receipt purported to be the fair market value of the property, based on an appraisal. The Minister reassessed on the basis that the fair market value of the donated property was the cost of the property to the taxpayer. The Tax Court Judge found in each case that the fair market value of the property was that determined by the appraisal introduced in evidence before him. He allowed the taxpayers' appeals.
FACTS
[2] CVI Art Management Inc.("CVI") operated a program through which it sold groups of limited edition prints to individuals, arranged for appraisals and located charities and universities qualified under subsection 118.1(1) of the Income Tax Act to accept gifts for which official tax receipts could be issued. The taxpayers learned of the program through their financial planners.
[3] CVI had available for sale and sold groups of limited edition prints in 1997, 1998 and 1999 as follows:
|
Date
|
Number of Groups of Prints Available for Sale
|
Number of Groups of Prints
Sold
|
Dates of Sales
|
Sale Price Range for Groups of Prints
|
|
1997
|
35
|
35
|
June 6 - Aug. 17, 1997
|
$8,648
|
|
1998
|
155
|
150
|
April 6 - Aug. 14, 1998
|
$8,025 to $8,625
|
|
1999
|
300
|
298
|
April 8 - Dec. 24, 1999
|
$4,012.50 - $9,315
|
[4] The taxpayers purchased groups of prints from CVI and donated them to charities or universities as follows:
|
Taxpayers
|
Property
Acquired
|
Purchase Date
|
Purchase Price
|
Donation Date
|
Property Donated
|
Amount of Charitable Receipt
|
Charity or University
|
|
Barbara Quinn
|
One group of 48 prints
|
Aug. 9, 1997
|
$8,648
|
Oct. 15,
1997
|
One group of 48 prints
|
$25,280
|
InKind Canada
|
|
Susan Tolley
|
One group of 100 prints
|
June 8,
1998
|
$8,025
|
Nov. 18,
1998
|
One group of 99 prints
|
$28,325
|
Fresno Pacific Univ.
|
|
Caedmon Nash
|
One group of 85 prints
|
Oct. 21, 1999
|
$8,667
|
Dec. 13,
1999
|
One group of 84 prints
|
$29,400
|
Ferris State Univ.
|
DECISION OF THE TAX COURT JUDGE
[5] The reasons of the Tax Court Judge contain 36 pages in which he reproduced verbatim the text of the taxpayers' counsel's notes of argument. At paragraph 83 of his reasons he stated, "I agree with all the submissions contained in Appellant's [taxpayers] counsel's notes of argument reproduced herein and with those advanced in his response".
[6] He found the evidence of the taxpayers' appraiser Ms. Tropper was impressive and not compromised on cross-examination. He found that her mode of valuation was consistent with the definition of fair market value. He expressed the opinion that the evidence of the taxpayers' witnesses created "not only a prima facie case but an impressively strong case". The Minister produced no expert evidence.
[7] Finally, he stated that it would be extremely difficult to disagree with the decision of the Tax Court in Klotz v. R., [2004] 2 C.T.C. 2892 (in which actual cost was found to be the fair market value) but he distinguished Klotz on the basis that the evidence in Klotz was inferior to that in the present cases. He concluded that the valuations made by Ms. Tropper were the fair market values for purposes of the taxpayers claims under subsection 118.l(3) and he therefore allowed the appeals.
THE DEFINITION OF FAIR MARKET VALUE
[8] The well-accepted definition of fair market value is found in the decision of Cattanach J. in Henderson Estate and Bank of New York v. M.N.R. 73 D.T.C. 5471 at 5476:
The statute does not define the expression "fair market value", but the expression has been defined in many different ways depending generally on the subject matter which the person seeking to define it had in mind. I do not think it necessary to attempt an exact definition of the expression as used in the statute other than to say that the words must be construed in accordance with the common understanding of them. That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and under no compulsion to buy or sell. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand.
Although Cattanach J. expressed the caution that his words did not constitute an "exact" definition, the extent to which his words have been adopted in the jurisprudence without change over some thirty years suggests that his approach, although not necessarily exhaustive, is now considered to be the working definition.
STANDARD OF REVIEW
[9] An appeal court will not interfere with findings of fact or inferences of fact by the trial judge absent palpable and overriding error (see Housen v. Nikolaisen, [2002] 2 S.C.R. 235 at paragraph 25). Fair market value has often been referred to as a question of fact. However, it is probably more accurate to say that fair market value is a determination of mixed fact and law. A determination of mixed fact and law involves applying a legal standard to a set of facts (see Housen at paragraph 26). In fair market value cases, the judge must apply the legally accepted definition of fair market value to the facts found from the evidence adduced before him.
[10] Normally, in a fair market value determination, the dominant component of the mixed question of fact and law is factual and the appeal is based on a dispute as to some aspect of the factual component of the determination. That is the case here. Therefore, the standard of review in this case will be the deferential standard, palpable and overriding error.
ANALYSIS
[11] Typically, the determination of fair market value of certain property depends at least in part on evidence of comparable transactions involving the same or similar property. However, to give effect to the Henderson definition, it is necessary to ensure that the suggested comparisons are sound.
[12] The Tax Court Judge summarized the Henderson definition of fair market value and found that it had been applied by Ms. Tropper:
The meat of that definition (Henderson) is the highest price reasonably expected if an asset is sold in the normal method in the ordinary course of business in a market without undue stress composed of willing buyers and sellers. That describes precisely the mode of valuation made by Tropper.
[13] In her appraisal analysis, Ms. Tropper did not consider the purchase price of the prints as relevant to the determination of fair market value. Instead, she stated that "the market layer however that determines Fair Market Value for individual works of art is the open, retail market, where an asset is reasonably expected to bring the highest price to a seller from a buyer and is the market in which such property is sold in the 'normal method' in the 'ordinary course of business'". On cross-examination, Ms. Tropper stated that the financial planner market, in which the taxpayers bought their groups of prints, was not a market open to the public. In particular, she said that "one does not go to purchase artwork from one's financial planner". Although she did not say so explicitly, it seems that, for these reasons, Ms. Tropper concluded that actual sales did not reflect the relevant market in which to determine the fair market value of the prints.
[14] Fundamental to Ms. Tropper's analysis was that the assets being valued were individual prints. Ms. Tropper valued the prints individually using what she called the "Market Data Comparison Approach", which required examination and comparison of sales of comparable properties in the appropriate market. In applying this approach, she examined three separate markets. For one group of prints she looked at the offset lithograph market for wildlife imagery, for another the offset lithograph market for general subject matter and for the third, the market for native North American art work and prints. She reviewed these markets by contacting dealers, galleries, publishers, artists and web sites. The value she came to for the groups of prints was the aggregate of the values of the individual prints in these markets.
[15] In approving of Ms. Tropper's mode of valuation, the Tax Court Judge assumed that ascertaining the fair market value of the groups of prints required a determination based on the value of individual prints in the retail markets considered by Ms. Tropper. He determined that Ms. Tropper's estimates were the fair market values of each of the groups of prints in issue.
[16] For comparison purposes, the following table sets out the purchase price of each group of prints, the amount of the charitable receipt and the fair market value determined by Ms. Tropper.
|
Taxpayer
|
Property Acquired
|
Purchase Price
|
Ms. Tropper's Appraisal of Property Acquired
|
Property Donated
|
Amount of Charitable Receipt
|
Ms. Tropper's Appraisal Applicable to Property Donated as calculated by taxpayers
|
|
Quinn
|
One group of 48 prints
|
$8,648
|
$24,384
|
One group of 48 prints
|
$25,280
|
$24,384
|
|
Tolley
|
One group of 100 prints
|
$8,025
|
$23,930
|
One group of 99 prints
|
$28,325
|
$23,690
|
|
Nash
|
One group of 85 prints
|
$8,667
|
$30,257
|
One group of 84 prints
|
$29,400
|
$29,932
|
[17] In applying the Henderson definition of fair market value, the first step is to accurately identify the asset whose fair market value is to be ascertained. It is only once the asset is identified that the market in which the asset is normally sold in the ordinary course of business can be determined.
[18] The evidence before the judge was that CVI only sold groups of prints, that it arranged for the donation of the groups of prints and that the taxpayers did, in fact, acquire and donate the groups of prints. There was no evidence of individual prints being acquired or donated. Because the prints were only acquired and donated in groups, the relevant asset was the group of prints, not the individual prints in the group.
[19] It is wrong to assume, as did Ms. Tropper and the trial judge, that the fair market value of a group of items is necessarily the aggregate of the price that could be obtained for individual items in the group. That might be so in some cases, but it is necessary to carefully consider the circumstances in which the groups are being acquired and disposed of in order to make that determination.
[20] If the evidence is that the groups are not sold in the same market as individual items, the fair market value of the groups will not be the aggregate of the fair market value of the individual items. For example, if items are sold in large volumes in a wholesale market, the fair market value of the volumes sold in that market will be less than the aggregate of the values of the items considered individually that make up those volumes. If that were not the case, there would be no wholesale market. The wholesalers would sell their large quantities in the retail market to obtain the aggregate of the retail prices for the individual items for the large quantities they sold. But that does not occur because consumers will not purchase the large quantities the wholesalers are selling. There are other differences between a wholesale and retail market such as convenience and other services to the consumer provided by retailers but not by wholesalers. That is why there is a difference between prices in the retail and wholesale markets.
[21] On the other hand, if the evidence is that the groups of items are acquired and disposed of in the same market as the individual items, it may be that the fair market value of the groups is the aggregate of the fair market values of the individual items. Generally, shares of common stock might be valued in this way.
[22] In other cases, there may be no evidence of a normal market for the sale in the ordinary course of business applicable to a group of items. For example, a one-time disposition of a group of paintings may not reflect a normal method of sale of paintings in the ordinary course of business. In the absence of a market for the sale of large groups of paintings, the ordinary retail market for individual paintings might be considered a proxy. If so, it will still be necessary to determine whether any adjustment need be made to account for the disposition of the group. For example, a blockage or volume discount may apply to take account of the depressive effect on the retail market price caused by the availability of the large number of paintings at one time.
[23] This is what occurred in Malette v. Canada (2004), 320 N.R. 359. In that case, 981 works by a single artist were donated to a public gallery. Noël J.A. determined that a blockage discount was an appropriate valuation methodology when considering the aggregate retail market value of individual paintings when the volume of paintings in a group would depress the price in the retail market.
[24] When a court is required to determine the fair market value of an asset for which there is no market that permits a direct comparison, it may be necessary to consider the transactions in some other market, subject to such adjustments as may be appropriate to the case, such as a blockage or volume discount. But where there is a market in which assets of the description of the asset being valued are traded, there is no need for the use of a proxy.
[25] In this case, there was a market in which the specific groups of prints were traded. In 1997, CVI sold 35 out of 35 available groups, in 1998, 150 out of 155 available groups and in 1999, 298 out of 300 available groups. These sales indicate that there was a market for the specific groups of prints. Indeed, almost all the groups CVI had available for sale were sold. This was CVI's normal course of business. CVI and the taxpayers were dealing with each other at arm's length. There was no compulsion. CVI freely sold the groups and the taxpayers freely bought them. Contrary to Ms. Tropper's assertion, there was no evidence the market was not open. Approximately 480 transactions occurred over a three year period. There was no evidence of any qualification necessary to acquire prints from CVI or to donate them to the charities or universities.
[26] The groups of prints purchased by the taxpayers were donated to charities or universities within two to six months of their purchase. If any of the taxpayers had wished to sell the groups of prints within that time frame, what price could have been obtained? The inevitable answer is that the price would have been, at most, the price for which that group of prints was being sold by CVI. If a higher price was sought, a knowledgeable potential purchaser would buy from CVI. In other words, CVI's price was the highest price each of the groups of prints would bring at or near the relevant time.
[27] If Ms. Tropper's appraised values were the fair market values of the groups as the judge determined, the obvious question is why CVI did not sell for those prices. CVI dealt with the taxpayers at arm's length. It would make no sense for CVI to offer to sell to the taxpayers at one-third of the fair market value, if indeed, the fair market value was as determined by Ms. Tropper and the judge.
[28] A similar observation was made in Hunter v. CIR 51 T.C.M. (CCH) 1533 (U.S. T.C. 1986) at 1537:
The record is devoid of any explanation of why Rocquencourt would sell the prints to petitioners for less than fair market value. Neither Sovereign nor Rocquencourt purported to be a nonprofit organization. If Rocquencourt sold the prints for approximately one-third of what it might otherwise have obtained, as petitioners claimed, then such from an economic point of view, makes no sense. As we found in Chiu v. Commissioner, supra, we also find here no credible explanation as to why petitioners would be able to acquire the prints at substantial discounts from value. Thus, we believe that the fair market value of the prints in October 1978 (as well as in December 1979) was the price paid for them by petitioners.
[29] Where there is a gap between the time an asset is acquired and disposed of, the cost of the asset will normally be an unreliable basis for estimating fair market value. But where the dates of acquisition and disposition are very close in time, barring evidence to the contrary, the cost of acquiring the asset will likely be a good indicator of its fair market value. In Chiu v. Commissioner of Internal Revenue, 84 T.C. 72 (U.S. T.C. 1985), at 2960, the Court stated:
In this case, however, we have what has been described as the most reliable evidence of value, to wit, sales of the same property within a short period of time prior to the valuation date. In another context, the Court of Appeals for the Sixth Circuit, the Court to which our decision in this case is appealable, has recently stated that "[i]n determining the fair market value of property, little evidence could be more probative than the direct sale of the property in question.
[30] In the present appeals, Ms. Tropper ignored the prices paid for the groups of prints. In doing so, she failed to take account of the most probative evidence of the fair market value of the groups. In Hunter, supra, the U.S. Tax Court stated at page 1537:
Petitioners presented a plethora of evidence, including written appraisals of each artist's work and the testimony of three expert witnesses. Neither the appraisals nor the expert witnesses were persuasive. All experts failed to consider the price paid for the prints by petitioners.
The most probative evidence of the fair market value of the prints is the amount petitioners paid for them, especially as their acquisition occurred only one year prior to the time of contribution.
[31] The determination of fair market value in the United States may be subject to a different definition than is applicable in Canada. However, in referring to Hunter and Chiu, I am pointing out the reasoning of other Courts in respect of facts that are very similar to the facts in these appeals.
[32] The evidence before the Tax Court Judge was that in 1997 the highest price for the group of prints was $8,648, in 1998 $8,625 and in 1999 $9,315. Having regard to the assets required to be valued, these were the highest prices available and therefore represented their fair market values.
KLOTZ V. R.
[33] Because of the similarity of facts in this case and in Klotz, it is useful to consider the analysis of Bowman A.C.J. (as he then was) inKlotz. That decision was upheld by this Court, [2005] 3 C.T.C. 78. Mr. Klotz was one of about 660 individuals who acquired limited edition prints which were donated to colleges and universities. In Klotz, groups of prints were acquired for about $300 per print and immediately donated to the colleges or universities. The taxpayers received a receipt based on a value of approximately $1,000 per print which they used to support a claim for a charitable gift tax credit.
[34] In the present case, the taxpayers were three of approximately 480 individuals who acquired groups of limited edition prints which they donated. They bought the prints for about one-third of the amount of the receipt they received from the college or university. In these appeals, the donations were made within a few months after the prints were acquired.
[35] While Bowman A.C.J. referred to the prices for individual prints, as well as for the group, because of the similarity between Klotz and this case, his observations at paragraphs 45, 46 and 56 are instructive:
45 The Crown's principal argument was that the magnitude of the mass art donation program (63,000 prints in 1997-1999 sold by Curated alone) created its own market.
46 The respondent's approach is in my view more realistic. Mr. Alasko described the sale to the appellant by Curated as a wholesale or bulk transaction. No doubt the respondent would have preferred to have him say it was a retail sale but in the final analysis it does not really matter what one calls it. It is what it is. It was a sale of 250 prints for $75,000 between two arm's length parties. The gift was a virtually contemporaneous disposition of the same 250 prints. What better evidence is there of what the 250 prints were worth at that time? Why chase the will o' the wisp of an elusive and largely hypothetical fmv through the trendy up scale art galleries of New York and ignore the best evidence that is right there before your very nose? The problem with the claim here, whereby property is acquired for $5 to $50, sold to the appellant for $300 and claimed to have a fmv two days later of $1,000, is that it is devoid of common sense and out of touch with ordinary commercial reality.
56 I continue to be of that view. It is one thing serendipitously to pick up for $10 a long lost masterpiece at a garage sale and give it to an art gallery and receive a receipt for its true value. It is another for Curated to buy thousands of prints for $50, create a market at $300 and then hold out the prospect of a tax write-off on the basis of a $1,000 valuation. Mr. Mathew presented the appellant's case with consummate skill and persuasiveness but ultimately his case foundered on the shoals of common sense.
The colourfully expressed logic of Bowman A.C.J. is self-evident.
PERSONAL USE PROPERTY
[36] The issue of the application of the personal use property provisions of section 46 of the Income Tax Act do not arise. The property acquired and disposed of was, in each case, a group of prints. The cost of acquisition and the fair market value in the case of Ms. Quinn were the same. Ms. Tolley's cost of acquisition was $8,025 and the fair market value was $8,625. The cost of Mr. Nash's acquisition was $8,667 and the fair market value was $9,315. As the cost of acquisition and the fair market value all exceed $1,000 for Ms. Tolley and Ms. Quinn, the personal use property provisions do not affect the capital gain realized by them.
CONCLUSION
[37] The Tax Court Judge made two palpable and overriding errors. The first was to accept Ms. Tropper's valuation evidence based on the retail market for individual prints when there was a normal market for the groups of prints, the specific property he was required to value. The second was to find the fair market value of the property to be approximately three times the amount paid for the property with no credible explanation for the apparent three-fold increase.
[38] The appeal should be allowed with costs here and in the Tax Court. The matter should be remitted to the Minister to reassess the taxpayers on the basis of the fair market value of the groups of prints they acquired being the highest price CVI obtained for the sale of the groups, in 1997 $8,648, in 1998 $8,625 and in 1999 $9,315. The fair market value of the group donated by Ms. Quinn was $8,648. As the group donated by Ms. Tolley included only 99 prints, the fair
market value of her donation was $8,539. As the group donated by Mr. Nash included only 84 prints, the fair market value of his donation was $9,205. Section 46 of the Act is not applicable.
"Marshall Rothstein"
J.A.
"I agree
Gilles Létourneau J.A."
"I agree
B. Malone J.A."
FEDERAL COURT OF APPEAL
Names of Counsel and Solicitors of Record
DOCKET: A-572-04
STYLE OF CAUSE: ATTORNEY GENERAL OF CANADA
Appellant
- and -
CAEDMON NASH
Respondent
PLACE OF HEARING: TORONTO, ONTARIO
DATE OF HEARING: SEPTEMBER 12, 2005
REASONS FOR JUDGMENT BY: ROTHSTEIN J.A.
CONCURRED IN BY: LÉTOURNEAU J.A.
MALONE J.A.
DATED: NOVEMBER 21, 2005
APPEARANCES BY:
Mr. Arnold H. Bornstein
Mr. P. Michael Appavoo
Ms. Brianna Caryll FOR THE APPELLANT
Mr. Clifford L. Rand
Mr. David C. Muha FOR THE RESPONDENT
SOLICITORS OF RECORD:
John H. Sims, Q.C.
Deputy Attorney General of Canada FOR THE APPELLANT
STIKEMAN ELLIOTT LLP
Toronto, Ontario FOR THE RESPONDENT
FEDERAL COURT OF APPEAL
Names of Counsel and Solicitors of Record
DOCKET: A-571-04
STYLE OF CAUSE: ATTORNEY GENERAL OF CANADA
Appellant
- and -
BARBARA QUINN
Respondent
PLACE OF HEARING: TORONTO, ONTARIO
DATE OF HEARING: SEPTEMBER 12, 2005
REASONS FOR JUDGMENT
BY: ROTHSTEIN J.A.
CONCURRED IN BY: LÉTOURNEAU J.A.
MALONE J.A.
DATED: NOVEMBER 21, 2005
APPEARANCES BY:
Mr. Arnold H. Bornstein
Mr. P. Michael Appavoo
Ms. Brianna Caryll FOR THE APPELLANT
Mr. Clifford L. Rand
Mr. David C. Muha FOR THE RESPONDENT
SOLICITORS OF RECORD:
John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario FOR THE APPELLANT
STIKEMAN ELLIOTT LLP
Toronto, Ontario FOR THE RESPONDENT
FEDERAL COURT OF APPEAL
Names of Counsel and Solicitors of Record
DOCKET: A-569-04
STYLE OF CAUSE: ATTORNEY GENERAL OF CANADA
Appellant
- and -
SUSAN TOLLEY
Respondent
PLACE OF HEARING: TORONTO, ONTARIO
DATE OF HEARING: SEPTEMBER 12, 2005
REASONS FOR JUDGMENT
BY: ROTHSTEIN J.A.
CONCURRED IN BY: LÉTOURNEAU J.A.
MALONE J.A.
DATED: NOVEMBER 21, 2005
APPEARANCES BY:
Mr. Arnold H. Bornstein
Mr. P. Michael Appavoo
Ms. Brianna Caryll FOR THE APPELLANT
Mr. Clifford L. Rand
Mr. David C. Muha FOR THE RESPONDENT
SOLICITORS OF RECORD:
John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario FOR THE APPELLANT
STIKEMAN ELLIOTT LLP
Toronto, Ontario FOR THE RESPONDENT
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