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Citation: 2003TCC542
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Date: 20030813
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Docket: 2000-135(EXP)G
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BETWEEN:
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CHARLES MALETTE,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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____________________________________________________________________
REASONS FOR JUDGMENT
Beaubier, J.
[1] This appeal pursuant to the
General Procedure was heard at Vancouver, British Columbia, on
July 23, 2003. The Respondent called Victor Miner, Executive
Director of the Appraisers Association of America,
Kathryn C. Minard, who was qualified as an expert
witness to give opinion as to the value of 981 works at issue and
appraisal methodology.
[2] An Agreed Statement of Facts was
filed as Exhibit A-3 which reads:
1. The parties are in agreement that
the total Fair Market Value of the 981 works of art of artist
Harold Feist irrespective of a discount for volume or a bulk
discount is $828,000
[3] The Respondent filed Exhibit R-1
which reads:
The Appellant concedes that if, as a matter of law bulk
discounts may be applied to donations of cultural property,
then:
(i) this was
an appropriate situation to apply a bulk discount;
(ii) the bulk
discounts applied by Ms. Minard in her expert report were
appropriate; and
(iii) the appeal should be
dismissed.
[4] The Appellant has appealed for a
redetermination of a decision by the Review Board under the
Cultural Property Export and Import Act that the fair
market value of donated property consisting of 981 works
(paintings) by the artist Harold Feist that were created by him
and were irrevocably disposed of by the Appellant and Ronaye
Malette and Lance Morginn to the Art Gallery of Algoma on July
22, 1998 were of a value of $293,246.
[5] The Appellant originally submitted
that their value was $879,714 on the donation date.
[6] Subsection 32(1) of the
Cultural Property Export and Import Act reads in English
and French:
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Request for determination by Review Board
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32.(1) For the purposes of subparagraph
39(1)(a)(i.1), paragraph 110.1(1)(c), the
definition "total cultural gifts" in subsection
118.1(1) and subsection 118.1(10) of the Income Tax
Act, where a person disposes of or proposes to dispose
of an object to an institution or a public authority
designated under subsection (2), the person, institution or
public authority may request, by notice in writing given to
the Review Board, a determination by the Review Board as to
whether the object meets the criteria set out in paragraph
29(3)(b) and (c) and a determination by the
Review Board of the fair market value of the object.
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32. (1) Pour l'application du sous-alinéa
39(1)a)(i.1), de l'alinéa
110.1(1)c), de la définition de « total
des dons de biens culturels » au paragraphe
118.1(1) et du paragraphe 118.1(10) de la Loi de
l'impôt sur le revenu, lorsqu'une
personne aliène ou se propose d'aliéner
un objet au profit d'un établissement, ou
d'une administration, désigné
conformément au paragraphe (2), la personne,
l'établissement ou l'administration
peuvent demander par écrit à la Commission
d'apprécier la conformité de l'objet
aux critères d'intérêt et
d'importance énoncés au paragraphe 29(3)
et de fixer la juste valeur marchande de l'objet.
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Saisine de la Commission
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any Section 33.1 reads:
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Appeal of Redeter-mination of fair market value
Decision of Court
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Appeals Before the Tax Court of Canada
33.1 (1) Any person who has irrevocably disposed of an
object, the fair market value1 of which has been
redetermined under subsection 32(5), to a designated
institution or public authority may, within ninety days
after the day on which a certificate referred to in
subsection 33(1) is issued in relation to that object,
appeal the redetermination to the Tax Court of Canada.
1 Publisher's note: There is a
discrepancy between the English and French versions.
(2) On an appeal under subsection (1), the Tax Court of
Canada may confirm or vary the fair market value and, for
the purposes of the Income Tax Act, the value fixed
by the Court is deemed to be the fair market value of the
object determined by the Review Board in respect of its
disposition.
S.C. 1995, c. 38, s. 2.
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Appel devant la Cour canadienne de
l'impôt
33.1 (1) La personne qui a aliéné de
façon irrévocable en faveur d'un
établissement ou d'une administration
désignés un objet dont la valeur
marchande1 a été fixée de
nouveau dans le cadre du paragraphe 32(5) peut interjeter
appel devant la Cour canadienne de l'impôt dans
les quatre-vingt-dix jours suivant la date de
délivrance du certificat visé au paragraphe
33(1).
1 Note de l'éditeur: Il y a
défaut de conformité des versions
française et anglaise.
(2) Sur un appel interjeté en vertu du
présent article, la Cour canadienne de
l'impôt peut confirmer ou modifier la valeur
marchande fixée par la Commission et, pour
l'application de la Loi de l'impôt sur le
revenu, la valeur fixée par la Cour est
réputée avoir été fixée
par la Commission.
L.C. 1995, ch. 38, art. 2.
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Appel en ce qui concerne la valeur marchande
Décision de la Cour
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[7] The provisions of the Income
Tax Act are similarly expressed in that they refer to
"object" in the singular. (See subsection 118.1(1), (3)
and (10).
[8] There is a discrepancy between the
English and French versions of Section 33.1 of the Cultural
Property Export and Import Act (hereinafter "Cultural
Act"). In subsections 33.1(1) and (2) Cultural Act, the
English version states that the Tax Court of Canada may confirm
or vary the "fair market value" redetermined under
subsection 32(5) Cultural Act, while the French version
says that the Court may confirm or vary the "market
value" ("valeur marchande") instead of the
"fair market value" ("juste valeur
marchande"). However, there is no discrepancy between the
English and the French versions of subsection 32(5) Cultural
Act. Both provisions say that the Canadian Cultural Property
Export Review Board should determined the "fair market
value" (la "juste valeur marchande") of an object
qualified as a cultural gift for the purpose of section 118.1 of
the Income Tax Act (hereinafter "ITA").
The relevant provisions of the ITA and the interpretation
bulletin regarding these provisions also contain the expression
"fair market value" in both official language versions.
In these circumstances, the Court finds that the plain meaning of
the sections in question is that the Court must confirm or vary
the fair market value of the object.
[9] The argument between the parties
settled on whether the fair market value of the works of art
should be determined individually as to each object or,
altogether subject to a blockage effect when a mass of these
works of art are sold together so as to cause the value of the
mass to be different from the sum of all its comprised parts.
[10] The third definition of
"object" contained in the Compact Edition of the Oxford
English Dictionary is:
"Something placed before the eyes, or presented to the
sight or other sense; an individual thing seen or perceived, or
that may be seen or perceived; a material thing; ...
That is to say that it is singular and not plural.
[11] With the question posed in paragraph
[12] in mind, it should be noted that the singular object in a
donation, such as the one of 981 paintings in question, may be
the entire donation itself. Subsection 118.1(1) describes the
total cultural gifts of an individual as:
"the total of all amounts each of which is the fair
market value of a gift (a) of an object ..."
The definition reads in full as follows:
"total cultural gifts" of an individual for a
taxation year means the total of all amounts each of which is the
fair market value of a gift
(a) of an object that the Canadian Cultural Property Export
Review Board has determined meets the criteria set out in
paragraphs 29(3)(b) and (c) of the Cultural Property Export
and Import Act,
and
(b) that was made by the individual in the year or in any of
the 5 immediately preceding taxation years to an institution or a
public authority in Canada that was, at the time the gift was
made, designated under subsection 32(2) of the Cultural
Property Export and Import Act either generally or for a
specified purpose related to that object,
to the extent that those amounts were
(c) not deducted in computing the individual's taxable
income for a taxation year ending before 1988, and
(d) not included in determining an amount that was deducted
under this section in computing the individual's tax payable
under this Part for a preceding taxation year.
[12] Ultimately then, the question is
whether the fair market value of each work is to be arrived at
individually, or is it to be arrived at individually but disposed
of, as each was, in a group of 981, in the words of Section 32 of
the Cultural Property Export and Import Act, to a
designated institution or public authority? Each reference in
that Act is to an individual object. Thus, while the
object may be disposed of with others, it is treated in the
Act as an individual object. It is that disposition which
creates the question of value, not the transaction between the
Appellant and Feist. And, finally, it is that disposition which
is governed by the words of the Act.
[13] Ms. Minard valued each object
individually and then gave each a bulk discount of 90 percent,
based on the premise that the disposition occurred in the
"tax shelter market", in which the value consisted of 8
percent to 15 percent of the individual objects' fair market
value. For the entire 981 objects she testified that she struck a
value of $141,402.34 in December, 1995, contrary to page 4 of her
report. (Exhibit R-2).
[14] The painter, Mr. Feist, and his agent
Ms. Laverty transferred the 981 objects to Mr. Malette and his
group for an initial proposed amount of $250,000 no earlier than
January 31, 1997. After dickering, based on an agreement of what
they considered to be a net of 25 percent of the works' fair
market value, they ultimately arrived at a final price of 25
percent of whatever the certificate amount from the Board would
be. It was a "tax driven transaction". The vendor was
paid $50,000 cash at the time of the sale. (Exhibit R-5,
Examination for Discovery of Charles Malette, September 18,
2002.) The remaining amount had not been paid at the date of the
Hearing.
[15] Ms. Minard's report fixes the value
of the 981 works at $141,402.34 as of December 1995. The
disposition to the Art Gallery of Algoma occurred on
July 22, 1998. The Board decided that item value then was
$293,246.00.
[16] Ms. Minard's report states that the
works are in five different categories, each with a distinct
market. Some were in poor condition when she inspected them. She
was of the opinion that the amount paid by Mr. Malette to Mr.
Feist "may be the best indication of fair market
value." On average Mr. Feist only sold 2 works on paper
annually. His sales on canvas were better. Of the 981 works in
question:
Category 1 -
610 works on paper
Category 2
- 47 works on paper
Category 3 -
70 original prints
Category 4 -
231 studies, sketches and trial concepts
Category 5
- 23 paintings on
styrofoam
[17] Because of the Agreed Statement of
Facts the real question for the Court is whether a discount for
volume should exist when arriving at the fair market value in
this case. Without the discount, Ms. Minard's valuation would
be approximately ten times what she finally arrived at. Ms.
Minard's block discount was admittedly based on the "tax
shelter market". Mogan J. dealt with the block discount
problem in Pustina, Whent and Zelinski v. The Queen, 96
DTC 1594 at 1610 and 1611 when he said:
I do not accept Mr. Lake's block discount of 50%. The
hypothetical open market in which fair market value is determined
contemplates purchasers and vendors acting without pressures to
buy or sell. There was no evidence that these Appellants were
under any pressure to dispose of the Morrisseau Art. In fact,
their evidence was to the contrary and I believe them. The fact
that they decided to give away all of the Morrisseau [96 DTC
1594 at 1611] Art within a 24-month period does not mean that
they would attempt to sell it within the same period if they had
decided to follow the sale route. And finally, Mr. Robinson was
of the view that all 216 works could have been sold at retail
within a two-year period if they had been carefully grouped and
distributed to selective retail galleries from Montreal and
Toronto through to Calgary and Vancouver. I am not sure how Mr.
Robinson could reach that conclusion when there is so little
evidence of retail galleries selling Morrisseau's works in
the years 1984, 1985 and 1986 but the idea appeals to me as a
sensible marketing strategy for an owner who decides to sell
without any pressure.
....
Based upon the evidence before him of the value of Morrisseau
paintings of $3.00 per square inch at their peak market and the
subsequent decline in Mr. Morrisseau's personal life and
his sponsoring gallery, combined with the appraisals in evidence,
Mogan J. arrived at a value of $2.00 per square inch and was
upheld in appeal. Most important for the purposes of this case,
is the fact that he rejected the block discount. He did not refer
to the singular references to "object" in the
legislation. But in dealing with the concept of fair market
value, he did refer to an orderly marketing of the paintings in
the retail market, governed to some extent by the particular
condition of Morrisseau and the gallery.
[18] It is in the light of Mogan J's
analysis, its acceptance by the Federal Court of Appeal and the
individual references to each "object" in the governing
Canadian legislation, that the Court rejects the concept of a
blockage effect with reference to a donation to a public gallery
such as occurred here. Donations of art to public galleries often
consist of a large number of works. Such donations are to be
encouraged so that the works are presented and shown to the
public. It is difficult to imagine that a donation of ten or many
more paintings by a famous international artist such as Renoir
would be discounted. Rather, they would be applauded generally.
It is equally difficult to imagine that they would be subject to
a block discount to determine their fair market value. On the
contrary, the value of the gallery would be multiplied by the
critics and the public.
[19] No doubt it is for these reasons that
the legislation refers to an object individually.
[20] Because the Court finds that there
should be no discount for volume or a bulk discount, the Court
finds that the fair market value of the 981 works of art in
question is $828,000 as was agreed by the parties in Exhibit A-3.
The determination of the Review Board is varied accordingly.
[21] The Appellant is awarded party and
party costs.
Signed at Regina, Saskatchewan, this 13th day of August
2003.
Beaubier, J.
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