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Citation: 2004TCC649
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Date: 20040924
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Docket: 2002-3718(IT)G
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BETWEEN:
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BARBARA QUINN,
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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
Bell, J.
ISSUES:
1. In respect of her 1997
taxation year, what was the fair market value of the 48 signed
and numbered limited edition Prints (each "Print" and,
collectively, the "Prints") donated by the Appellant ("Donation")
to In Kind Canada ("In Kind") on October 15, 1997, the date of
Donation? That amount will determine the Appellant's
Donation tax credit amount deductible under subsection 118.1(3)
of the Income Tax Act ("Act") in respect of such
Donation.
2. If the amount on which
the Appellant's Donation tax credit was calculated was higher
than the Appellant's purchase price of the Prints, were the
Prints "personal-use property" as defined in section 54 of the
Act to which the provisions of subsection 46(1) of the Act
applied? If they were "personal-use property", the Appellant's
adjusted cost base of each of those Prints will be deemed to be
$1,000 and no gain or loss will have been realized on disposition
by the Donation.
FACTS:
[1] The Appellant was advised by her
financial planner of the potential of buying art works and
donating them to a charitable institution for a tax receipt of
market value, being higher than her purchase price. She said that
she decided to participate both for the income tax reduction and
to benefit charity. The Appellant, on August 10, 1997
acquired Prints, being 48 reproductions of art work by artist
Barry Barnett, from CVIAM for a total purchase price of
$8,648. On October 15, 1997 she donated the Prints to In
Kind ("Donation"), a registered charity within the meaning of
paragraph (a) of the definition of "total charitable
gifts" in subsection 118.1(1) of the Act ("In
Kind"). In Kind issued to the Appellant a donation receipt
dated October 16, 1997 in the amount of $25,280, being in respect
of 16 Prints at $225 each, 16 Prints for $410 each and 16 Prints
for $945 each. The Appellant filed this receipt with her return
of income for her 1997 taxation year and in computing her total
charitable gifts and total gifts for that year, included $25,280
in respect of the Donation. The Minister of National Revenue
("Minister") reassessed the Appellant in respect of that year by
reducing the amount of the fair market value of the 48 Prints at
the time of Donation to her cost thereof, namely $8,648. The
Minister also assessed penalties against the Appellant in the
amount of $3,770 pursuant to subsection 163(2) of the Act
and subsection 19(11) of the Income Tax Act of Ontario. At
the hearing, counsel for the Respondent informed the Court that
the penalties would be deleted.
EXPERT WITNESS ROLLAND FORD
[2] Rolland Ford ("Ford") was
qualified as an expert in the limited edition art print industry.
His credentials are very impressive. A summary of his education
and experience follows:
EXPERIENCE:
4/2002 -
Present
Mill Pond
Press
Venice, FL
VP/Sales & Marketing
Manage all sales and marketing efforts to national accounts
and international distributors. Oversee all marketing decisions.
Participate in decision making for; new artists, art published,
edition sizes, pricing and distribution strategy. Responsible for
continued development of new distribution channels. Responsible
for maintaining Company's awareness level of all industry
news including competitor product changes. Developed and
conducted a Regional Sales Training program for entire dealer
network via 14 Regional Seminars. Management of in-house sales
department. Developed outside sales rep program. Spearheaded
improved dealer communication via website and e-mail.
11/2000 - 3/2002 Light of the
Future Galleries Naperville, IL
Director of Operations
Manage sales & marketing efforts for three art galleries.
Responsible for inventory control, buying decisions and product
evaluation. Hired and trained all sales staff. Developed and
implemented training programs and sales strategies. Set schedules
and goals to meet Company growth plans. Plan and manage all major
events. Final decision making for all product pricing, including
secondary market pieces.
2/1996 - 11/2000 Media Arts
Group, Inc.
Naperville, IL
Regional Sales Manager
Developed territory from 1.3m to 5.1m in 3 years! Top RSM 3 of
4 years. Primary focus was developing franchise prospects into
owners of multiple stores. Oversee all franchise steps from
original business plan to grand opening and beyond. Focused on
building trust and respect with top accounts. Worked diligently
to improve established low volume accounts. Developed a regional
training program that was later used by entire company. Meetings
with business owners to review P & L's, identify
opportunities, manage inventory and plan growth. Conducted
on-site recruiting and training.
1/1992 - 1/1996 Home
Cable Concepts
Cincinnati, OH
District Manager
Built a professional team of 25 salespeople, generating
monthly revenue over $200k. Took over office ranked 46th of 47 in
nation and developed it to #1. Hired for all departments,
including service and administration. Developed and rolled out
new sales program used nationally for new product line.
2/1985 - 1/1992
Entre Computer Centers Stamford,
CT
Sales Manager/Training Manager
Developed a new computer software training department.
Spearheaded sales efforts to local companies, including fortune
500's. Managed all aspects of retail sales.
EDUCATION:
NYU
(CED)
US-NY-New York
Vocational
- Computer Science certificate
Andover Inst. of Business US-ME-Portland
Associate Degree
- Business Administration
[3] Additional comments on Ford's
experience are taken from the report prepared by him. He stated
that he had been in the business of selling limited edition art
work since 1996 and that he had been mainly employed by two
different publishers of limited edition art and that he managed
three Chicago area art galleries that sold limited edition art.
In that role he purchased art from publishers and artists and
sold it to retail consumers. He also collected, prior to 1996,
more than a dozen limited edition prints. He stated that,
currently being the vice president of sales and marketing at Mill
Pond Press, a publisher of limited edition art prints, he was
required to maintain a very high level of knowledge "of the
limited edition print industry, the players, the product, and the
wholesale and retail markets."
[4] His report said that the subject
matter of limited edition prints encompasses a varied group of
genre including wild life, modern, inspirational, native,
landscape, floral, nostalgia, figurative, sports, western,
aviation, and a variety of others. Referring to an article in the
July, 2002 edition of Art Business News magazine, he said
that the most popular subject matter of limited edition prints is
landscapes, the second most popular is flowers and the third most
popular is wild life.
[5] He stated that art print
reproductions fall into two categories, open edition prints and
limited edition prints. An open edition print is never numbered
and may be produced in unlimited quantity. In the case of limited
edition prints the artist and publisher have committed to produce
only a certain number of prints called the "edition
size". Because of the limited number of pieces personalized
by the artist, limited editions, according to Ford, are, by their
nature, desirable, collectible and exclusive. He stated that
limited edition prints, when "sold out" in the primary
market (retail outlets) will often trade in the secondary market
and that open edition prints do not generally trade in the
secondary market. His report said that limited edition prints are
almost always numbered with a fraction that indicates the number
of prints in the edition and the number of the particular print,
being the numerator in the fraction.
[6] Ford testified further that within
an edition of limited edition prints there are often special
prints designated as "proofs", the most common of those
designations being the "artists proof". They are
generally limited to a percentage of the total print run
(generally less than 25 percent) and are labelled "AP"
in the margin of the print. Traditionally these were the first
prints that were produced through the printing process. He said
that the artist would scrutinize them and would refine the
printing medium by making colour adjustments, et cetera, being
the prints that the artist would "proof" before the
other prints were run through the printing press. They were
generally considered more desirable and to have more value.
[7] Ford then stated that an artist
would, in some cases, add a small original work of art in the
margin or on the back of a print or would embellish the print
with hand-painted brush strokes. A print on which the artist has
added an original drawing or painting is often referred to as a
"remarque". He stated that these special prints would
generally comprise a very small portion of the total edition of
prints and would often sell, at both wholesale and retail market
levels, for several times the value of the "standard"
signed and numbered prints. He said that these remarques tend to
increase in value, at a higher rate in a secondary market.
[8] He further stated that limited
editions are printed on top quality paper using expensive,
long-lasting inks and are often run through a press multiple
times using touch plates to print small corrections on each
print, being, usually a minor colour correction. He explained
that open edition prints use lower quality paper and inks that do
not last.
[9] He then explained offset
lithography, being the most common printing method used in the
reproduction of limited edition art. He explained the process
stating that a modern offset printing press is a motor-driven
machine with a computer brain that can cost several million
dollars. That process is called "offset" lithography
because the paper never actually touches the printing press. Ford
stated that in the press, the image is transferred to a roller
which then prints the image onto the paper and hence the image is
"offset" before printing.
[10] He also explained serigraphy using the
silk-screen process. That involves placing a stencil that is made
of tightly stretched silk or other fabric over the substrate
(most often paper). The stencil blocks the areas where paint is
not to be applied to the substrate. After describing the
rest of the process, Ford said that due to the labour and skill
necessary to create a serigraph, they typically sell for
significantly more than offset lithographs. He attached a book
entitled The Complete Guide to Limited Edition Art Prints
by J. Brown that describes the offset lithography and serigraphy
processes in detail.
[11] He referred to other types of processes
pursuant to which limited edition prints are produced, one of
them being an "etching", where an image is etched onto
a stone or other medium and the print is created by covering the
medium with ink and impressing the medium onto the substrate. He
said that offset lithographs are generally not considered to be
"fine art".
[12] Ford spoke of the edition sizes for
limited edition art prints saying that they varied widely. He
stated that offset lithographs range from 195 to 1950 in typical
editions. He then said that some artists will release prints of
an image on more than one substrate (e.g. on canvas and on paper)
and in different sizes, each type of print forming its own
edition. He gave different examples of how prices in different
print editions could vary substantially in price.
[13] He then said that on a regular basis he
is directly involved in the process of pricing limited edition
prints. He said that the retail pricing of a print is usually a
product of the cost of producing it, the cost of bringing it to
market and the market demand for it. He spoke of the factors
determining cost, the selection of print size and the edition
size and the establishment of wholesale price which must be
sufficiently high so that the publisher can recoup its costs and
make a profit. He said that other factors that influence the
pricing decision include competitor pricing for similar prints,
popularity of the artist, the subject matter and the success that
the artist has had selling previous prints, et cetera. He
said:
Generally, only small variances occur due to those factors.
For example, a print of equal size and type by a very famous
artist, say, Robert Bateman, would not be priced significantly
higher than a print produced by a less-known regional artist.
Generally, however, the more famous artists tend to release
prints in larger edition sizes.
He said that the publisher generally sells prints directly to
dealers at a wholesale price that is around 50 percent of the
retail price, the dealers being the retail outlets where the
prints are sold such as galleries and gift shops, et cetera. He
said that a publisher would not, under any circumstances, sell at
wholesale prices other than to "bricks and mortar"
galleries at the prices set out in the price lists. He said that
if a publisher learned that a retailer was selling prints at a
significant discount to the retail sales price, the publisher
very well might terminate its relationship with the retailer.
[14] Ford stated that most limited edition
lithographs retail for somewhere between $170 and $340 Canadian.
He said that publishers of limited edition prints consider the
North American market to be one market, it being very common for
American print artists to retail their prints in Canada and vice
versa. He opined that wholesale and retail prices are consistent
for similar prints in Canada and the United States.
[15] He testified that there are millions of
buyers of limited edition prints in North America and more in the
international market. He referred to an article in the August
2003 edition of Art Business News which reported that the
total market for art and wall décor was estimated to be
over 35 billion dollars U.S. for 2002 and that approximately 10
percent of that would be comprised of limited edition art prints.
He stated that Mill Pond Press has a retail network of
approximately 2000 retailers, about 200 of whom are located in
Canada. He said that the limited edition print market was
extremely strong in the early to mid 1990s, was moderately strong
in the late 1990s "and has been soft in the early
2000s". He added that tourist galleries were hit extremely
hard by the tragic events of "9/11" and its negative
effects on the tourism industry.
[16] Ford then said:
The limited edition print market has not, to my knowledge,
been affected by large donations of prints made in either Canada
or the United States. Before I was retained to testify in this
case, I had never heard of a syndicated art donation program, and
had never heard of a company called CVI Art Management Inc.
[17] The concluding part of his report
relates to the Prints donated by the three Appellants whose
appeals were heard together. It is set out as follows:
E.
The Prints donated by Caedmon Nash, Barbara Quinn and Susan
Tolley
On May 26 and May 27, 2004, I viewed a number of prints that I
was advised were identical to those donated to charities by the
individuals that are the subject of these cases in the Tax Court.
In particular, I viewed a large number of prints from three
collections entitled "A Distant Thunder", "The
Barry Barnett Collection" and "Nature &
Wildlife". I also reviewed an appraisal of the Barnett
prints prepared by Cynthia Duval and appraisals of the other
prints prepared by Robert Parks.
A Distant Thunder
The prints I viewed were by artists Carl Beam, Richard
Bedwash, Russel Noganosh and Brian Marion. They were high quality
serigraphs from an edition of 300 (345 including artist's
proofs). The images were desirable and saleable. In my opinion,
the values set out in the Robert Parks appraisal are lower than
the prices paid for similar types of prints that were sold at the
retail level in North America at the end of 1999.
Barry Barnett Collection
The prints I viewed were signed and numbered prints,
artist's proofs and remarques by American artist Barry
Barnett. Each of the remarques had a hand-drawn picture in the
margin that related to the subject matter of the image. I also
viewed a sample "Certificate of Authenticity" (I
assumed a similar certificate accompanied each print). They are
quality lithographs. The images were desirable and saleable. In
my opinion, the values set out in the appraisal are equal to the
prices that similar quality prints would have sold for in 1997 in
retail galleries across North America.
Nature & Wildlife
The prints I viewed were stamped and numbered prints, each
from an edition of 155, by artists Lynn Donoghue, Adriene
Veninger and Pamela Stagg. They were quality lithographs. The
images were desirable and saleable. In my opinion, the values set
out in the appraisal were approximately equal to the prices paid
for similar prints in 1998 in retail galleries across North
America.
He signed his report after making the statement that he had
prepared it and believed its contents to be accurate and complete
to the best of his knowledge. This report was dated June 2,
2004.
[18] Ford testified that the majority of
limited edition prints would be priced somewhere between $125
U.S. and $250 U.S. He then stated that his company, Mill Pond
Press does not publish many serigraphs and that they generally
range from $300 U.S. to $1,500 U.S. He said that he had been in
many galleries and had seen a lot of serigraphs produced by other
print publishers or artists who are self-published and:
... that combined with the serigraphs that have been
published by Mill Pond that is the price range.
[19] Ford's experience, according to his
oral testimony, was that he was part of the selection process at
Mill Pond as to what original art works would become limited
edition prints. He testified that he was a member of the
selection committee because he is the person who "gets the
most feedback from the dealers on what is selling". He
testified that "almost anybody" is a customer for
limited edition prints. Specifically, he said:
It's the masses. It's most. It's probably 75
percent of the buying public, the same folks that go to Lazy Boy
to buy a recliner and the same folks that go to all the other
stores and buy regular stuff.
He also said that there was a large market for the purchase of
limited edition prints by offices, with or without the assistance
of interior designers. He stated that Mill Pond Press publishes
over one million prints each year at an average retail price of
$200 U.S. per print and that there are hundreds of other
publishers in the U.S.A., about 30 to 40 of which are
"significant players". He also said that there are
millions of limited edition prints sold each year in North
America.
[20] Appellant's counsel posed the
following question to Ford:
Q. Then you wrote in the first full paragraph on page 11:
"The limited edition print market has not, to my
knowledge, been affected by large donations of prints made in
either Canada or the United States. "
You say:
"Before I was retained to testify in this case, I had
never heard of a syndicated art donation program and had never
heard of a company called "C.V.I. Art Management
Inc.".
Why would the market, in your opinion, not have been affected
by syndicated donation programs?
A. Well, sheer
numbers and marketing power probably. We have our art dealer
network. We send hundreds of thousands of prints out every year
and for the most part they are sold through and we are only one
of many significant players in that business. We have the muscle
of the advertising and the reputation and whatever number of
prints you are talking about, whether it be 1,000 or 10,000 or
whatever.
The best example I can think of is if you put 5,000 prints
into a market like Ann Arbour, Michigan you could give one to
every 200 people that just attended a football game and they
would all be gone and I doubt if I would ever, in my role as Mill
Pond's Vice-President, I doubt if I would ever get a call
from any of my retailers in Michigan complaining that they had
lost a sale because someone else had some edition prints
there.
Q. Haven't you
just flooded the market in Ann Arbour by doing that, for
example?
A. One print for
every 200 people? No.
Q. Why is that?
Doesn't that diminish the demand for prints in Ann
Arbour?
A. Not in my
opinion.
Q. Why is that?
A. It's just
that you are talking about again maybe a town of, I have no idea,
maybe its 300,000 people. So if one out of five are going to buy
a limited edition print some time in the next couple of years you
are not going to significantly affect that market because one out
of 200 people at a football game got one of those prints.
[21] The following exchange then took
place:
Q. ... For A
Distant Thunder the amounts indicated on the Robert Parks'
appraisal was CDN $350. You say here in your report that in your
opinion that amount set out in the Robert Parks' appraisal is
lower than the prices paid for similar types of prints, that CDN
$350 is lower for similar types of prints sold at the retail
level in North America in 1999. Can you give us an idea of what
those kinds of prints, similar kinds of prints, would have been
sold at that that time?
A. Definitely.
Either at or a little bit higher I guess would be the way I would
describe it for multiple reasons. One is they are serigraphs,
which again is a very labour intensive process and very accepted
in multiple markets, so whether it be the mass market, slightly
higher end or even the fine art market. Before I even wrote this
actually I did just a little bit of checking because I had not
heard of Carl Dean and it appeared from what I could dig up on
the internet he is a very saleable artist, has a certain amount
of fame and notoriety, and that is important. So yes, I looked at
him. There were pluses and minuses throughout the collection but
when you added the pluses and minuses they came up to be pretty
much consistent with the average serigraph type prices that I
would bring similar pieces to the market at.
Q. With respect to
the Barry Barnett collection, Ms Duvall is the appraiser there
and she had appraised them at U.S. $200 for the prints, U.S. $400
for the artists proofs and U.S. $900 for the remarques and these
are in each of these cases. You say in your opinion that those
values were equal to the prices that similar quality prints would
have sold for in 1997 in retail galleries across North America.
Is that correct?
A. That is exactly
correct.
Q. For Susan
Tolley's prints, the Nature & Wildlife Collection, they
were appraised by Mr. Parks for their value in 1998. There were
different artists there. These were the floral artists.
A. Yes.
Q. Some were at $280
Cdn, some were at $285 Cdn, some were at $290 Cdn. Are those
approximately equal to the prices that would have been paid for
similar prints in 1998 in retail galleries across North
America?
A. Yes, approximately,
and certainly considering the small edition size again they would
have to be brought to market and priced around that amount. They
were quality lithographs in the sense they were printed on good
stock. They appear to have used good inks. Again there were some
pluses and minuses but I think when you added it all up it was
darn close to that.
Q. Did as a matter
of fact the syndicated donation programs that you have now
learned about have an impact on the market, on the industry, your
industry, in 1997, 1998 or 1999?
A. Not to my
knowledge. I had never heard of it. I am involved in associations
in the limited edition print industry, the National Association
of Limited Edition Dealers is one. We get together, we talk on
the phone and not only had I never heard of it but the subject
had never come up in any of my conversations with anybody in our
industry.
[22] On cross-examination Ford said that
none of the artists whose work is the subject matter of the
donations had ever been in Mill Pond Press' inventory. He
also said that one of the collections did not have a certificate
of authenticity and that Mill Pond Press would probably not have
published prints in that way. He said that there were no
signatures on some prints, simply stamping the initial of the
artist. He then said that Mill Pond Press would not have
published prints without the signature. Ford also said that when
a print was simply stamped as opposed to being signed by the
artist one could not tell whether the artist had approved the
print.
[23] Respondent's counsel then asked
Ford a number of questions to each of which he responded
"no". Those questions dealt with whether he had checked
the impact of CVIAM on the market for Barry Barnett's Prints,
whether he had checked it in respect of A Distant Thunder
Collection, whether he had done it for any of the artists in the
Nature & Wildlife Collection, et cetera.
EXPERT REPORT OF SANDRA J. TROPPER, ASA
[24] Sandra J. Tropper ("Tropper")
was qualified as an expert appraiser of personal property
including limited edition art prints. Tropper has what appear to
be outstanding credentials in the area of her expert
qualification. They read as follows:
APPRAISER'S CREDENTIALS
Sandra Tropper, owner of Artemis, Inc., has been an art
dealer, consultant, and appraiser in the Washington, D.C. area
for over twenty years. As a private dealer she assists in the
purchase of original artwork including Limited edition prints,
paintings, sculpture and contemporary crafts. Her clients include
corporate entities (including major accounting firms, law firms,
trade associations, etc.), private collectors and government
agencies.
She received a B.A. in Art History and Political Economy from
Sweet Briar College in Sweet Briar, Virginia in 1973. She
received her Master of Arts in Art History from the George
Washington University in 1986, Washington, D.C. She also has a
Master of Arts in International Studies from The John Hopkins
University Paul Nitze School of Advanced International Studies,
Bologna, Italy and Washington, D.C., received in 1975.
In addition to her academic background as an art historian,
Ms. Tropper has also taken practical classes in the fine
arts at the Corcoran School of Art, the Smithsonian Institution,
Pyramid Atlantic, and the Maryland College of Art and Design.
Ms. Tropper is an accredited senior appraiser (ASA) with the
American Society of Appraisers, an international
multi-disciplinary certifying and accrediting organization. the
American Society of Appraisers has a mandatory recertification
program for all its senior members and Ms. Tropper is in
compliance with that program. She is currently an officer of the
national Personal Property Committee of the ASA and a member of
the Board of Examiners. Currently Ms. Tropper serves as an ASA
representative to the Terminology, Applications and Concepts task
force of the Centre for Advanced Property Economics for
reinterpreting appraisal definitions in the Uniform Standards
of Professional Appraisal Practice. She is an instructor for
ASA Personal Property Valuation courses including Personal
Property 203: Report Writing; and Personal Property 204:
The Legal and Commercial Environment.
Ms. Tropper has completed courses in appraisal practice and
theory including Principles of Valuation (Personal Property
Appraising); Research and Analysis in Appraising Personal
Property; Personal Property Appraisal Report Writing (Master
Class); Personal Property Appraisers in Practice (Standards and
Obligations); and the Uniform Standards of Professional
Appraisers Practice (2001). In addition she has attended numerous
courses and seminars including Personal Property Valuation
(Appraising Fine and Decorative Arts); Asian Decorative Arts;
Japanese Woodblock Prints; Victorian Painting; Appraising
Photography; Williamstown Art Conservation Center's Summer
Institute on the Conservation, Analysis and the Interpretation of
Works of Art; Beyond Warp and Weft (Understanding Textile
Connoisseurship, Conservation & Valuation); Cultural Property
(Due Diligence and Provenance, Legal and Ethical Issues) and
American Folk Art.
She is a member of both ArtTable, a national organization of
women in the arts, and Charter 100, a national organization of
professional women.
[25] Tropper's letter of transmittal of
her report to Mr. Cliff Rand, counsel for the Appellants reads as
follows:
Dear Mr. Rand:
In accordance with your request for the preparation of a
valuation report for Fair Market Value for 233 prints by various
artists (Barry Barnett, Lynn Donoghue, Pamela Stagg, Adriene
Veninger, Carl Beam, Russel Noganosh, Richard Bedwash and Brian
Marion), I inspected comparable properties at your offices on May
16, and 17, 2004 at my office in Bethesda, Maryland on May 24,
and June 2, 2004 or at the Crowne Plaza Hotel in Arlington,
Virginia on May 30, 2004. I understand that the prints that I
inspected are from the same editions but are not the exact ones
that are included in these donations. I have assumed that the
prints included in these donations are comparable in all
features, including condition.
Based on my inspection of the property and subsequent research,
including analysis of the artists' markets and the sale of
comparable properties, I have reached the conclusion that, as of
the dates of donation, the Fair Market Values for the properties
are as follows:
Barry Barnett: Fair Market Value for 48 prints as of October
15, 1997: $24,384
Lynn Donoghue: Fair Market Value for 44 prints as of December
3, 1998: $10,560
Pamela Stagg: Fair Market Value for 35 prints as of December
3, 1998: $8,750
Adriene Veninger: Fair Market Value for 21 prints as of
December 3, 1998: $4,620
(Total Fair Market Value for prints from Nature and
Wildlife: $23,930)
Carl Beam: Fair Market Value for 25 prints as of December 31,
1999: $10,625
Russel Noganosh: Fair Market Value for 17 prints as of
December 31, 1999: $5,525
Richard Bedwash: Fair Market Value for 25 prints as of
December 31, 1999: $8,775
Brian Marion: Fair Market Value for 18 prints as of December
31, 1999: $5,332
(Total Fair Market Value for prints from A Distant
Thunder: $30,257)
Please note that the conclusions presented here are for the
artwork's Fair Market Value for charitable donation. For all
intents and purposes within this document, Fair Market refers to
the definition from the judgment of Cattanach, J. in Henderson
v. Minister of National Revenue, 1973 Carswell Nat 189,
[1973] C.T.C. 636, 73 D.T.C. 5471. Per this judgment, Fair Market
Value is defined as the highest price an asset might reasonably
be expected to bring in 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.
In the preparation of this report I have observed the Code of
Ethics of the American Society of Appraisers and have conformed
to the standards promulgated in the Uniform Standards of
Professional Appraisal Practice of the Appraisal Foundation, an
organization representing major appraisal organizations
nationwide. In addition, I have no past, current or future
interest in the properties contained within this report.
Thank you for allowing me to be of service to you in this
matter.
Yours truly,
Sandra Tropper, ASA
American Society of Appraisers
[26] Tropper also included a page of
definitions of appraisal terms as follows:
DEFINITIONS OF APPRAISAL TERMS
A Personal Property Appraisal
An appraisal is an informed opinion as to the value, quality,
condition and authenticity of an article of personal property.
That opinion is backed by education, appraiser training, market
experience, and research. A personal property appraisal must be
used in its entirety including the Limiting Conditions as
described on pages 104-5.
Purpose and Function of this Appraisal
The purpose of this appraisal is to conclude the Fair Market
Value of artwork. The function of this appraisal is to apply
these values to substantiate a charitable donation to non-profit
organizations.
Fair Market Value
Fair Market Value is defined as the highest price an asset might
reasonably be expected to bring if sold by the owner in the
normal method applicable to the set 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. (Cattanach, J. in
Henderson v. Minister of National Revenue, 1973 Carswell
Nat 189, [1973] C.T.C. 636, 73 D.T.C. 5471)
Approach to Value
Personal Property is valued using a Market Comparison Approach, a
Cost Approach or the Income- or Revenue-Producing Approach. For
the artwork included here, the Market Approach was used. The
other approaches were deemed inappropriate after
consideration.
Market Data Comparison Approach
The Market Data Comparison Approach entails examination and
comparison of transactions of like or comparable properties that
have taken place in the appropriate marketplace in order to
arrive at an apposite market value. As there are comparable
properties in the marketplace, this approach was chosen for
valuation of properties included here.
Cost Approach
The Cost Approach provides a concluded cost of replacing the
depreciated property with reproduction, or new, substitute
property. It can also include the cost of repairs to return
property to its original condition. As comparable properties
exist in the marketplace, using this approach is not
appropriate.
Income Approach
The Income Approach to value is used when an object will be used
to generate income at a future date. (Generally this is used when
the subject property is being either leased or rented;
depreciation must be accounted for as this may reduce the life
span of the object due to handling and use over time.) Except for
their sale, the properties being considered in this report are
not able to generate income and this approach was not chosen.
Condition/Quality
Condition and quality are ranked from top to bottom by the
terms:
Excellent, Good, Average, Fair and Poor.
[27] Tropper's report continues with a
Narrative of 26 pages, followed by a very detailed Description of
Artwork describing each of the 233 Prints involved in this
appeal, identifying the type of print, the material used, the
size, the number, the fact of signature, a very comprehensive
description, and the fair market value of each such piece.
[28] Obviously, a reproduction of all of
this material is not practicable. A summary of the Narrative is
that Tropper inspected the three groups of Prints including 48 by
Barry Barnett, 100 Prints grouped under the title "Nature
& Wildlife" and 85 Prints grouped under the title
"A Distant Thunder". She arrived at her statement of
the fair market value of each print for the appropriate Donation
date being:
Barry
Barnett Prints - October 15, 1997
Nature
& Wildlife - December 3, 1998
A
Distant Thunder - December 31, 1999
She provided a description of the artists' background, a
general description of the art work and a review of the
artists' market. For the groups and the artists, she
discussed the market in which these prints are regularly traded
"in the ordinary course of business". For the
groupings, she discussed each artist's background and market
separately, noting similarities as well.
[29] She stated that she sought the fair
market value for calculating the amount of the charitable
Donation on those dates according to the definition of "fair
market value" from the judgment of Cattanach, J, in
Henderson v. Minister of National Revenue, 73 D.T.C. 5471.
Her narrative recites that:
...this judgment, Fair Market Value is defined as 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.
[30] She set out the conversion rates for
calculating the conversion of U.S. dollars into Canadian dollars
on the appropriate date. She further stated that she approached
each work as a separate property and that each work would command
a price in the market place. She reviewed the open markets which
were described as "not subject to undue" stresses and
where no one has a compulsion to buy or sell for any reason other
than to purchase art work as an investment, as decoration or as
an addition to a collection.
[31] Tropper said that the Appellants
purchased the Prints at a reduced price based on an opportunity
provided by CVIAM. She added that they were not purchased in the
open market, a requirement for concluding the fair market value
of the works. She added further that the Prints were not
purchased by the donors in the market where property of that sort
would normally be sold in the ordinary course of business. She
stated that there are various market layers in the many levels of
galleries and dealers in the art world. She then said that the
market layer that determines fair market value for individual
works of art:
...is the open common 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."
[32] Tropper described the three separate
markets that were to be considered. The first is the offset
lithograph market of wildlife imagery (for Barry Barnett). The
second market is the offset lithograph market for general subject
matter (for the Nature & Wildlife Prints). The third
market is for native North American art work overlapping the
print market where hand pulled art work is sold (for A Distant
Thunder Prints). She then described the nature of those
markets, concluding with the statement that prices vary a great
deal in all such markets depending on many factors including size
of the print, number of Prints in an edition, marketability of
the image (which includes colour and the ability of the artist),
reputation of the artist, quality of paper and quality of
printing.
[33] Tropper described the internet market
and the effect it had upon prices, affecting, in part, prices in
1997, 1998 and 1999. She explained that those years did not have
the benefit of exposure of the public to art work through the
internet. She also reviewed the general market by contacting
dealers, galleries, publishers, artists and websites to learn
about the variations in prices due to the quantity of prints in a
run and discussed that in some detail.
[34] She then discussed "blockage
discounts", concluding that there was not an adequate number
of Prints in any one of the Donations to suggest the need to
calculate a reduced value due to quantity. She said:
In fact, even the total number of prints in all the editions
by these artists would not overload the huge North American
market.
Tropper also discussed the variety of ways in which the
recipient institutions were dealing with the works.
[35] She said that each group of Prints
would sell through a different area within the art market and
therefore had its own rationale for concluding fair market value.
She stated that all three markets were analyzed in relation to
the above stated definition. Her report then went on to discuss
Barry Barnett's work in substantial detail and sales records
from Barnett's gallery, and described her research respecting
the approaches to pricing the different productions of his works
leading to her conclusion on value.
[36] Tropper pursued the same process with
respect to Nature & Wildlife respecting the art works of Lynn
Donoghue, Pamela Stagg and Adriene Veninger.
[37] Following this she discussed the silk
screen Prints of the four Canadian Native artists making up the
collection known as A Distant Thunder. Her research was extensive
and her report detailed, leading to the valuation of works in
that collection.
[38] As indicated above, Tropper then
devoted 67 pages to a description of the art works giving fine
detail in respect of each of the 233 works examined and appraised
by her.
[39] A page devoted to certifications is
reproduced as follows:
233 Prints: 48 by Barry Barnett; 44 by Lynn
Donoghue; 35 by Pamela Stagg; 21 by Adriene Veninger; 25 by Carl
Beam; 17 by Russel Noganosh; 25 by Richard Bedwash; 19 by Brian
(Pashegesic) Marion
CERTIFICATIONS
Having carefully and personally examined the properties listed
above on May 16 and 17 at the offices of Wildeboer Rand Thomson
Apps & Dellelce, Toronto, at the offices of Artemis, Inc.,
Bethesda, Maryland, on March 24 and June 2, 2004, or on May 30,
2004 at the Crown Plaza Hotel, Arlington, Virginia. I present
this valuation. I have made these certifications on the basis of
my experience, expertise and analysis of markets where this
property or comparable properties by these and comparable artists
are traded.
I certify to the best of my knowledge and belief:
· facts and
data included in this report are true and correct.
· the
reported analyses, opinion and conclusions are limited only by
the limiting conditions (pages 104-5) and are my personal,
unbiased, professional analyses, opinions and conclusions.
· I have no
present or prospective interest in the property that is the
subject of this report, and no personal interest or bias with
respect to the parties involved.
· my
compensation is not contingent upon the reporting of a
predetermined value or direction in value that favors my client,
the amount of the value estimate, the attainment of a stipulated
amount or the occurrence of a subsequent event resulting from the
analyses, opinions or conclusions in this report or from its
use.
· my
analyses, opinions and conclusions were developed and this report
has been prepared in conformity with the Uniform Standards of
Professional Appraisal Practice.
· no one
provided significant appraisal, appraisal review, or appraisal
consulting assistance to me in the preparation of this
report.
"Sandra J.
Tropper"
"June 2, 2004"
Sandra J. Tropper,
A.S.A.
June 2, 2004
American Society of Appraisers
The limiting conditions described on pages 104 and 105 of her
report are reproduced as follows:
LIMITING CONDITIONS
In order to be valid, this appraisal must be used in its
entirety of 106 pages with 104 pages of photographs, as
delineated in the Table of Contents.
The valuations included in this report are effective as of the
dates of donation as follows:
October 15, 1997 (for Barry Barnett prints)
December 3, 1998 (for Nature & Wilderness artist
prints)
December 31, 1999 (for A Distant Thunder prints)
The fee for this appraisal is based solely on an hourly rate
and is not dependent on any conclusion of value.
The appraiser for this report, Ms. Sandra Tropper, has no
past, present or future interest in the property and neither
personal interest nor bias with respect to the parties
involved.
This appraisal is limited to the purpose and intended use (as
stated in the definitions), and nothing else. It is an estimate
of value of the subject properties on the dates of donation. Any
other use of this report renders it null and void. The appraiser
assumes no responsibility for its unauthorized use.
This appraisal does not guarantee the title of the subject
property.
This appraisal is neither a guarantee of proceeds from sale
nor should it be relied on for purchase of a property.
This appraisal makes no warranty as to the authenticity of the
property appraised. Absolute identity is frequently possible only
through the use of scientific testing. Values are therefore based
on the best information available. This appraisal is based upon
visual examination on site; properties were not subjected to
extensive testing by the appraiser.
The appraiser shall make no disclosure of the contents of the
report without the approval of the client except as mandated by
law and/or regulations of a professional organization.
This appraisal has been prepared to conform to USPAP,
the Uniform Standards of Professional Appraisal Practice,
a comprehensive set of procedural, competency and ethical
standards developed by the Appraisal Foundation, and promulgated
annually by the Appraisal Standards Board of the Appraisal
Foundation, an organization of the major appraisal organizations
in the United States.
This appraisal should be considered complete and not limited
by any extraordinary assumptions. It is however a summary
appraisal and all back-up information will be held in
Artemis' work files. These files will be maintained for a
minimum of five years, or two years following the conclusion of
litigation, per USPAP requirements.
In this valuation, the appraiser has considered data from
various sources (e.g. dealers, artists, authorities) and
published documents (e.g. invoices, sales records) and considered
that information to be reliable. Liability for the accuracy of
those sources cannot be accepted.
Photographs included in this document are not considered to be
professional in nature and are included solely to serve as an
adjunct to the description included in this report.
[40] The report further includes coloured
photographs of each of the Prints.
[41] In oral testimony Tropper said that she
had looked for and tried to conclude a fair market value for
calculating the amount of the charitable donation on the various
dates of donation. She said that she used the definition of fair
market value of Cattanach, J. in Henderson v. Minister of
National Revenue. She stated that she used that definition
because she understood that it was the appropriate definition to
use and that she was provided with it by the law firm of
Wildeboer Rand. She said that she tried to figure out how the
artists fit into the various markets where their work seems to
have been sold. She stated:
I tried to conclude values based on again the artists'
backgrounds, the information that I had about past sales records,
looking at the artwork itself trying to place it in a market
context, a market where I believe it indeed would sell, and
concluded values.
[42] She said that the markets that she
looked at were the open markets for these particular types of
assets where one observes the asset and selling prices as
knowledgeable dealers or sellers or buyers normally conduct their
business. She said that they looked at free markets, open
markets, in most cases being retail art galleries. She said
that that could be expanded to include:
... things like frame shops, you can include things such
as gift stores, art consultants and art dealers who work
privately. I think all of those things compose the art
market.
[43] She emphasized that the open and free
market, the market in which fair market value according to the
definition would be found, would be that retail market. She said
that that is the place that the highest price an asset might
reasonably be expected to bring, would bring, if sold. She said
that she had looked at the circumstances in which the Appellants
had acquired their Prints and concluded that it was not the
normal market. She said:
That is not the normal way artwork is sold. It was kind of an
artificial market. It didn't exist over a period of time.
Going to a financial planner to purchase artwork is not really
the norm.
[44] She said that, as written in her
report, historical supply and demand for comparable works helps
determine asking prices. She said:
When you look at the market what you are looking at is what
have people been willing to pay in the past, what exists out
there, what is similar, what is comparable. These pieces had not
sold in the marketplace and so my assignment was, as far as I
could see, to go back and to find indeed where similar kinds of
things, comparable kinds of things had sold in the past.
[45] She said that her understanding was
that these works were produced specifically for a tax shelter
promoter market and that they were not going to be going out into
a retail market.
... at least not on the specific dates when this fair
market appraisal - the various dates when the fair market value
conclusions were to be drawn.
[46] In giving evidence, Tropper described
in detail the nature of the work of the artists in question. She
took into account size of editions, paper quality, ink quality,
the strength of colour values, et cetera. She also took into
account the experience and reputation of the artist. She
described the difficulty in obtaining invoices because:
Galleries and dealers don't want to provide you with
invoices, especially invoices from six, seven, even five years
ago. They have to dig in their records. They are going to pull
things out. They are not receiving any compensation in most cases
for this so it becomes very difficult. You have to establish some
kind of relationship with the person that you are working with
and hope that they will be forthcoming with information. There is
also a privacy issue. To provide you with invoices is providing
you with their clients and their clients' addresses. And
while I speak with a lot of people on the phone they don't
always know who I am and they don't always know if I'm
looking to find myself a good mailing list to send out
information about other artists ... or go directly.
[47] With respect to obtaining discounts,
Tropper said that the discount would normally be given on framing
rather than on the art work stating that she believed that
because there is no "up front" cost to the gallery on the framing
that is an easier way of giving a discount. She stated that it
also maintains the integrity of the price for the artist. She
also said that there are artists who will not allow people to
sell their work, galleries and dealers, if discounts are given.
She said that designers and decorators generally add it on to the
purchase price when buying for clients.
[48] In cross-examination Tropper said that
her assistant made some of the information seeking telephone
calls. She stated that she had not heard about any of the artists
in question before this assignment of valuations. Counsel also
questioned her respecting information received from gallery
owners. Tropper explained that they were not always forthcoming
with information and were, on occasion, reluctant to speak to her
or her assistant. He also asked her questions respecting the
pricing of artists proofs and remarques and a number of questions
about the artist Barnett and his view of the value of his works
compared with the values assigned by Tropper. He asked about
silkscreen works, lithographs, et cetera and about the various
artists and the types of work they did. In addition he asked
about several invoices and also the code of ethics of the
American Society of Appraisers. Tropper was clear in her response
to questions concerning her conclusions about the value of
artists' Prints, namely that she was referring to comparable
works in the market place. Tropper, in response to
Respondent's counsel's questions, stated that she did not
make enquiries of CVIAM of how many sales they had made and in
fact made no enquiries whatever of CVIAM. She also said that she
did not question anyone at Fresno Pacific University about how
many donations of prints identical to Nature & Wildlife were
donated to that university.
EVIDENCE FROM EXAMINATION FOR DISCOVERY READ
IN:
[49] Appellant's counsel read into evidence
certain portions of the transcript of the examination for
discovery of Mr. S. Tringali ("Tringali"), an official of the
Customs & Revenue Agency ("CRA"). It dealt with the work of a
Mr. Gary Roy ("Roy"), an auditor with the CRA who had provided
assistance on the review of the art work herein. He was described
as having had experience in buying and selling art work, devoting
about ten hours per week to that activity for approximately ten
years. Roy became an accredited appraiser [International Society
of Appraisers ("ISA") accreditation] in 2003. Tringali said that
Roy contacted the artists in writing and received letters or
telephone calls in response. He also said that Roy used:
... not only his experience but, again, sales
comparables, the condition of the art work, his knowledge of the
art work, speaking with others in the field, so forth and so
on.
[50] Tringali was referred to a "Range
Report to Appeals Officer from Gary Roy Re: Barry Barnett
Collection with Supporting Material". That report assigned a
value of $25,280 to the Barry Barnett Collection. Tringali said
he believed that to be the value of the art that appeared on the
donor's donation receipt. He then said that he did not believe
that the document had been released to the appeals officer and
that it was rejected by CRA. He said that CRA did not have a
"position" but had an "indication" that the
fair market value was what the donors paid. He then said that Roy
had no comparables. Tringali said that report stated that all
remarque prints in each of the three Barry Barnett series should
be allowed at $945, that all artists proofs should be allowed at
$410 and that all prints from the regular edition should be
allowed at $225.
[51] Tringali, referring to other range
reports, said that the word "Draft" was not stamped on them and
that they were dated. Respondent's counsel said he was not
certain as to which other range reports were sent by Roy to
CRA.
APPELLANTS' SUBMISSION
[52] I have decided, based upon the
thorough, yet succinct, notes of Appellants' argument, simply
to reproduce them here as opposed, with potential compromising
effect, to translating them into my own prose. A complete text of
that submission, therefore, follows:
A.
Introduction and Material Facts
1. The basic
facts in these three appeals are quite simple. Each of the
Appellants purchased a different group of limited edition art
prints from CVI Art Management Inc. ("CVIAM") and
donated the prints to a recipient included in the categories of
qualified donees listed in the definition of "total
charitable gifts" in subsection 118.1(1) of the Income
Tax Act (Canada) (the "Act"). Each of the
Appellants claimed charitable donation tax credits in respect of
his or her gift of the prints to the donee. The Appellants
participated in these transactions on the advice of their
financial planners.
2. CVIAM
designed and facilitated these transactions. In addition to
selling the prints to the Appellants, it arranged to have the
prints appraised and provided copies of the appraisals to the
Appellants, and it located qualified donees who were willing to
accept donations of the prints.
3. Each of the
Appellant's purchased different prints:
· Caedmon
Nash purchased 85 serigraphs produced from original works by four
Canadian First Nations' artists: 25 by Carl Beam, 25 by
Richard Bedwash, 17 by Russell Noganosh and 18 by Brian Marion.
Mr. Nash retained one of the Noganosh prints, and donated
the other 84 prints to Ferris State University.
· Susan
Tolley purchased 100 limited edition prints produced from
original works by three Canadian women artists: 44 by Lynn
Donoghue, 35 by Adriene Veninger and 21 by Pamela Stagg. Ms.
Tolley retained one of the Lynn Donoghue prints, and donated the
other 99 prints to Fresno Pacific College.
· Barbara
Quinn purchased 48 limited edition prints created from original
works by American wildlife artist Barry Barnett. The 48 prints
were comprised of one limited edition print, one artist's
proof and one remarque[1] of each of 16 different images. Ms. Quinn donated all
48 of the prints to In Kind Canada.
4. Although
the prints were all different, they had many things in common.
Ms. Tropper, the expert appraiser, testified that all of the
prints were good quality, professionally-produced, numbered
limited edition prints. Mr. Ford's testimony was to the same
effect. The prints were all decorative pieces of the sort that
consumers throughout North America would purchase to decorate
their homes and their places of business.
5. Mr. Ford,
an individual with a lot of experience in the production and
marketing of limited edition prints, provided evidence as to the
nature and scope of the market for limited edition prints.
According to Mr. Ford's evidence millions of limited edition
prints are produced for sale each year in the North American
market. He testified that limited edition prints comprise a
significant portion (i.e., U.S. $2.5 billion to U.S. $3 billion)
of the over US. $35 billion annual market for art and wall
décor. Mr. Ford testified that there are 10,000 to 20,000
retail outlets for limited edition prints in North America.
6. The
Appellants based their claims for donation tax credits in respect
of the gift of their prints on the amount indicated on the
receipt that was issued by the charity or institution that
received their gift. The receipt amounts in turn were based on
the appraised value of the donated prints.[2] The Minister of National Revenue
reassessed the Appellants to reduce their donation tax credits on
the basis that the amount of the donations they made was equal to
the price they paid to purchase the prints.
7. The
Minister also assessed penalties against each of the Appellants.
On June 18, 2004, the Minister advised the Appellants that he
would reverse the assessment of penalties against them.
B.
Issues
8. The issues
before the Court in these appeals may be summarized as
follows:
(a) What donation
tax credit amounts were the Appellants entitled to deduct under
subsection 118.1(3) of the Income Tax Act (Canada) (the
"Act") in respect of the donation of their prints?
(b) If the amounts
on which the Appellants' donation tax credits were calculated
were higher than the Appellants' purchase price of the
donated prints, were the prints "personal-use property"
of the Appellants to which the provision of subsection 46(1) of
the Act applied?
C.
Arguments
(a) Fair Market
Value
(i)
Background
9. Subsection
118.1(3) of the Act provides that, in computing tax payable for a
taxation year, an individual may deduct a tax credit computed on
the basis of his or her "total gifts" for the year. An
individual's "total gifts" for a taxation year is
defined in subsection 118.1(1) as the least of three amounts, the
first of which is the individual's "total charitable
gifts" for the year. Subsection 118.1(1), as it read at the
relevant times, provided that an individual's "total
charitable gifts" for a taxation year was "the total of
all amounts each of which is the fair market value of a
gift....made by the individual in the year or in any of the
5 immediately preceding taxation years". As a result, the
issue before the Court is the fair market value of the prints at
the time they were donated by each of the Appellants.
10. The Respondent has
assessed the Appellants on the basis that the amount of their
total charitable gifts is equal to the amount the Appellants paid
to acquire the prints from CVIAM. It follows that the Respondent
has assumed in issuing its reassessments that the fair market
value of the prints was equal to the Appellants' cost of the
prints.
11. The arrangements
promoted by CVIAM under which the Appellants acquired and donated
the prints have been referred to by the Department of Finance as
"buy-low, donate-high" arrangements. It is
understandable that the Minister of National Revenue and the
Department of Finance do not like "buy-low,
donate-high" arrangements. Permitting taxpayers to make a
profit from the tax system through the mechanism of a charitable
donation is clearly not in accordance with good tax policy.
Nonetheless, as Mr. Justice MacDonald noted in Nova Corp. of
Alberta v. R.,[3] if there is a [opportunity] in the Act, then a
taxpayer who finds it and exploits it while it is available is
entitled to any resulting advantage.
12. The loophole exploited
by the tax shelter promoters who designed charitable gifting
arrangements resulted form the combination of two factors. First,
the Courts had recognized that a taxpayer can make a
"profitable" gift.[4] Second, in 1996 and 1997 the federal government
introduced measures "to help all charities attract donations
from modest income Canadians"[5] by significantly enhancing the
charitable donation tax credit system. Specifically, the
percentage of an individual's income that could be
tax-effectively donated to charity was increased from 20% to 50%
in [the] March 6, 1996 federal budget, and then to 75% in [the]
February 18, 1997 budget. The door had been opened to permit the
marketing of charitable gifting arrangements to ordinary lower-
and middle-income Canadians, and the tax shelter promoters did
not hesitate to walk right through it. Within a few months of the
1997 budget, CVIAM was busy promoting its charitable giving plan
to Canadian taxpayers.
13. Where a loophole
exists, it may be closed in one of two ways: through the
introduction of amending legislation (even, in some cases,
amending legislation with retroactive effect[6]) or, where circumstances allow,
by the Minister invoking the general anti-avoidance rule to deny
the tax benefits arising from transactions intended to take
advantage of the loophole. In the case of charitable gifting
arrangements, the government chose the former route. By press
release dated December 5, 2003, the Minister of Finance announced
draft amendments to the Act intended to put an end to the
"buy-low, donate-high" charitable donation
transactions.[7]
The press release accompanying the draft legislation said, in
part:
The amendments proposed today respond to concerns that various
promoters are marketing charitable gifting schemes to the public
in which property acquired by a taxpayer is donated to a charity
at a value represented to be in excess of the taxpayer's
acquisition cost. These "buy-low, donate-high"
arrangements provide taxpayers with a tax benefit greater than
their actual cost of the donated property.[8]
14. If these draft
amendments to the Act are enacted[9] the assessing position taken by the Respondent
in these appeals will clearly be correct in respect of taxpayers
making similar donations of property on or after 6:00 p.m. on
December 5, 2003. The draft amendments to the Act provide that,
for the purposes of computing the taxpayer's donation tax
credit in respect of a gift of property, the amount of the gift
is limited to the taxpayer's cost of the donated property
where:
· the
property was acquired by a taxpayer less than three years before
the gift was made;
· the
property was acquired under a "gifting arrangement" (as
defined in section 237.1 of the Act); or
· the
property was acquired in the expectation of making a gift.[10]
15. In the Appellants'
submission, the Respondent is effectively asking this Court to
put into effect the December 5, 2003 draft amendments to the Act
six years prior to their introduction by the Minister of Finance,
and to do so by stretching or contorting the well-established
Canadian Tax law concept of "fair market value". In
doing so, the Respondent is asking the Court to make a decision
on the basis of policy rather than law.
(ii) Canadian
definition of "fair market value"
16. "Fair market
value" is (sic) not defined in the Act. It is,
however, a fundamental concept in Canadian income tax law. The
term appears well over a hundred times in the Act, in such
diverse provisions as the inventory allowance rules, various
corporate reorganization provisions, the debt forgiveness rules,
and the rules prescribing the consequences of ceasing to be
resident in Canada. One of the main uses in the Act of the
concept of fair market value is to police non-arm's length
transactions and ensure that accrued gains are taxed at the
appropriate times and in the hands of the correct taxpayers.
Primary examples are in subsection 69(1), which deals with
inadequate consideration in non-arm's length transfers, and
subsection 70(5), which provides for the taxation of accrued
capital gains on the death of a taxpayer. In most of the
circumstances in which the issue of the fair market value of
property arises, the concern of the revenue authorities is to
ensure that fair market value is not understated. There is a
substantial body of Canadian jurisprudence dealing with the
meaning of fair market value for the purposes of the Act. The
essential elements of the definition given to this term in that
jurisprudence is that it is the highest price available
for the property in question in an open and unrestricted
market. It is fair to say that the revenue authorities have
advocated and largely benefited from the fact that the Canadian
definition of fair market value looks for the highest
price a property would bring. However, the same definition of
fair market value applies to situations in which the
Minister's preference would be to arrive at the lowest
possible value, such as where the issue is the V-day value of
property, or the value of property that has been donated.
17. Two judicial
expressions of the meaning of "fair market value" are
frequently cited by Canadian courts. The first, which is quoted
or relied on in numerous Canadian tax cases[11], is that provided by Mr.
Justice Cattanach in Henderson v. M.N.R.:[12]
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.
The second, more succinct, definition of fair market value
that is often used by Canadian courts dealing with income tax
cases[13] is that
adopted by McIntyre J. in Re Mann Estate[14]:
..."fair market value" is the highest price
available estimated in terms of money which a willing seller may
obtain for the property in an open and unrestricted market from a
willing knowledgable purchaser acting at arm's length.
18. The essential elements
of the meaning of fair market value, being the search for the
highest price available in an open and unrestricted market, are
firmly entrenched in Canadian tax law.
(iii) Highest
Price
19. Canadian courts take
extensive measures in order to give effect to the "highest
price" component of the fair market value concept. For
example, Canadian courts go so far as to determine the fair
market value of a property on the basis of its highest and best
use, regardless of its actual use at the valuation date,[15] and take into
account the existence of special purchasers who might be willing
to pay a premium for the property.[16]
(iv) Notional sales in the
relevant market
20. The "open and
unrestricted market" in which fair and market value is to be
determined assumes the existence of willing buyers and willing
sellers, under no compulsion to buy or sell, and subject to no
restrictions preventing purchase or sale.[17] In the Appellants' submission,
the market in which the value of their donated prints must be
determined is readily identified. It is the large and active
retail market in which newly-published limited edition prints of
like size, nature and quality as the donated prints are sold with
great frequency, and in large volumes. It is the market described
in the testimony of Mr. Ford, and the market to which Ms. Tropper
looked for comparables in reaching her opinion on value. That
retail market is the market in which these prints (which Mr. Ford
described as having mass appeal) would be sold in the ordinary
course of business and in the normal method applicable to
newly-published limited edition prints of this sort. It is also
the market in which these prints would be sold for the highest
price. In the Appellants' submission, based on that evidence,
Canadian jurisprudence on the meaning of fair market value
requires that this Court look to that retail market in
determining the fair market value of the prints.
21. There is, of course,
little or no evidence of actual sales in the retail market of
prints from the same editions as the donated prints (except in
the case of Barry Barnett prints). The reason for this is clear.
The donated prints were newly-published prints and, on the
valuation dates, had never been available for sale in the retail
market. The evidence is that, with the exception of the Barry
Barnett prints that were retained by Mr. Barnett, all of
the prints from the same editions as the prints donated by the
Appellants were donated to charities and educational
institutions. They were not put into the retail supply chain.
That does not, of course, mean that the donated prints do not
have a value or could not be sold in the retail market; on the
contrary, the expert evidence was that the prints are desirable
and saleable in the retail market. It does mean that comparables
must be relied upon to establish their value in this market.
Reliance on comparables is a basic tool used in applying the
price comparison or market data approach to valuation.
Comparables are the evidence to which Canadian courts most
commonly look in making fair market value determinations.
Comparables are what Ms. Tropper largely relied upon in reaching
her opinion as to the value of the prints. Mr. Ford's
evidence as to the nature and scope of the limited edition print
market provides support for the use of comparables in determining
the retail value of the donated prints. Ms. Tropper and Mr. Ford
testified that comparable prints are purchased and sold in the
retail market on a regular basis, and that these transactions
were a reliable guide on which to estimate the prices the donated
prints would fetch in the retail market.
22. The Respondent will argue
that there is not need to look to comparables in these appeals
because there is evidence of sales of the donated prints
and prints from the same editions - i.e., the sales by CVIAM to
the Appellants and other purchasers. That arguments ignores the
essentials elements of the meaning of fair market value
established in Canadian jurisprudence, which involves a
determination of the highest price a property would bring
if sold in the normal method applicable to that property in an
open and unrestricted market. In our submission, the sales to the
Appellants did not occur in the market in which the highest price
would be obtained for the prints. In addition, there is nothing
normal about selling or purchasing limited edition prints through
a financial planner. The financial planner network through which
CVIAM sold these prints was anomalous. It existed for only two
and a half years, from mid-1997 to late 1999.[18] It is not the market in which
limited edition prints are normally sold. The expert evidence was
that a person wishing to buy a nice botanical print to decorate
the powder room would not call a financial planner to make that
purchase. Rather, the person would visit a local print shop,
framing shop or gift shop to see what was available. The same
would be true whether the purchaser wished to acquire a single
print or a number of prints. Mr. Ford testified that, if a
business wanted to buy, say, 80 prints to decorate the walls of
its offices, the person charged with the task of purchasing the
prints would likely go to a local print shop or acquire the
prints from an interior designer or decorator. Again, that person
would not call a financial planner. Accordingly, the market in
which the Appellants purchased the prints is not the correct
market in which to determine the fair market value of the prints
under Canadian income tax law. It was for these reasons
that Ms. Tropper determined that the promoter market was not the
appropriate market in which to determine fair market value under
the Canadian definition.
23. The approach taken by
Judge Mogan in Whent v. R.[19] is instructive on the issue of the
relevant market in which to determine fair market value. That
case involved the valuation of 215 original works of art by a
Canadian First Nations' artist, Norval Morriseau. The art had
been purchased by the taxpayers, three practicing lawyers,
between March 1984 and February 1986, and donated to five
different institutions between December 1984 and December 1986.
During that period, Morriseau, formerly an important Canadian
artist, had fallen on hard times for a number of reasons, not the
least of which was a problem with alcohol. On the evidence before
him, Judge Mogan concluded that there "was a very shaky, possibly
non-existent, market in private galleries for new Morrisseau
paintings" in the valuation years.[20] Due to a lack of gallery sales
information during the relevant years, the Crown valuator had
relied upon auction records as the primary tool in reaching his
opinion on fair market value. Judge Mogan rejected this approach,
on the basis that the auction market was not the one in which
works of a contemporary artist like Morrisseau would bring the
highest price.[21] Judge Mogan also noted that "the best first hand
evidence of arm's length transactions" in new Morrisseau
paintings in the valuation years was the purchases by the
taxpayers.[22]
Nonetheless, he concluded that the fair market value of the art
was the amount that, based on the evidence and taking into
account all relevant factors, it most likely would have fetched
in retail art galleries at that time, had there been a gallery
market for it. In other words, Judge Mogan approached the fair
market value determination by first deciding in which market the
Morrisseau paintings would have fetched the highest price, and
then proceeding to determine what that price most likely would
have been in that hypothetical market. In the
Appellants' submission, Judge Mogan's approach was the
approach mandated by the Canadian jurisprudence concerning the
meaning of fair market value. The Federal Court of Appeal
reviewed and upheld the approach taken, and the conclusions
reached, by Judge Mogan.
(v) Application of "well accepted
valuation principles and methodology"
24. The recent decision of
the Federal Court of Appeal in Malette v. R.[23] endorses and
supports the approach consistently taken by Canadian courts
dealing with valuation issues (with, perhaps, the exception of
one recent case, the Klotz case, which is discussed
below). That approach is that determinations of value, in
the context of charitable gifts as in other provisions of the
Act, must be made by applying "well accepted valuation principles
and methodology". Mr. Justice Noël noted in his judgment in
Malette that "when Parliament wishes to depart from the
accepted meaning of fair market value it does so in express terms
(see for instance subsections 10(4), 69(6), 69(7), 70(5.3),
107.4(4), 160(3.1) and paragraphs 70(8)(a) and 110(1.5)(b) of the
Act)".[24]
If the December 5, 2003 draft legislation becomes law, subsection
248(35) will be another subsection that could be added to Mr.
Justice Noël's list of Income Tax Act provisions that
prescribe a departure from the accepted meaning of fair market
value. For the years under appeal, however, the Federal Court of
Appeal decision confirmed that it is the normal, accepted meaning
of fair market value that applies for the purposes of determining
the amount of a charitable gift.
25. The approach taken by
Canadian courts in dealing with the valuation of donated property
is to carefully and critically examine the methodology employed
by the experts presenting evidence to them, and to scrutinize
their value conclusions. Then, based on all of the evidence
presented to the court and the court's understanding of
applicable valuation principles, the court determines what the
value of the property would be in the relevant market. For
example:
· In
Langloisv. R.,[25] Judge Garon was faced with the task of
determining the fair market value of several original works of
art donated by the taxpayer. He determined the value of each work
of art by weighing the valuation of evidence presented to him,
the evidence provided as to the retail market (i.e., auction
versus gallery) in which each work in issue would most likely be
sold, and evidence as to the selling prices of works that were
comparable as to size, subject-matter and medium. The
Federal Court of Appeal made note of the conscientious manner in
which Judge Garon reached his value determination, and upheld his
decision.[26]
· In
Whentv. R., as discussed above, Judge Mogan had to
determine the fair market value of 215 original works of art by
Norval Morrisseau. The taxpayers had paid an aggregate purchase
price of $130,000 for the art, and donated it to a number of
institutions for an appraised value of $990,000. The Minister had
reassessed the taxpayers on the basis that the fair market value
of the art was the amount the taxpayers had paid to acquire
it. Judge Mogan carefully reviewed the three expert
appraisals before him, which ranged from a low of $255,155 to a
high of $1,104,795. For a variety of reasons that arose from the
evidence before him, Judge Mogan was not wholly satisfied with
the methodology used by any of the appraisers, nor with their
conclusions. He considered the views of the experts as to
the appropriate market in which to value the art, and concluded
that the retail gallery market was the appropriate market since
it was the market in which the highest prices could be realized
for the Morrisseau paintings. Taking into consideration all of
the evidence before him, and adopting different aspects of the
methodologies employed by the various appraisers, Judge Mogan
determined a value of $660,000 for the art.[27] The Federal Court of Appeal
upheld Judge Mogan's approach, and his value determination.[28]
· In
Friedberg v. R.[29], Associate Chief Justice Jerome had to
determine the fair market value of two collections of antique
textiles donated by the taxpayer to the Royal Ontario Museum. ROM
staff had located the collections and arranged for their purchase
and immediate donation by Mr. Friedberg. One of the collections
was purchased by Mr. Friedberg for $67,500 and donated at a value
of $496,175. The other was purchased for $12,000 and donated at a
value of $229,437. Each of the collections had been appraised by
three appraisers. The Court reviewed the methodology used by the
appraisers, who had concluded that, for the antique textiles in
issue, auction house prices lists were the place to search for
comparables, as were the prices paid by the ROM in the past for
similar textiles.[30] Jerome ACJ concluded that the methods used by the
appraisers were "more than adequate" to determine the fair market
value of the textiles, and accepted the average of the appraised
amounts as the fair market value of the collections.[31] The Federal Court of
Appeal upheld Associate Chief Justice Jerome's conclusions on the
fair market value of the collections.[32]
(vi) "Blockage
discount"
26. The recent Federal
Court of Appeal decision in Malette confirmed that one of
the accepted valuation principles that may apply in determining
fair market value in Canadian tax law is the application of a
blockage discount, where appropriate. A blockage discount
reflects the fact that there may be a depressive effect on the
fair market value of property when supply exceeds demand. It is
an accepted valuation principle that such a discount may apply
where the assumption is that a large number of similar properties
will come on the market at one time. Since the property that must
be valued in these appeals consists of a numbers of prints -
specifically, in the Caedmon Nash appeal 84 prints, in the
Barbara Quinn appeal 48 prints, and in the Susan Tolley appeal 99
prints - the issue arises as to whether or not a volume or
blockage discount should be applied in valuing the donated
prints.
27. Malette was not
the first Canadian tax case to deal with blockage or volume
discounts. In Untermeyer Estate v. A-G. British
Columbia the Supreme Court of Canada concluded that it would
not be proper to apply a volume discount in determining, for
succession duty purposes, the fair market value of a block of
318,800 public company shares (i.e., approximately 6.4% of the
entire float of the company). Mr. Justice Mignault's reasoning
was as follows:
I would not deduct anything from the market value of theses
shares on the assumption that the whole of them would be placed
on the market at one at the same time, for I do not think that
any prudent stockholder would pursue a like course. To make
such a deduction in a case like the one at bar, would be to
render the "sacrifice value" or "dumping value" of the shares the
measure of valuation.[33]
Mr. Justice Cattanach adopted this reasoning in Dobieco
Ltd. v. M.N.R..[34] Dobieco involved the determination
of the fair market value of large blocks of speculative public
company shares held by the taxpayer as inventory. Based on
the evidence of trading volumes, Mr. Justice Cattanach concluded
that it was reasonable to suppose that "the market was capable of
absorbing the shares without undue disturbance"[35], and, citing the above-quoted
passage from Untermeyer Estate, that it "would not be
either normal or prudent" for the appellant in Dobieco to
place all of its shares on the market at one time.[36] Accordingly,
no discount from trading value was appropriate.
28. In Whent, the
Minister's expert appraiser had applied a 50% blockage discount
in determining the fair market value of the 215 original works of
art by Norval Morrisseau paintings. Judge Mogan rejected the
application of a blockage discount in that case. He did so
on the basis that "the hypothetical open market in which fair
market value is determined contemplates purchasers and vendors
acting without pressures to buy or sell".[37] He also accepted the opinion,
expressed by one of the taxpayers' valuators, that the donated
works could have been disposed of in the retail gallery market
within a two year period if a sensible coast-to-coast marketing
strategy had been employed.[38] Judge Mogan's reasons for rejecting the
application of a blockage discount effectively mirror those of
the Supreme Court in Untermeyer Estate: it must be
assumed that a seller would adopt a rational, prudent course of
action in disposing of the property in issue.
29. The Appellants submit
that, due to the size and scope of the market for limited edition
prints, the circumstances in these appeals are akin to those in
Untermeyer Estate, Dobieco and Whent. The limited
edition print market is large enough to absorb the prints donated
by the Appellants, if not immediately then over a relatively
short period of time. Ms. Tropper's expert report reaches the
same conclusion, stating that:
There were not an adequate number of prints included in any
one of these donations to suggest the need to calculate a reduced
value due to quantity. In fact, even the total number of prints
in all the editions by these artists would not overload the
huge North American market.[39]
30. In the Appellants'
submission, the decision of the Federal Court of Appeal in
Malette does not derogate from the Untermeyer
Estate principle that one must assume a seller would adopt a
rational, prudent course of action in disposing of property. The
Malette decision certainly does not stand for the
proposition that a blockage discount will always apply where
several properties are being valued, merely that it may apply
where the circumstances warrant. In Malette, both
parties had agreed that the 981 original works of art by artists
Harold Feist that were at issue in that case could not be
absorbed into the market over a short period of time.[40] In addition, the
taxpayer had agreed that it was appropriate to apply a blockage
discount on the facts in Malette, unless as a matter of
law such a discount could not be applied.[41] The Court of Appeal's role,
therefore, was limited to determining whether, in appropriate
circumstances, a blockage discount could be applied in
determining the fair market value of donated cultural property.
The Court's determination that a blockage discount could apply
was based on the fundamental principle that accepted valuation
principles and methodology are to be followed in determining the
fair market value of property, and that blockage discounts
are an accepted principle or proper valuation methodology.
In the appeals before this Court, the opinion of the
Appellants' expert appraiser was that it would not be
appropriate to apply a blockage discount. The Respondent
has presented no expert evidence to the contrary.
(vii)
Cost is not determinative
31. Canadian courts
(again, with the exception of the Tax Court decision in
Klotz) have made it clear that cost is not determinative
of fair market value. Consider, for example, the following
passage from the decision of Associate Chief Justice Jerome in
Friedberg:
The above conclusions lead to the necessity of determining the
fair market value of each of the collections for income tax
deduction purposes. Counsel for the Minister argues that
the purchase price can be taken as the fair market value, however
such an approach is not supported by the jurisprudence. In
Conn v. M.N.R., 86 D.T.C. 1669 (T.C.C.), after a lengthy
review of the authorities the judge stated at page 1677:
"Fair
market value does not seem to pay any attention to cost of
acquisition, only what might be obtained in the market at the
time of disposition. Costs of acquisition can vary greatly,
as has been illustrated, even for the same item, and such a cost
or an adjusted cost base might affect income tax but in my
opinion does not affect fair market value."[42]
In Friedberg, the Minister had reassessed the
taxpayer on the basis that the fair market value of the donated
textiles was equal to the amount the taxpayer had paid for
them. On appeal, the Minister argued that the trial judge
erred in law in accepting the appraisals, since the appraisers
had not taken into account the price paid by Mr. Friedberg for
the textiles. The Federal Court of Appeal rejected this argument,
and refused to interfere with the value determination made by Mr.
Justice Jerome, noting that in reaching that determination Jerome
ACJ was well aware of Mr. Friedberg's purchase price. Mr. Justice
Linden also made note of the fact that the Minister,
"surprisingly and in retrospect unwisely", had called no expert
evidence on value.[43] In these appeals, Ms. Tropper considered the market
in which CVIAM sold prints to the Appellants and others.
She rejected that market because it was not the open market for
purchasing prints, nor the market in which prints would normally
be sold in the ordinary course of business. Ms. Tropper
testified that a person wishing to purchase art prints would not
look to their financial planner to do so. For these
reasons, Ms. Tropper concluded that the financial planner market
through which CVIAM sold prints to the Appellants and others was
not the relevant market in which to determine fair market
value.
32. This is not to
suggest that Canadian courts ignore the purchase price of
property in making determinations of fair market value. In
Whent, another case in which the Minister had
originally reassessed the taxpayers on the basis that the
fair market value of the donated artwork was equal to the amount
they had paid to acquire it, Judge Mogan noted that, since there
was little or no evidence of gallery sales of the Morrisseau's
work during the valuation period, the purchase by the taxpayers
of Morrisseau's work "[t]he best firsthand evidence of arm's
length transactions" during that period.[44] On that basis, he concluded
that the cost to the taxpayers of the art was "a
relevant but not a determining fact in the question of
fair market value".[45] The fact that cost was certainly not a
determining fact is evident from Judge Mogan's conclusion that
the fair market value of the artwork was more than five times the
amounts the appellants had paid to acquire it.
33. There may be
circumstances in which the evidence establishes that there can be
no market for the type of property in issue, or that the only
market is the one in which the property was purchased. In those
circumstances, the cost of property may be indicative of its fair
market value. These were the circumstances before the Courts in
Aikman[46] and in Global Communications.[47] In
Aikman, Judge Bowman was faced with the task of
determining the fair market value of the "Cyclo-Crane", a
prototype of a lighter-than-air, heavy-lift vehicle. On the
evidence, Judge Bowman found that the Cyclo-Crane was too large
for museum display,[48] and that there was no commercial market for the
product of which it was a prototype.[49] In those circumstances, the price
negotiated by the purchaser for the Cyclo-Crane was indicative of
its value. In Global Communications, an issue before the
Federal Court of Appeal was the true value of seismic data
purchased by the taxpayer. The Federal Court of Appeal rejected
the appraisals of the property on the basis that they did not
take into account the amount for which seismic traded on the only
market in which it actually sold for cash.[50] In the Appellants'
submission, the facts in the appeals before this Court are very
different from those in Aikman and Global
Communications. There is no Cyclo-Crane or seismic data for
sale at the local shopping mall; however, there are thousands of
print and framing shops at which limited edition prints
comparable to the donated prints are sold on a regular basis.
(viii) Klotzv.
R.
34. Some of the basic
facts before the Court in the recent case of Klotz v. R.[51] are
similar to those in these appeals, in the sense that Mr. Klotz
had participated in a "buy-low, donate high" arrangement
involving the purchase and donation of a number of limited
edition prints. Associate Chief Justice Bowman concluded that the
fair market value of the Klotz prints was equal to the
purchase price paid by Mr. Klotz to acquire the prints from the
promoter. His conclusion was based on several factors. One
important factor that seems to have influenced the Court's
decision in Klotz was the nature of the prints donated by
Mr. Klotz. His expert appraiser had based her value conclusions
on the assumption that the market in which Mr. Klotz's prints
would bring the highest price was the New York retail art gallery
market. Bowman ACJ was troubled by the fact that many of the
limited edition prints donated by Mr. Klotz had been acquired by
the promoter from those very retail galleries at huge discounts
from their usual list prices. He was also troubled by the fact
that that appraiser did not appear to take into account the age
of the prints or "how long they had been lying around unsold"[52] in reaching her
opinions on value. The fact that many of the Klotz prints
were purchased at between 1/200th and
1/20th of their purported fair market value from the
sort of galleries where that fair market value would in theory be
obtained is an indication that these were "remaindered" prints,
or unsaleable inventory, that had failed to sell in the retail
market. The facts in the appeals before this Court are quite
different in this respect. The prints purchased and donated by
the three Appellants were newly published. The images that
were reproduced in these prints were fresh and new to the market.
Rather than scouring the market to pick up cheap unsold (and
quite likely unsaleable) prints like the promoter did in
Klotz, CVIAM effectively became a print publishing
company, commissioning or purchasing the right to reproduce new
works from established artists or their agents and arranging for
their reproduction. Although it is not clear from his
reasons for judgment, it may be that Associate Chief Justice
Bowman concluded that, due to the nature of the prints donated by
Mr. Klotz, there could be no retail market for them, and hence
that it was appropriate to adopt the Aikman and Global
Communications approach to valuing those prints. In
contrast, the expert evidence provided in these appeals was that
the newly-published prints donated by the Appellants had mass
appeal and could readily be sold in the retail market.
35. In Klotz,
Associate Chief Justice Bowman was faced with valuation evidence
that he rejected for a number of reasons. The only appraisal
evidence before the Court was that of Ms. Laverty, the original
appraiser of the Klotz prints, and a participant in the
donation program for which she had provided appraisals. Her
participation obviously brought into question her objectivity.
The other expert witness called by Mr. Klotz, Mr. Alasko, merely
commented on Ms. Laverty's methodology, and Bowman ACJ noted that
Mr. Alasko had made it clear that he "was not endorsing the
conclusions" in Ms. Laverty's report.[53] At paragraph 40, Bowman ACJ
listed a number of other reasons for rejecting the appraisal,
which may be summarized as follows:
1. a lack of
evidence of sales of identical or similar prints in retail art
galleries;
2. the fact
that the retail art gallery asking price for an individual print
was not indicative of the price that print would sell for if
scores of them were dumped on the market at the same time;
3. the fact
that the value conclusion in respect of over 80% of the prints
was $1,000, which coincidentally was also the maximum proceeds
amount for which personal-use property could be disposed of
without incurring a capital gain;
4. the fact
that the value conclusions did not differ on the basis of the
identity of the artists, the medium, the size of the series, the
age of the prints, or how long the prints had been "lying around
unsold"; and
5. the fact
that some of the prints were acquired by the promoter from retail
art galleries at 1/20th of the appraised value, and
some for as low as 1/200th of the appraised value.
In the Appellants' submission, the appraisal evidence that was
presented to this Court by Ms. Tropper, combined with the
evidence of Mr. Ford as to the size and scope of the retail
market for limited edition prints similar in nature to those
donated by the Appellants, does not suffer from any of the
weaknesses of the appraisal evidence presented to Associate Chief
Justice Bowman in Klotz.
36. Based on the weakness
of the valuation evidence and the logical inconsistency of the
fact that many of the Klotz prints were purchased by the
promoter from retail galleries and dealers at huge discounts to
the appraised values, a conclusion that there was no retail
market for the Klotz prints was not surprising. On
this analysis, Klotz can be reconciled with the body of
Canadian jurisprudence on fair market value that preceded it.
However, in reaching his conclusions, Bowman ACJ did consider and
apparently rely upon a series of United States Tax Court
decisions rendered in the mid-1980s. Given that the Respondent
presented no valuation evidence in these appeals, the Respondent
will ask this Court to take the same approach as that taken by
Bowman ACJ.
(ix) U.S. authorities
37. In the Appellants'
respectful submission, the U.S. authorities represent a
significant departure from the large body of Canadian case law on
the meaning of fair market value, and should not be followed. As
Associate Chief Justice Bowman himself noted in Aikman,
U.S. authorities should be approached with some caution, as the
U.S. courts operate under a different statutory regime, and the
U.S. Courts, faced with similar issues, "may have developed
solutions that are not necessarily appropriate in Canada."[54]
38. There are several
differences between the definition of "fair market value"
prescribed by regulation under U.S. tax law and the long-accepted
meaning of the term in Canadian tax law. The U.S. treasury
regulation being interpreted by the U.S. Tax Court in the series
of cases referred to by Bowman ACJ provided a definition of the
term fair market value. That definition provided that fair market
value was "the price at which the property would change hands
between a willing buyer and a willing seller, neither being under
any compulsion to buy or sell and both having reasonable
knowledge of relevant facts" (see Anselmo v. Commissioner,
(1985) 757 F.2d 1208 (U.S.C.A., 11th Circuit) at page
1212). This definition does not make reference to the
highest price a property would fetch, a concept
that is firmly embedded in the meaning assigned to fair market
value by Canadian courts.
39. In addition, in most
of the U.S. Tax Court cases referred to by Bowman ACJ, the U.S.
Tax Court had expressly stated that the U.S. estate tax treasury
regulation was applicable in determining the fair market value of
donated property. That regulation prescribed the relevant market
in which to make a fair market value determination. It provided,
in part, that the fair market value of an item of property is to
be determined in the market in which that item is "most commonly
sold to the public" (Anselmo v. Commissioner at page
1214). In its decisions, the U.S. Tax Court interpreted this
estate tax regulation as requiring the court to engage in an
examination of whether the taxpayers whose appeals were before it
were "ultimate consumers" of the property donated in those
cases.[55]
The Court concluded that the taxpayers were the ultimate
consumers of the property, since they did not purchase it for
resale. The court then proceeded to look for the "most active"
market where the property in question was sold to "ultimate
consumers." Based on volume of sales, the court concluded
that the market in which the taxpayers had purchased the property
was the "most active" market and therefore, by operation of the
estate tax regulation, it was the market to which the court had
to refer in making the fair market value determination. For
example, in Hunter v. Commissioner the U.S. Tax Court made
the following statement:
In determining the fair market value of the prints, we must
examine the market in which the prints are sold to the ultimate
consumer... In Lio, we said "the sale to the ultimate
consumer is any sale to those persons who do not hold the item
for subsequent resale... and the most appropriate market for
valuation purposes is the most active market place for the
particular item involved."[56]
40. Needless to say, the
U.S. treasury and estate tax regulations prescribing the
definition of fair market value and the relevant market do
not apply in determining questions of Canadian law. On the
contrary, the long-established Canadian definition of fair market
value does not direct that the value determination be made in a
market in which property is purchased by an "ultimate consumer",
nor does it mandate a search for the most active market in which
property is sold. What it does mandate is a determination of the
highest price for which property could be sold in a market in
which such highest price would be obtained, and in which the
property is sold in the normal method applicable to it in the
ordinary course of business. As a result, in the Appellants'
submission, the reasoning and criteria used to reach a conclusion
as to the fair market value of property in these U.S. Tax Court
cases should not be applied to the determination of fair market
value in these appeals.
41. It may be
illustrative of this point to compare the approach Judge Mogan
took in Whent to that which it can be assumed the U.S. Tax
Court would have taken if presented with the facts in that case.
The U.S. Tax Court would have sought to identify the most active
market in which Morrisseau paintings were purchased by "ultimate
consumers", and then determined the price the paintings would
sell for in that market. There is little doubt that the U.S. Tax
Court would have concluded that the three appellants in
Whent were "ultimate consumers", and that the streets and
corner shops of Thunder Bay and Vancouver was the most active
market for Morrisseau's work in the relevant period. As a result,
the U.S. Tax Court almost certainly would have concluded that,
under the treasury and estate tax regulation and its own
jurisprudence, the fair market value of the Morrisseau paintings
was the amount the appellants in Whent had paid to acquire them.
As previously discussed, Judge Mogan's approach was quite
different. Judge Mogan (1) identified the retail gallery market
as the market in which the Morrisseau paintings would bring the
highest price; and (2) determined on the evidence what the likely
selling price would be in that market, had it existed. The
Federal Court of Appeal found no fault with that approach. In our
submission, Judge Mogan's approach and result are correct under
Canadian law. The approach that the U.S. Tax Court would take to
deal with the same facts, and the result that it would reach, are
not.
(x) Onus of Proof
42. If the Respondent
based its assessments of the Appellants in these appeals on the
assumption that the tax promoter market was of such a size and
level of activity as to render it the proper market in which to
determine fair market value (which, in our submission, would in
any event be incorrect under Canadian law), then we submit that
the evidentiary burden of establishing the facts concerning this
market must fall on the Respondent. In particular, in the
face of the Appellants' expert evidence that, as a matter of
accepted valuation principles and methodology, this market is not
the proper market in which to determine fair market value, the
Respondent ought to have provided expert evidence that it
is. Information concerning the size of and activity in this
market is not information within the knowledge of the Appellants,
who were merely individual participants in the donation
arrangement promoted by CVIAM. Your Honour's detailed
discussion in the recent decision of Redash Trading
Incorporated v. R.[57] of the issue of onus of proof leads to the
conclusion that, in such circumstances, the onus shifts to the
Respondent.
(xi) Summary of expert
evidence
43. The Respondent
presented no expert appraisal evidence to the Court, and no
expert evidence concerning the market for limited edition prints.
If the Court accepts the Appellants' evidence and argument as to
the correct market in which to value the donated prints, the only
expert evidence on value before the Court was that provided by
Ms. Tropper. In addition, Mr. Ford testified that, based on his
knowledge of the retail market for limited edition prints, the
values originally assigned to the donated prints (by the Parks or
Duval appraisals) and relied on by the donees in issuing the
donation receipts were approximately equal to the prices
that would have been paid for those prints in the retail market,
in the years under appeal. Ms. Tropper's value conclusions, and
the amounts shown on the donation receipts are as follows:
Tropper Value[58]
Donation receipt amount
Nash
prints
$29,932
$29,400
Tolleyprints
$23,690
$28,130
Quinn
prints
$24,384
$25,280[59]
44. Even Gary Roy, the
Canada Revenue Agency's own valuator, apparently concluded that
the prints donated by Ms. Quinn had a fair market value equal to
the amount reflected on the donation receipt issued to her.
There is no evidence as to whether Mr. Roy did any valuation work
on the prints donated by Ms. Tolley or Mr. Nash.
(b) Personal-Use Property
(i) Generally
45. The second issue in
these appeals is whether or not the donated prints were
"personal-use property" for the purposes of the Act. This
determination is relevant in the event that the Court concludes
that the fair market value of the donated prints was higher than
the amount the Appellants paid to acquire them.
46. Pursuant to
subparagraph 69(1)(b)(ii) of the Act, the Appellants' donation of
the prints was a disposition with deemed proceeds equal to the
fair market value of the prints. Pursuant to subsection
40(1) of the Act,[60] upon donation of the prints each of the Appellants
would have realized a capital gain to the extent that his or her
proceeds of disposition exceeded his or her adjusted cost base of
the prints.
47. In the Appellants'
submission, each of the donated prints is a personal-use
property. Accordingly, subsection 46(1) of the Act, as it
read in the years under appeal, deemed the Appellants' adjusted
cost base and proceeds of disposition of each of the prints to be
$1,000. As a result, no gain or loss would have been
realized on the disposition of the prints.
48.
In effect, this special rule that applies to personal-use
property provides that gains that would otherwise be realized on
a disposition of personal-use property are not taxed if the value
of the property does not exceed $1,000. It must be noted,
however, that there is another way in which the tax rules that
apply to personal-use property differ from those applicable to
other non-personal use capital property. Pursuant to subparagraph
40(2)(g)(iii) of the Act, any loss realized on the disposition of
personal-use property (other than property which falls within the
special subset of "listed personal property") is deemed to be
nil. As a result, one might assume that the Minister would
encourage a broad interpretation of the meaning of personal-use
property.
(ii) Inclusive definition
in section 54
49. Personal-use property
is defined inclusively in section 54 of the Act. This
inclusive and non-exhaustive definition provides, in part, that
personal-use property includes "property owned by the taxpayer
that is used primarily for the personal use or enjoyment of the
taxpayer". The fact that the definition provided in the Act
is merely inclusive means that the term retains its ordinary
meaning. This is discussed in Sullivan and Driedger on
the Construction of Statutes as follows:
Non-exhaustive definitions presuppose rather than displace the
meaning a defined term would bear in ordinary (or
technical) usage. A non-exhaustive definition is normally
introduced by the verb "includes" and is used for one of the
following purposes:
· to expand the ordinary meaning of a
word or expression
· to deal with borderline
applications
· to illustrate the application of a word or
expression by setting out examples.[61]
In the Appellants' submission, the non-exhaustive definition
of personal-use property provided in section 54 performs the
first two of these tasks. It expands the meaning of
personal-use property to include receivables arising as a
consequence of the disposition of personal-use property and
options to acquire personal-use property. It also deals
with borderline applications of the term, providing that
personal-use property includes property used primarily for the
personal use or enjoyment of persons related to the owner or, in
the case of property held by a trust or partnership, by the trust
beneficiaries and partnership members. However, apart from
the expansions and clarifications provided by the definition in
section 54, personal-use property as used in the Act has its
ordinary meaning. The task, then, is to determine what that
meaning is.
(iii) Personal use versus commercial
use
50. In the Act, the term
"personal" is used to describe property, interests and expenses
that relate to individuals in some manner, and, most
significantly, that are not connected to businesses or other
income-earning activities. For example, the definition of
"personal or living expenses" in subsection 248(1) of the Act is
based on the distinction between (a) the expenses of "properties
maintained by any person for the use or benefit of the taxpayer",
and (b) the expenses of properties "maintained in connection with
a business carried on for profit or with a reasonable expectation
of profit".
51. The policy rationale
underlying the personal-use property regime is based on the
distinction between that which is personal and that which is
related to a business or commercial activity. The Summary
of 1971 Tax Reform Legislation (June 1971) noted that permitting
the deduction of losses realized on personal-use property "would
amount to government subsidization of personal expenses".
Accordingly, the personal-use property provisions are constructed
so as to ensure there is no mingling of losses from personal-use
property with gains realized in the commercial context.
Subsection 46(3) of the Act goes so far as to deny any loss
realized on a share of a corporation or interest in a trust or
partnership that can reasonably be attributed to a decline in the
value of personal-use property held by the corporation, trust or
partnership. Section 41 of the Act provides a set of
special rules that apply to "listed personal property" (which is
defined in section 54 as a subset of personal-use
property). These rules provide for the recognition of
losses on the disposition of listed personal property; however,
those losses may only be applied against gains from the
dispositions of listed personal property, and are not available
to offset gains from the disposition of commercial or business
properties.
52. The definition of
"listed personal property itself should be noted. Listed
personal property of a taxpayer is defined as "the taxpayer's
personal-use property that is all or any portion of, or any
interest in or right to, any
(a) print, etching, drawing, painting, sculpture, of
other similar work or art,
(b) jewellery,
(c) rare folio, rare manuscript or rare book,
(d) stamp, or
(e) coin".
The fact that art prints comprise a part of this subset of
personal-use property suggests that prints are a type of property
that is generally considered to be personal-use
property.
53. In the Appellants'
submission, the scheme of the Act is based upon a division of
property into two broad categories: property that is connected to
a business, or used for a business, commercial or income-earning
purpose, and property that is not so connected or used.
Everything that falls into the latter category is personal-use
property. In other words, the meaning of personal-use
property is most easily expressed in the negative: personal-use
property is all property other than that which is connected to a
business or used for a business, commercial or income-earning
purpose.
54. After considering the matter
in some detail, this is the interpretation given to the term
personal-use property by Associate Chief Justice Bowman in
Klotz.[62] It is also the approach followed by courts
in the few reported cases that deal with the issue of whether or
not a particular property (generally, real property) is properly
characterized as personal-use property. Consider for
example, the following passage from Boudreau v. R.:
The evidence adduced at trial points to the conclusion that
the Property is personal-use property. The Property was not
acquired for the purpose of gaining income from property.
Not once did the Appellant rent the Property at fair market
value.[63]
To a similar effect is the Court's expression of the issue
before it in Jason v. R.:
[T]he primary issue is whether the amount of $188,164 is a
business loss from an adventure in the nature of trade or a loss
on the disposition of personal-use property.[64]
55. The Minister's own
publications adopt the same approach. See, for example,
· Interpretation
Bulletin IT-373R2 entitled "Woodlots" at paragraph 11:
Where a woodlot is a non-commercial woodlot, and money or
other valuable consideration is received for the sale of timber
or the right to cut timber, the sale proceeds are subject to tax
on capital account, generally as a disposition of "personal-use
property".
·
Interpretation Bulletin IT-218R entitled "Profit, Capital
Gain and Losses from Real Estate" at paragraph 10:
Real estate that is held by its owner as capital property may
be used by its owner as personal-use property (see definition in
paragraph 54(f) or it may be used for the purpose of gaining or
producing income from business or property.
56. In the Appellants'
submission, their donated prints fall into the category of
personal-use property because they were not acquired or used for
any commercial, business or income-producing purpose, or in
connection with any business or adventure in the nature of
trade.
(iv) Donation is a
personal use of property
57. The Appellants further
submit that, in any event, the donation of property amounts to a
personal use of that property, bringing property acquired for the
purpose of donation and used to make a gift into the personal-use
property category. This was the conclusion of Associate Chief
Justice Bowman in Klotz:
I have concluded that the prints are personal-use property.
Even if I had accepted the narrower interpretation advanced by
the Crown I would still have held that the prints were
personal-use property. One way of using an object is to give it
away, whether the motive be altruistic, charitable or fiscal.[65]
58. That the Appellants'
donation of the prints was a personal use by them of this
property is far more clear on the facts in these appeal than it
was in the case of Mr. Klotz, who did not see the prints he
purchased, never had possession of them, and had no role in
choosing them. His only motivation in purchasing and donating
prints was an anticipated tax benefit.[66] The Appellants, on the other hand,
appreciated the fact that their donations would benefit charities
and universities. Mr. Nash and Ms. Tolley testified that they
participated in the donation program largely to assist charities.
Ms. Tolley chose to purchase the prints by the three Canadian
women artists because the idea of supporting them appealed to
her, and she selected and kept one of the prints. Similarly, Mr.
Nash selected the prints by the First Nations' artist because he
likes aboriginal art. He also selected and kept a print. The
Appellants owned and had the prints in their homes for a period
of time before donating them.
59. An examination of
certain amendments made to section 46 of the Act with effect from
February 27, 2000 provide [sic] additional support for the
proposition that property acquired for the purposes of donation
is personal-use property.
60. Although subsection 45(2)
of the Interpretation Act provides that an amendment to a
statute is not "deemed to be or to involve a declaration that the
law" was different prior to the amendment, this does not prohibit
use of statutory amendments as an aid in interpreting
legislation. See, for example, the following statement by Mr.
Justice Sexton in Silicon Graphics Ltd. v. R.:
...the Interpretation Act does not preclude the
Court from drawing an inference that amendments to legislation
are intended to change the legislation where the internal and
external evidence warrants such a conclusion. It has been
suggested that there is a presumption that changes to the wording
of legislation are purposeful and that the provisions of the
Interpretation Act referred to above [i.e., subsection
45(2)] do not preclude the Court from acknowledging that, in
principle at least, the foremost purpose of amendments is to
bring about a substantive change in the law.[67]
In that case, the Federal Court of Appeal relied in part on
amendments made to the definition of "Canadian-controlled private
corporation" in the Act in interpreting the meaning of the
definition prior to its amendment. Similarly, in HSC
Research Development Corp. v. R.,[68] Judge O'Connor performed
a detailed analysis of the manner in which subsection 256(5.1)
was added to the Act as an aid to determining that, prior to the
introduction of that new provision, the phrase "controlled,
directly or indirectly in any manner whatever" when used in the
Act meant de jure, not de facto, control. Finally
in Nova Corp. of Alberta v. R., Mr. Justice MacDonald
relied in part upon the introduction of the "acquisition of
control" stop-loss rules to conclude that, prior to their
introduction, loss-trading transactions of the sort entered into
by Nova Corp. were permitted by the Act.[69]
61. The amendments to
section 46 enacted changes announced in the February 28, 2000
federal Budget. The background documents released with the
Budget made the purpose of these amendments quite clear:
Certain charitable donation arrangements have been designed to
exploit the $1,000 deemed adjusted cost base for personal-use
property and to create a scheme under which taxpayers attempt to
achieve an after-tax profit from such gifts. For example,
arrangements have been designed under which a promoter acquires a
number of objects for less than $50 each, invites taxpayers to
purchase the objects for $250 each, and arranges for their
appraisal at $1,000 each and their donation to a charity.
Based on the $1,000 appraised value, there would
be a $750 capital gain per item to the donor but for the $1,000
deemed adjusted cost base for the gift. [70]
...
The budget proposes to amend the Income Tax Act so that
the $1,000 deemed adjusted cost base and deemed proceeds of
disposition for personal-use property will not apply if the
property is acquired after February 27, 2000, as part of an
arrangement in which property is donated as a charitable
gift.
62. The means by which
this objective was achieved was the addition of subsection 46(5),
which provides a definition of "excluded property", and
amendments to the preamble portion of subsection 46(1), to except
"excluded property" from the special rules providing for a deemed
$1,000 adjusted cost base and proceeds of disposition.
"Excluded property" is defined, essentially, as property acquired
as part of an arrangement under which the property will be the
subject of a charitable gift. The definition of
personal-use property was not amended.
63. In the Appellants'
submission, it is clear both from the fact that these amendments
were made and from the manner in which they were made that
personal-use property, both before and after the amendments were
enacted, encompasses property acquired for the purpose of making
a gift of donation. If that were not the case, there would
be no property that would fall within the new category of
"excluded property".
D.
Order Sought
64. Each of the Appellants
therefore respectfully requests that his or her appeal before
this Honourable Court be allowed with costs and that this
Honourable Court refer these matters back to the Minister of
National Revenue for reassessment on the basis that the
reassessments appealed from be vacated, or varied to reflect the
fact that the fair market value of the donated prints on the date
of donation was, in the case of Mr. Nash $29,932; in the case of
Ms. Tolley $23,690, and in the case of Ms. Quinn $24,384, and
that the prints were personal-use property of the Appellants.
RESPONDENT'S SUBMISSIONS:
[53] Respondent's counsel's position
is that the fair market values of the grouping of Prints donated
by the Appellants are the prices paid by the Appellants for those
groupings. The written submission says:
They bought their prints from CVI Art Management Inc.
("CVIAM"). In the years under appeal, CVIAM was
certainly the normal, if not exclusive vendor of the groupings of
prints in question. For those groupings, CVIAM charged its
customers, other than the Appellants, prices that were the same
as, or similar to, those it charged the Appellants. In making
sales of those groupings of prints, CVIAM established the
highest, reasonably attainable prices that those groupings could
fetch at the times the Appellants donated their prints.
The written brief continues by saying that if this Court finds
that the fair market value exceeded the cost to the Appellants
then the Appellants have realized capital gains on the
donation of their Prints and that those Prints were not
personal-use properties of the Appellants.
[54] Respondent's Counsel referred to
the finding of Associate Chief Justice Bowman in Klotz v.
R., 2004 TCC 147. He said that Bowman, A.C.J. stated that
there was a sale of 250 Prints for $75,000 between two
arms-length parties with a gift to charity virtually
contemporaneous with the purchase. Counsel then said that the
learned justice questioned what better valuation evidence there
would be than the purchase price. Counsel stated that the Court
said that claiming a fair market value in excess of the
Appellant's purchase price two days after purchase "is
devoid of common sense and out of touch with ordinary commercial
reality".
[55] Counsel posed a number of
questions:
1. Do the prices paid by
the Appellants satisfy the classic definition of fair market
value in the Henderson case?
2. Is it an acceptable
approach to valuation to rely on the prices charged by CVIAM?
3. Are those prices
reduced prices for the Prints in question?
4. Should the Court value
the Prints, as Tropper did, on a print by print basis?
5. Does the evidence of
Ford and Tropper about the prices for Prints similar to those in
question support fair market value of the Prints set out on the
Appellants' charitable donation receipts?
6. Should the Court accept
the opinion of Tropper?
7. For Quinn's
donation, should the Court be bound by the Range Report prepared
by Gary Roy?
[56] He then deals with these questions.
1. Do the prices paid by
the Appellants satisfy the classic definition of fair market
value in the Henderson case?
Counsel set out the meaning of fair market value as presented
by Cattanach, J. in Henderson and stated that the
Appellants entered into transactions with CVIAM containing all
the main elements of that definition. He referred to 931
Holdings Ltd. v. M.N.R., [1985] 2 C.T.C. 2094 in which
Rip, J. said that an open market is one:
from which no purchaser is excluded even if the property is so
situate that to one or more persons it presents greater
attractions than to anyone else.
Counsel then said that Tropper did not support her assertion
with an independent inquiry into CVIAM's business and that
Tropper felt that the market was not an open market solely
because CVIAM sold its prints to financial planners. He said that
they received commissions for selling prints, that there was no
evidence that no customers were turned away and that there would
be an incentive to sell prints to as many customers as possible.
He then referred to Gilvesy Enterprises Inc. v. R., [1997]
1 C.T.C. 2410 in which Bowie, J. of this Court, regarding
the operation of a "shot-gun" clause respecting the sale of
shares said:
There was no room for negotiation because of the terms of the
buy-sell agreement and in particular its shot-gun clause. I do
not believe, however, that these restrictions diminish the
probative value of the sale for the present purposes.
Counsel's point was that even if a market created by CVIAM
was restricted it could still provide the best evidence of fair
market value.
He then said that although Tropper testified that limited
edition prints are normally sold by art galleries, gift shops,
frame shops, art dealers and art consultants, CVIAM was a source
of many prints in 1997 to 1999 and offered many groupings of
prints for sale in those years. He then said that it was simply
another kind of retail vendor of prints and was able to offer 35
groupings identical to the groupings that Quinn bought.[1]
Counsel then concluded his submission on this first point by
stating that since CVIAM was the main, if not the only source of
collections purchased by the Appellants, the prices paid to it by
them "are the highest prices reasonably attainable for those
Prints".
[57] He then moved to his second question,
namely:
2. Is it an acceptable
approach to valuation to rely on the prices paid by the
Appellants to CVIAM?
Counsel referred to the American authorities, commented upon
by Bowman, A.C.J. in the Klotz case. He stated that
Justice Bowman, found the reasoning in such cases instructive and
persuasive. He said that fair market value in those cases is
defined as:
The price at which the property would change hands between a
willing buyer and a willing seller, neither being under any
compulsion to buy or sell and both having reasonable knowledge of
the relevant facts.
He said that for charitable contributions the Internal Revenue
Code and Regulations do not specify which market courts must look
to but that for American estate tax and gift tax purposes the
courts are instructed to look to the market in which the asset in
question is most commonly sold. That market is a sale to the
ultimate consumer.
[58] Counsel then turned to his third
question, namely:
3. Are the prices paid by
the Appellants reduced prices for the Prints in question?
Counsel stated that Tropper, in her report, suggested that the
prices paid by the Appellant were reduced prices. He said that
there was no evidence that that was so. He therefore submitted
that the price actually paid was the fair market value of the
Prints.
[59] Counsel then dealt with his fourth
question, namely:
4. Should the Court value
the prints, as Ms Tropper did, on a print by print basis?
Counsel said that Tropper wrote that each of the Prints in
question,
had an individual title, an individual image and was a
numbered, individual work of art and would therefore sell
individually. For this reason I approached each work as a
separate property.
He submitted that there was no evidence that CVIAM sold any
Print in question on an individual basis around the time of the
Donations. He submitted that Tropper was in error, her approach
being contrary to the reasoning of Bowman, A.C.J. in Klotz who
stated:
We are not valuing an individual print. We are valuing 250
prints given en masse to a university. What is to be valued is
the totality of that gift and one must look to what those 250
prints would fetch on the open market. The best evidence of what
250 prints would sell for it what they in fact sold for -
$75,000.
Counsel then submitted that the Appellants were obliged to buy
the Prints in groups. He said that little weight should be given
to Tropper's conclusions because Tropper is a member of the
American Society of Appraisers ("A.S.A.") and is
therefore bound to adhere to the Uniform Standards of
Professional Appraisal Practice ("U.S.P.A.P."). He then
said that she did not adhere to those standards but for almost
every artist relied on current sales data to reach a value
conclusion. He submitted that her questioning the accuracy of
Barnett's oral statements did not have a clear basis. He
added that, most importantly, Tropper ignored CVIAM, the vendor
of the Prints, making no enquiries into its operations or into
the number of sales it had made.
[60] The fifth question dealt with by
counsel was:
5. Does the evidence of
Ford and Tropper about the prices for Prints similar to those in
question support fair market value of the Prints set out on the
Appellants' charitable donation receipts?
Counsel submitted that the Court should not rely on Ford's
opinion that limited edition prints similar to those in question
"fetched prices close to the appraised values of the prints
in question". He said that Ford's testimony about
current and past prices for limited edition prints by artists
other than those in question, such as Robert Bateman, a household
name, were not "comparables". He submitted that
Ford's substantial reliance on pricing at Mill Pond Press was
not applicable to the artists in question, Mill Pond never having
published any of those artists. He said that Mill Pond claimed
that all its limited edition prints are accompanied by
certificates of authenticity and are signed and numbered and that
many of the prints in this case would not meet those standards,
there being no evidence that any of the Prints except the Barnett
Prints were accompanied by certificates of authenticity and that
the Nature & Wildlife Prints were not signed and numbered.
Counsel further submitted that the existence of a market is a
question of fact, not of opinion, and that the Court should not
rely upon Tropper's opinion that there were markets for the
Prints in question in the years under appeal she not, for two of
the artists, finding a market for any limited edition Prints in
1997 to 1999. He also said that Tropper did not testify as to any
sales of specific prints donated by the Appellants close to and
before the times of the Donations. Counsel also said that Tropper
acknowledged Barnett's unreliability but gave an opinion
depending upon information he provided. He submitted that Tropper
offered no evidence of a market for any prints by most of the
artists in 1998 or 1999 et cetera.
[61] The sixth question was:
6. Should the Court accept
Ms Tropper's opinion?
Counsel submitted that little weight should be given to
Tropper's conclusions for the reasons above set forth.
[62] The seventh question was:
7. For Ms. Quinn's
donation, should the Court be bound by the Range Report prepared
by Gary Roy?
Counsel stated that In Kind issued Quinn a charitable donation
receipt showing a fair market value of $25,280 for Barnett
Prints. He said that Gary Roy, then an auditor with Revenue,
prepared a "Range Report" in which he agreed to that
fair market value. He submitted that at the time he prepared his
report Roy was not an accredited appraiser and had had experience
only in buying and selling books and art work on a part-time
basis. He submitted that Roy's conclusion is unreliable
because of its dependence on Barnett's oral statements that
sales of comparable Prints had been made. Counsel said that Roy
took, at face value, what Barnett had told him. He submitted
further that the report could be considered a draft report even
though it was not stamped as such, the report being addressed to
an appeals officer but never sent.
PERSONAL USE PROPERTY
[63] Respondent's second counsel made
submissions respecting whether the Prints were "personal-use
property" as that term is used in the Act. Counsel
submitted that the Appellants bought and owned the Prints for two
reasons, namely to save tax and to donate them. She then
submitted that donating them was not the way the Appellants used
the Prints but was only an intended use. When counsel finally, at
my urging, referred to the definition of "personal use
property" she submitted that it was inclusive and gives aid
in interpreting the meaning of personal-use property in
borderline situations. She said that in order for the Court to
determine how the Appellants used the Prints it should look at
why the Appellants bought them and what they did with them. She
said that Nash donated because it made sense financially and that
he intended to donate all or most of the Prints. She then said
that Tolley thought that she would get the money back that she
put into it.
[64] She referred to the case of Woods
Estate v. R., [2000] 3 C.T.C. 2179. Counsel said the
property in question, a house, was found not to be personal-use
property. It was a house belonging to the estate and, not being
rented, never produced income. It was not used by the taxpayer or
anyone related to the taxpayer. Her point was that this was a
type of property other than business and commercial property but
was not personal-use property, referring to Appellants'
counsel's suggestion that there were only two types of property.
She said that purchasing the prints and donating them to save tax
was not a personal use but "more like an investment
use". She said that receiving the Prints, looking at them
and deciding which ones to keep and which ones to donate might be
considered a use,
but in our submission they do not constitute a personal use
because they are part of the process of buying and holding and
donating the prints to save tax, or to obtain a credit.
As indicated above, she submitted that the Donation was not
"an actual use" but was "an intended use"
while the Appellants held the prints. She then referred to
Mid-west Feed Ltd. et al v. Minister of National Revenue,
[1987] 2 C.T.C. 2101 (T.C.C.) and submitted that it stands for
the proposition that it is the actual use of the property that
must be looked at, not an intended use or a future use.
[65] Counsel then referred to Glaxo
Wellcome Inc. v. Her Majesty the Queen, [1996] 1 C.T.C. 2904
(T.C.C.) where the Court said:
Unless some principle of interpretation compels me to ascribe
a broader meaning to the word, "use" connotes actual
utilization for some purpose, not holding for future use.
Counsel submitted that the asset was property purchased by the
taxpayer for future expansion. The property was sold when the
owner realized that it was not large enough to be useful in the
expansion of the business. The question, according to counsel,
was whether the property was a "former business
property". At my urging she referred to the definition of
that term as being,
"former business property" of a taxpayer means a
capital property that was used by him primarily for the purpose
of gaining or producing income from a business ...
She then said:
It is our submission that the prints that the Appellants
acquired and held and donated in this case, that by donating them
they did not use them in any meaningful sense of the term as the
Court interpreted the term "use" and "used"
in Glaxo Wellcome. The Appellants did not use their prints by
donating them. They gave them away so that someone could use
them. This is not, in the Respondent's submission, a personal
use contemplated by section 46 or by the definition of personal
use property in section 54. The Respondent submits that the
ordinary use to which one would put prints would be to hang them
on their wall, enjoy looking at them in their office and home
over some period of time. Even if they didn't use them in
that way, the Appellants could have used the prints themselves
personally. They could have used them for a multitude of things.
They could have used them for wrapping paper, packing material,
or they could have lined cupboards with them. Those are uses that
the taxpayer or the Appellants in this case ...
[66] Counsel completed her submission by
saying that the donation of the Prints was simply the fulfilment
of the investment like purpose in buying the Prints, that is to
save tax. She said that it was not a personal use nor was it a
primary use of the Prints.
[67] I asked what her view would be if
someone had a violin for 30 years, never played it and finally
donated it to The Canada Council instrument bank. She responded
that if it sat unused it would not be personal-use property.
Counsel then submitted that Bowman, A.C.J., in Klotz, in
respect of personal-use property, seems to have based his
conclusion on the fact that donating can be a use and that the
Respondent disagreed with that conclusion.
[68] Respondent's first counsel then made
reference to Appellants' counsel's concession that
Tropper's opinion of the fair market value of Tolley's
Prints was less than originally claimed. The same applied to
Quinn's Prints. He said that with respect to Nash, the
Tropper opinion was higher, by some $500, than the amount of the
fair market value claimed by Nash. He referred to subsection
118.1(2) of the Act stating it reads as follows:
(2) A gift shall not be included in the total charitable
gifts, total Crown gifts, total cultural gifts or total
ecological gifts of an individual unless the making of the gift
is proven by filing with the Minister a receipt therefor that
contains prescribed information.
He said that the receipt was for a lesser value than the
valuation. He then referred to section 3501(1.1) of the Income
Tax Regulations reading as follows:
(1.1) Every official receipt issued by
another recipient of a gift shall contain a statement that it is
an official receipt for income tax purposes and shall show
clearly in such a manner that it cannot readily be altered,
He also referred to paragraph (h) reading:
(h) the
amount
...
(ii) where the
donation is a gift of property other than cash, the amount that
is the fair market value of the property at the time that the
gift was given;
APPELLANTS' COUNSEL'S RESPONSE:
[69] Counsel dealt firstly with the last
point raised by Respondent's counsel. He said that section
118.1(2) simply provides that a taxpayer must prove the fact that
he has made a gift by filing a receipt, and that the Regulations
then say what should be on that receipt. He stated that once the
fair market value of the Donation is challenged it is an open
issue for the Court to determine.
[70] He submitted that the facts in this
case are very different from those in Klotz, specifying
that the present Appellants were dealing with new Prints. He
submitted that Bowman, A.C.J. had said in his Reasons for
Judgment in Klotz that the expert witness, Laverty, had
embarrassed herself in the context of Mr. Alasco, the
Appellant's second expert witness, not wanting to embarrass
her further. He submitted that Ford and Tropper did not embarrass
themselves and that this was a key distinction. He submitted
further that the embarrassed witness was not credible and that a
case such as Klotz would be "going ... downhill
from there because then you have no credible expert witness on
either side in Klotz".
[71] Counsel referred to the Gilvesy
case which had to do with a "shotgun" clause. He submitted that
it wasn't a case in which the Court was asked to determine
the fair market value of the shares. He said it was an allowable
business investment loss ("ABIL") case and that the
judge did not conclude that the shotgun sale price was equal to
fair market value but "just that it was not more than fair
market value". The issue was the cost base used in the ABIL
claim. He submitted that the only point in Gilvesy is the
proposition, with which he agreed, that a sale in a restricted
market would not give a price that is more than fair market
value.
[72] He then referred to Respondent's
counsel's submission that CVIAM "was just another
retailer". He submitted that it was the last thing from
being another retailer but was there to implement a program that
involved the donation of Prints. He said:
It was about finding a financial planning network, getting
legal opinions and accounting opinions in place, finding donees,
doing all that stuff that retailers of prints don't do.
[73] He pointed out that the Barry Barnett
Prints were sold only to 35 individuals because there were only
35 artist's proofs and 35 remarques. He said that it is not
entirely clear from the evidence what happened to all of the
prints but many of them went to Mr. Barnett and he sold many of
them and that this provided the basis for Tropper's
evaluation of same. He said that Respondent's counsel's
description of sales by CVIAM to other individuals or customers
was "this is the normal market for those Prints, the only
market for those Prints". He continued by saying that:
the Respondent's position was that applying
Henderson, being the only market for those prints,
that's where one must go to determine the fair market
value.
He then said that the Appellants' submission was that that
was not the Henderson test. He continued by saying
that:
The Henderson test is the highest price an asset would
bring when sold in the normal method applicable to the asset in
question in the ordinary course of business.
[74] He stated that purchasing through a
financial planner is not the normal method for buying limited
edition Prints. He posed the following example to explain his
position, namely:
Let's say there is a furniture manufacturer that makes 100
chairs and let's say the chairs have a new design and that
they have never been sold before and it is good quality wood,
very nice design and they are saleable chairs. To someone walking
in those are saleable chairs. Some expert will walk in like Mr.
Ford, not in prints, but a chair expert will walk in and say
those are saleable chairs. But they have never sold before in
retail. Let's say the manufacturer sold those 100 chairs,
just sold them to the Brick Warehouse, a retailer, sold them
wholesale for $50 each. Now Brick's going to sell them for $100
each. ... But those chairs have never been sold retail. So
my friend would argue, presumably, that you have got to look at
the only market in which those chairs sold. They only sold for
$50 each when they got sold to the Brick. They are still in the
factory. They haven't been delivered to the Brick yet. Or
even if they have been delivered to the Brick, they haven't
been sold yet retail. In their submission that is the only market
so far for those chairs. In our submission those chairs still
have a fair market value. It's what an expert in the value of
those chairs at retail would say that they are worth - $100 is
what the Brick is going to sell them for because it is a
hypothetical sale in the appropriate market, that is what the
case law says. That is what Friedberg and Whent
says. And the hypothetical sale in the appropriate market,
when you are dealing with mass appeal prints, is a sale in
the retail market. It is not a sale through your financial
planner. It is not a sale from CVI. ... you go to
Henderson. You say well, what is the highest price those
chairs would bring when sold in a normal method applicable to the
asset in question in the ordinary course of business. And the
highest price is obtained at the Brick Warehouse when they
finally sell those chairs. The fact that the person is donating
those chairs, having bought them from the manufacturer,
doesn't mean they are suddenly worth as a fair market value
$50 a chair because that is what he was able to pay for them.
[75] Counsel continued by saying that the
Court did not know much about CVIAM, whether they were in some
deal with a financial planner or the financial planning
community, et cetera. He stated that we do not know the
circumstances "because the Respondent has not told us and it is
beyond the ken of the Appellants to know all about that". He
challenged the assumption in the reassessment that the highest
price was the price at which CVIAM sold the Prints and posed the
query as to the basis for such assumptions. He then said that the
Appellants have done everything that they could reasonably be
expected to do, calling appraisers, hunting down whatever facts
they could, bringing in a market expert, introducing evidence
overall about the saleability of the Prints and the prices at
which they could be sold. Counsel then said that if the Appellant
had made a prima facie case by Tropper's evidence, by
Ford's evidence, by the Appellants' evidence and by the
evidence even of Roy, that the fair market value in one case was
roughly what was claimed on the donation receipts, the burden
shifts to the Respondent. He suggested about Respondent's
counsel finding fault with Tropper's approach missed the
point because Tropper said that print by print is the way sales
occur in the appropriate market, the Prints being all different
and, in effect, saleable one by one, not as a group. He said that
Respondent's counsel:
... has certainly picked away at the Tropper report and
in fairness to him he has not had his own expert evidence to rely
on and I understand that. But by saying she made a mistake, she
should have valued the prints not on a print by print basis but
as a group, that contradicts not only proper appraisal
methodology, it contradicts what the Respondents have done in the
past when they have adduced expert appraisal evidence in similar
circumstances.
[76] He then referred to the Mallette
case in the matter of blockage discount. He pointed out that the
Respondent's own expert applied a discount to "each
work" thereby taking the same approach as that now advanced
by the Appellant.
[77] Counsel referred to Tropper hunting
invoices from galleries, not knowing who was telling the truth,
and weighing information received against comparables in the
market. He submitted that Respondent's counsel, on
cross-examination, did "a little picking away at this and a
little picking away at that". He said that Tropper was not a
witness who embarrassed herself. He stated that her mission was
to find the highest price attainable using the normal method in
the ordinary course of business - the Henderson test. He
said:
Tropper didn't need to focus on the price paid by the
Appellants because she knew there was a market having examined
the prints, and having looked at them. With her background and
knowledge, she knew there was a market for those kinds of prints
in retail galleries, print shops and framing shops all across
North America.
[78] He then submitted that the Court could
draw an inference from the failure of the Respondent to produce
expert evidence. He suggested that the Respondent could not find
anyone to take an oath after having filed a report and after
having done the appropriate work and tell the Court that the
Prints did not have a fair market value beyond the price paid by
the Appellants.
[79] Counsel then reminded the Court that
Tropper had said that even if all the Prints sold by CVIAM, the
Prints in issue, had been on the retail market, such sale would
not have had any depressive effect on the market. He added that
Tropper said, in her written report:
There were not an adequate number of prints included in any
one of these donations to suggest the need to calculate a reduced
value due to quantity. ... In fact, even the total number of
prints in all the editions by these artists would not overload
the huge North American market.
[80] He also referred to Tropper's
evidence as an expert, including hearsay evidence, and said that
the Courts had endorsed the theory that such evidence could be
used by an expert. He referred to the Woods case in which
a trust owned a house which was found by this Court not to be
personal property. He stated that that does not stand for any
proposition other than that a trust cannot have personal use
property unless it fits within section 54(a)(iii) of the
Act.
[81] Counsel then referred to the release
with the Federal Budget of February 28, 2000 referring
specifically to certain charitable donation arrangements such as
in the present case, describing same as external evidence, adding
that the Act as it existed after the legislation
constituted the internal evidence. He referred also to Silicon
Graphics v. Her Majesty the Queen, [2002] 3 C.T.C. 527
(F.C.A.) and HSC Research v. Her Majesty the Queen, [1995]
1 C.T.C. 2283 (T.C.C.) as an authority for the proposition that
the Court is not restricted by subsection 45(2) of the
Interpretation Act in interpreting a change in legislation
where all the external and internal evidence suggested that the
change was purposive, there being a purpose for the change.
Counsel summarized his point by saying that by simply reading the
provision one can infer that Parliament must have intended a
change and that, therefore, prior to that change, these
properties were personal-use properties. With respect to
Respondent's counsel's argument on this point
Appellant's counsel said:
We say ... that as soon as you buy it and as soon as you
own it you are owning it with the purpose of making some use of
it which could be a charitable purpose. It is really splitting
hairs to say that it is only at the very moment that you donated
it because there is some hand-over time when you are donating it,
but you still own it.
ANALYSIS AND CONCLUSION:
[82] I agree with all of the submissions
contained in Appellant's counsel's notes of argument reproduced
herein and with those advanced in his response.
[83] Tropper is extremely well qualified and
was extremely knowledgeable in the area of her expertise, having
been qualified as "an expert appraiser of personal property
including limited edition prints". I found her to be totally
credible and I was highly impressed with the professional manner
in which she testified, both in direct examination and
cross-examination. Her report was exceptionally well prepared and
was very well presented. Respondent's counsel's questions to her
respecting USPAP and the markets for the work of the artists who
prepared the images from which the Prints were made, et cetera,
appeared to be an attempt to compromise the accuracy and efficacy
of her valuation. I was impressed with Tropper's forthright
replies as to both what she had done and had not done in her
examinations. In my view her evidence was not compromised on
cross-examination.
[84] The Respondent produced no expert
evidence and, indeed, no other evidence. The evidence of the
Appellant's witnesses, including Ford, an art marketing expert,
and Tropper, as above stated, created not only a prima
facie case but an impressively strong case. The Minster made
assumptions of fact in each Appellant's Reply to the Notice of
Appeal respecting the fair market value of the Prints.
Specifically the Minister made these assumptions respecting
Nash:
m) The purchase price of
the donated Prints was $8,571.00
n) The fair market
value of the eighty-four Prints at the time of donation was no
more than $8,571.00
The Minister made these assumptions respecting Tolley:
m) The purchase
price of the donated Prints was $8,377.00
n) The fair market
value of the ninety-nine Prints at the time of donation was no
more than $8,377.00
The Minister made these assumptions respecting Quinn:
n) The purchase
price of the donated Prints was $8,648.00
o) The fair
market value of the forty-eight Prints at the time of donation
was no more than $8,648.00
[85] In Redash Trading
Incorporated (supra) I discussed at length the effect
of no evidence being adduced by the Respondent in a situation
where the onus had clearly shifted to the Respondent. I refer to
that entire discussion and conclusion on this matter.
Specifically, I set out here statements from Hickman Motors
Ltd. v. Canada, [1997] 2 S.C.R. 336 where the Supreme Court
of Canada stated:
As I have noted, the appellant adduced clear, uncontradicted
evidence, while the respondent did not adduce any evidence
whatsoever. In my view, the law on that point is well settled,
and the respondent failed to discharge the burden of proof
...
The law is settled that unchallenged and uncontradicted
evidence "demolishes" the Minister's assumptions: ... As
stated above, all of the Appellant's evidence in the case at bar
remained unchallenged and uncontradicted ...
Where the Minister's assumptions have been "demolished" by the
appellant, the onus ... shifts to the Minister to rebut the
prima facie case made out by the appellant and to
prove the assumptions.
and
Where the burden has shifted to the Minister, and the Minister
adduces no evidence whatsoever, the taxpayer is entitled to
succeed.
The Respondent has simply not responded to the shifted onus in
this case.
[86] On the evidence, set out in detail and
upon my agreement with Appellants' counsel's submissions,
I have concluded that the Appellants will succeed. I want to
underline particularly the thesis advanced by Tropper in using
the definition of fair market value made in Henderson
(supra) by Cattanach, J. The meat of that definition 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.
[87] I also want to underline my agreement
with Appellant's counsel respecting the Klotz case. It is
my opinion that the evidence in that case as described by Bowman,
A.C.J. was so inferior to that presented in the case at bar that
I would find it extremely difficult to disagree with his
decision.
[88] I can add little to Appellant's
counsel's comments and the comments of Bowman, A.C.J. in
Klotz respecting personal-use property. I agree entirely
with both. Respondent's counsels' thesis is that intended use
can't be use. The extension of that thesis, as she submitted,
concluding that a violin, owned for 30 years and never played,
would not be personal-use property is so wanting as to deserve no
further comment.
[89] I conclude that the valuation made by
Tropper is the fair market value that should be used for the
purpose of answering the question in the first issue. I conclude
further that the Prints were "personal-use property" within the
meaning of that term as set out in the Act for the purpose
of answering the question in the second issue. Based on the
concession by Respondent's counsel the penalties will be
deleted.
[90] Accordingly, the appeal will be allowed
with costs.
Signed at Ottawa, Canada this 24th day of September, 2004.
Bell, J.
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