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Citation: 2008 TCC 401
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Date: 20080912
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Dockets: 2007-11(IT)I
2007-15(IT)I
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BETWEEN:
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QUY NGUYEN,
BETTY LEUNG.
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Appellants,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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AMENDED REASONS FOR JUDGMENT
Campbell J.
[1] These are appeals
from assessments under the Income Tax Act (the “Act”) in respect
to Betty Leung’s 1999, 2000 and 2001 taxation years and Quy Nguyen’s 2000
and 2001 taxation years. The Appellants filed the appropriate elections to have
their appeals heard under the Informal Procedure.
[2] Mr. Nguyen is a
financial planner who operated a financial planning business during the years
under appeal. The Appellants are husband and wife who together purchased
original works of art from Canadian Art Advisory Services Inc. (“CAAS”) and shortly
thereafter donated them to charities identified by CAAS. CAAS purchased the
artwork directly from the artists and also arranged for and provided appraisals
of the artwork.
[3] In filing their
returns of income and claiming donation tax credits, the Appellants included
the following amounts, under “total gifts”, with respect to their donation of
the artwork:
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1999
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2000
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2001
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Betty Leung
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$17,000
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$35,300
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$28,000
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Quy Nguyen
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$64,700
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$32,600
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Total
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$17,000
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$100,000
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$60,600
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The Appellants submit
that these amounts represent the fair market value (“FMV”) of the donated artwork
in each of the taxation years.
[4] The Minister of
National Revenue (the “Minister”) reassessed the Appellants on the basis that
the FMV of the artwork was $5,000 for the 1999 taxation year and, due to
insufficient evidence in respect to price paid, nil for the 2000 and 2001
taxation years.
[5] On December 10,
1999, the Appellants purchased 17 paintings from CAAS for $5,000. The average
cost per painting was $294. This price included two independent appraisals which
were arranged for by CAAS. The paintings were appraised at $17,000 or 3.4 times
the purchase price. They were gifted in their entirety between December 16 and
December 20, 1999 to the Serpent River First Nation, which issued a charitable
receipt for the full amount of $17,000. Ms. Leung claimed the entire
donation tax credit in the 1999 taxation year. No taxable net gain arose because
the appraised values, and therefore the proceeds of disposition, were all equal
to exactly $1,000 per piece and the Act at that time deemed the adjusted
cost base of personal use property to be the greater of $1,000 and the amount
otherwise determined.
[6] On December 12,
2000, the Appellants purchased 69 paintings from CAAS for $22,913. The average
cost per painting was $332. This price again included two independent
appraisals and a 15% retainer fee paid to CAAS for acting on the Appellants
behalf in arranging the donation of the artwork. The paintings were appraised
at $100,000 or 4.36 times the purchase price. On December 22, 2000, they were
donated in their entirety to the Serpent River First Nation, which again issued
a charitable receipt for the full amount of $100,000. Due to amendments in the Act,
however, the Appellants had to report taxable net gains on the transaction.
[7] On December 19,
2001, the Appellants purchased 40 paintings from CAAS for $9,000. The average
cost per painting was $225. This price, as in the prior purchase, included two
independent appraisals and the 15% retainer fee. The paintings were appraised
at $60,600 or 6.73 times the purchase price. On December 19, 2001, they were
donated in their entirety to the Pride of Israel Synagogue, which issued a
charitable receipt for $60,600. Both Appellants reported taxable net gains on
the transaction.
[8] The Appellants’
position is that CAAS acted as a wholesaler that used volume buying to acquire
original artwork directly from artists at low or reduced prices, enabling CAAS
to pass along the savings to its clients. The Appellants claim that the
paintings ought to be valued according to the sale price of comparable works that
were located in retail galleries at the time. The Minister’s position is that
the art is worth at most the price the Appellants paid for it.
[9] The issue which I
have to determine is what the FMV of this artwork was on the dates of donation
in each of the taxation years.
[10] Neither party called
expert witnesses. The Appellants relied on the evidence of Mr. Nguyen and
William Russell. The Respondent called two witnesses, Barnet Goldberg, the
promoter, and Anton Plas, the auditor.
[11] Mr. Russell operates
Russell Tax Services, which is involved in the preparation of personal tax
returns. He advised a number of his clients to enter this art donation program
and he or his family personally participated in the program. Mr. Russell
earned commission fees from CAAS for referring clients. Before getting involved
in the program, Mr. Russell checked the Income Tax Rules and the general
advisory issued by Canada Revenue Agency (“CRA”), interviewed one of the
appraisers used by CAAS and visited the Serpent River First Nation, where he
videotaped artwork and its pricing.
[12] Mr. Nguyen was first
introduced to the CAAS donation program by letter dated November 24, 1999
(Exhibit A-3). He understood that he could obtain a return on investment of 39%
from the program and that the artwork would be offered at 35% of the appraised
value. However, he testified that his motivation in getting involved in the
program was for the purpose of donating the artwork. Prior to getting involved
in the program he spoke to six appraisers, four artists and two lawyers. In
2000 and 2001, Mr. Nguyen brought approximately 25 individuals to the CAAS
donation program, for which he received commissions. On cross‑examination,
Mr. Nguyen agreed that he purchased a bundle or group of 17 pieces of
artwork in 1999 for $5,000 and that they were not 17 separate pieces. In 2000
and 2001, he personally picked the artwork himself, concentrating on the work
of three specific artists, whom he had met. He liked their work and had
verified the value of some of their artwork in galleries. He stated that the
portfolio of artwork had serial numbers attached to the work and that he simply
picked a block of work by an artist he liked. However, he did not hand select
each individual piece and instead chose a sequence by an artist with attached
ID numbers.
[13] The only restriction
on his participation in the program was in respect to a minimum purchase
requirement where he could not purchase just one painting. He also understood
that artists were being asked to produce art for this program. Mr. Nguyen
testified that he understood that in 2000 there were proposed amendments to the
Act and that, as a result, the artwork was being offered at 20% of its
appraised value instead of 35%, because there would be a taxable net gain on
the disposition. To deal with this gain, he agreed, on cross-examination, that
he acquired the artwork for a lesser price in 2000 and 2001. Mr. Nguyen
testified that he did not know if the jump in appraisal values per piece from
$1,000 to $1,400 between 1999 and 2001 was related to the amendment which meant
this type of transaction now attracted taxable net gains. In respect to the
independent appraisals of the artwork, Mr. Nguyen testified that the appraisers
were valuing the artwork on an individual basis and not as a group. He also
agreed that the appraisal reports would be signed on the same date and would
generally be in agreement on the valuations.
[14] Barnet Goldberg, the
President and sole shareholder of CAAS, was called by the Respondent to
authenticate the documentation and confirm the sales. Mr. Goldberg was a
practising lawyer until he incorporated CAAS in 1998 to sell art. According to
the evidence, he had no involvement in the art business prior to 1998. He
agreed with Respondent counsel’s suggestion that CAAS was a vehicle through
which the art donation program could be offered.
[15] Mr. Goldberg went
through the various transaction documents, which were similar for each of the
relevant years. He explained that CAAS facilitated the transaction on behalf of
the clients and pre-arranged for a number of charities to accept the artwork.
He confirmed that a vast majority of the sales occurred in the fall of each
year. At times CAAS paid as little as $20 to $30 per piece for the artwork but,
in the early years, it paid as much as $100 to $150 per piece. He testified
that, although his background is in business and law, he had seen many
thousands of pieces of artwork and dealt with top appraisers. He explained that
CAAS had strong purchasing power, buying a lot of art for as little as possible
or at a fraction of its value. Mr. Goldberg also provided some evidence of
gallery transactions of individual pieces.
[16] Anton Plas reviewed
a large volume of documentation and, based on what was made available to him,
he essentially summarized seven volumes of material to show the amount of
artwork involved in the program. This was entered as the Microsoft Excel data
(Exhibit R-7) with the summary (Exhibit R-6). He obtained the documentation
pursuant to the issuance to Mr. Goldberg of a Requirement in accordance with
the Act. He reviewed purchase agreements, retainer agreements, deeds of
gift, portfolio lists and appraisal documents, although the documentation was
not complete for all of the transactions in each of the years. He identified
about 13,000 paintings and 26,000 appraisals. He tried to complete the picture
in respect to the missing documents by contacting other individuals that had
been involved in the program. He attempted to add the amounts listed in the
purchase agreements and compare those amounts to the total sales in each year.
His analysis of 1999 was only an approximate one as just 2.7% of the records
were available. However, in 2000 and 2001, where he was able to review much
more documentation, he concluded that artists, including those whose work the
Appellants purchased, had hundred of pieces of their work going through this
program.
Analysis
[17] The generally
accepted definition of FMV is found in Henderson Estate and Bank of New York
v. M.N.R., 73 DTC 5471. At page 5476, Cattanach, J. stated the following:
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.
[18] This definition was
quoted with approval by Rothstein, J.A. (as he was then) in Nash v. Canada,
[2005] F.C.J. No. 1921 (F.C.A.). At paragraph 9 he stated:
…Fair
market value has often been referred to as a question of fact. However, it is
probably more accurate to say that fair market value is a determination of
mixed fact and law. A determination of mixed fact and law involves applying a
legal standard to a set of facts (see Housen at paragraph 26). In fair market
value cases, the judge must apply the legally accepted definition of fair
market value to the facts found from the evidence adduced before him.
[19] In Klotz v. Canada, [2004] T.C.J. No. 52
(T.C.C.) aff’d. (2005) F.C.J. No. 754 (F.C.A.), Bowman, A.C.J. (as he then was)
dealt with an art donation program that was similar in many ways to the present
appeals except that it dealt with limited edition prints instead of original
works of art. The Court in Klotz rejected the evidence of the taxpayer’s
expert witness for several reasons but primarily because the wrong market was
chosen. It concluded that the best evidence of FMV was the actual price paid.
The U.S. authorities, some of
which the decisions in both Nash and Klotz reference, make the
same conclusion with respect to FMV.
[20] These appeals are
very similar to the Nash and Klotz cases. I am required to determine the FMV of a group of
prints in each taxation year. The appraisals which formed part of the
transaction documents are of little or no assistance as they were completed on
an individual as opposed to a group basis and were arranged for by CAAS. Mr.
Plas tried to gauge the number of paintings that went through the CAAS program
during the years in question. For the following artists, he compiled the
following sales information, which shows the purchases made in each year by the
Appellants:
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1999
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2000
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2001
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Appellants
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Total
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Appellants
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Total
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Appellants
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Total
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Simon Andrew
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-
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9
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31
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278
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6
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347
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Peter Banks
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3
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26
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-
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421
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6
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291
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Serge Deherian
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-
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34
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-
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529
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8
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367
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Juan Gallegos
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-
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--
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-
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24
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5
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455
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Vlad Grospic
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3
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52
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-
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237
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-
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213
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Gyula Kalko
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-
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--
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3
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7
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-
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81
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Jerzy Kolacz
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-
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--
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-
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--
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4
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77
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Eva Kolacz
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-
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17
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26
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283
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5
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413
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Blair Paul
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6
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26
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1
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63
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-
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--
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Jay Redbird
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-
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33
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6
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307
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-
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385
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Gary Silverberg
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3
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22
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-
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124
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-
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--
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Steven Snake
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2
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45
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1
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447
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6
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878
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Richard Stipl
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-
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69
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1
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245
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-
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197
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Total
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17
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333
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69
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2965
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40
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3704
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[21] I am satisfied that
these estimates, based on the documentation available to Mr. Plas, represent the
minimum quantities sold by CAAS for the years in question.
[22] In this case, the
Appellants, who bear the onus, have adduced very little evidence of the FMV of
this artwork. They made the decision to represent themselves, elected to
proceed by the informal procedure and initially chose not to engage experts. These
appeals were heard in the fall of 2007 but were not completed until March 2008.
When it became apparent to the Appellants that it would be crucial to their
case to engage experts and submit expert reports, they made this request prior
to the recommencement of the hearing in 2008. Although I might have been
prepared to accommodate this request, provided I could have done so without
prejudicing the Respondent, I refused to do so because the Appellants were made
aware of their right to call expert witnesses prior to the commencement of the
hearing of their appeals and after consideration they chose not to do so. However,
unless an expert appraiser had used some acceptable methodology to value the group
of artwork, I would have rejected an appraisal if it had been based on
individual pieces.
[23] One problem in these appeals is the sudden increase in
value of an artist’s work from 1999 to 2000 and 2001. Respondent counsel asked
that I infer that it was due to the amendments to the Act and the
resulting taxable net gains which arose. While I have no evidence that this was
in fact the case, it is particularly troublesome that an artist’s work was
increasing substantially while the market was being flooded with such artwork. To
use Bowman, J.’s phrase from Klotz, this is:
…
devoid of common
sense and out of touch with ordinary commercial reality.
In addition, there was
some evidence to suggest that the appraisers, who were paid in the range of $2
to $5 per piece according to Goldberg, may have on occasion signed the
appraisals subsequent to the transaction dates.
[24] According to Mr.
Nguyen’s evidence, he was aware he was purchasing in volume. He also assumed
that Mr. Goldberg was having artists’ produce work for the program. For
example, Stephen Snake produced over 800 pieces in 2001 according to the
documentation before me and the question that arises but remains unanswered is:
was the artwork produced for the program of a different quality than the artwork
which the artist would hope to have presented in an art gallery?
[25] Mr. Goldberg
testified that 99% of CAAS’ sales were in the art donation program; however,
when I compare the sales summary (Exhibit R-11) for the year ending September
30, 2001, the one year that is available, to the amounts in the financial
statements, one could just as easily conclude that the transactions in the
sales summary do not include any individual sales and that therefore all of the
sales in CAAS may well have been in the program.
[26] All three witnesses,
Mr. Nguyen, Mr. Russell and Mr. Goldberg referred to what they observed as the
list prices of a few individual pieces of art at isolated galleries as being a
good indicator of FMV of the artwork in these appeals. There are a number of
problems which prevent using these gallery listings as comparable sales. First,
they are for individual pieces listed for sale while I am dealing here with the
contemporaneous purchase and donation of a group or block of artwork. I must place
a FMV on the group of artwork if they were placed on the open market. Mr.
Nguyen testified that the single restriction on involvement in this program was
that he could not purchase one individual piece. I think there is abundant oral
plus documentary evidence, apart from the Appellants’ admission, that supports
a finding of fact that the purchases were block or en masse purchases of
artwork. I have no evidence of individual artwork being acquired or donated. It
is apparent that CAAS did not deal in individual pieces and that the program
centered around volume purchases. The second problem with the reference to
gallery sales, for which I have no evidence, is whether the artwork, even if by
the same artist, is comparable. By this I mean: is the art of the same quality
and therefore comparable if the artist is producing one or two pieces for a
gallery but hundreds of pieces in one year for this program. This was the case,
for example, in respect to Stephen Snake who produced over 800 pieces in 2001.
I have no evidence that would suggest that the quality and complexity of these
800 pieces would be the same or similar to those one or two pieces that he
might produce to hang in a gallery. Third, the definition of FMV speaks of informed
buyers and sellers whom, I must assume, would take into consideration a large
supply overhang when hammering out a fair and reasonable price. I believe this
would be so even with a ten year hold period by the charities that existed in
2000 and 2001 in these appeals. Therefore, isolated gallery sales would not
necessarily provide good indicators of FMV unless the galleries had knowledge of
the supply overhang and had passed this information on to the prospective
buyers. Fourth, I have no evidence respecting gallery sales apart from the
evidence of these three witnesses, none of whom I consider to be disinterested
parties. Mr. Russell’s evidence must be considered in light of a certain bias
because he is personally involved in this program. Quite apart from his
objectivity and independence being coloured by such bias, he is not qualified
to give expert evidence respecting the comparability of the artwork he saw at
galleries and the artwork he saw going through this program. Mr. Goldberg of
course is the creator and promoter of this program. He was a difficult witness.
He took every opportunity to discuss the quality of the artwork. However,
Mr. Goldberg is not an expert and was not offered as such. I am simply
rejecting his non-expert opinions and I am limiting his evidence to the purpose
for which he was called and that was to authenticate the transaction documents.
Fifth, I have no evidence of gallery sales. For these reasons I do not accept,
nor do I believe, that retail art galleries are the appropriate market for the
determination of FMV. The Appellant gave evidence of what he saw in respect to
gallery price lists and Mr. Russell used a video camera to record a price list
posted on the window of a gallery. This is not evidence that can in any sense
be used to establish FMV. So, if this is not the best evidence available to
determine the FMV of the donated artwork, what is? As Bowman, J. stated at
paragraph 44 of the Klotz case:
…The most contemporaneous and most comparable figure is
what Mr. Klotz paid Curated for them.
And at paragraph 46 he
went on to state:
… but in the final analysis it does
not really matter what one calls it. It is what it is. It was a sale of 250
prints for $75,000 between two arm's length parties. The gift was a virtually
contemporaneous disposition of the same 250 prints. What better evidence is
there of what the 250 prints were worth at that time? Why chase the will o' the
wisp of an elusive and largely hypothetical fmv through the trendy up scale art
galleries of New York and ignore the best evidence that
is right there before your very nose? The problem with the claim here, whereby
property is acquired for $5 to $50, sold to the appellant for $300 and claimed
to have a fmv two days later of $1,000, is that it is devoid of common sense
and out of touch with ordinary commercial reality.
At paragraph 29 of Nash,
Rothstein, J.A. stated that:
…where the dates of acquisition and disposition are very
close in time, … the cost of acquiring the asset will likely be a good
indicator of its fair market value.
In these appeals, the
acquisitions and dispositions occurred almost simultaneously.
[27] The Appellant has
failed to adduce evidence to overcome the Minister’s assumption that the FMV
was, at most, the price paid by the Appellants. I have no evidence of comparable
sales and, without the appropriate expert evidence, I have no way to determine
comparability even if it could be established that retail art galleries were an
appropriate market to determine the FMV of these groups of paintings. Even if
some evidence had been adduced respecting comparable gallery sales, I would
still need to be persuaded that art galleries represented the dominant sales
channel for the works in question. This would have been difficult, if not
impossible, considering the amount of art that was finding its way through this
program. The same analysis as applied in the cases of Nash and Klotz
is the correct yardstick to be used in these appeals. I do not believe that it
makes any difference whether the assets being donated are original works or
limited edition prints. Without evidence to the contrary, the best evidence of
FMV will be the purchase price of the group of assets.
[28] The Respondent’s position is that the FMV should be the
purchase price that the Appellants paid in each year less a 15% retainer fee,
which was paid by the Appellants pursuant to a Retainer Agreement. I agree with
Respondent counsel that this 15% of the purchase price is part of the cost of
acquiring the artwork and cannot form part of the FMV of the donated artwork.
Counsel referred me to several cases to support his conclusion (Conn v. M.N.R.,
1986 CarswellNat 459 (T.C.C.); Paradis v. R., 1996 CarswellNat 2261
(T.C.C.); Aikman v. R., (2000) CarswellNat 219 (T.C.C.) aff’d. 2002
CarswellNat 628 (F.C.A.)). The December 19, 2001 Purchase Agreement
stated:
1.02 …
In the event that the Purchaser elects to retain the services of CAAS to donate
all or part of the Art being purchased herein, it is understood and agreed that
a fee in the amount of 15% of the purchase price payable herein shall be
allocated and payable in respect of CAAS’ retainer fee for aiding the Purchaser
in respect of the donation of the Art.
This implies that if the
Appellants had decided to retain the art and not donate it, they would not have
incurred this 15% retainer fee.
[29] I have not been
persuaded that the analysis used in Nash and Klotz should not
prevail here. Without evidence of comparable sales or a market that permits a
direct comparison, the only value that I can reasonably attribute to the
donated artwork is the amount that someone was actually willing to pay for it
around the time it was donated. That someone could have been either CAAS or the
Appellants. However, since the Respondent has asked that the FMV be the amount
the Appellants paid less the applicable 15% retainer fee, I am not inclined to
consider any other amount. In deciding these appeals, I come back to the same
question which Rothstein, J.A. (as he then was) asked in Nash at
paragraph 26 and that is, as it applies to these facts, if the Appellants,
instead of donating the group of artwork, had tried to sell the group within
the same timeframe, what could they have sold the group for? The inevitable
answer is that the Appellants could not have fetched more for the group than
what they paid, since a potential informed purchaser would simply have purchased
the group from CAAS instead of the Appellants.
[30] At the commencement
of the hearing, the Respondent conceded the issue of gross negligence penalties
which had been applied pursuant to subsection 163(2) of the Act.
Therefore the appeals are allowed and referred back to the Minister for
reconsideration and reassessment on the following basis:
(a) the penalties are to be deleted in 1999, 2000 and
2001 in respect to both Appellants of Ms. Leung and in 2000 and 2001
in respect of Mr. Nguyen;
(b) the FMV of the artwork in each year 2000
and 2001 will be equal to the Appellants’ cost less the applicable retainer fee
of 15% but the FMV of the artwork in the 1999 taxation year will remain at
$5,000, as assessed by the Minister;
(c) there will be a recalculation of the taxable net
gains in accordance with my findings; and
(d) there will be no order as to costs.
Signed at Charlottetown, Prince Edward Island, this 12th day of September
2008.
Campbell J.
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