Canada v. Malette, 2004 DTC 6415, 2004 FCA 187

Date: 20040518

Docket: A-435-03

Citation: 2004 FCA 187

CORAM:        LINDEN J.A.

NOËL J.A.

SEXTON J.A.

BETWEEN:

                                                    HER MAJESTY THE QUEEN

                                                                                                                                            Appellant

                                                                           and

                                                           CHARLES MALETTE

                                                                                                                                        Respondent

                                   Heard at Vancouver, British Columbia, on May 6, 2004.

                                  Judgment delivered at Ottawa, Ontario, on May 18, 2004.

REASONS FOR JUDGMENT BY:                                                                                    NOËL J.A.

CONCURRED IN BY:                                                                                                   LINDEN J.A.

                                                                                                                                     SEXTON J.A.

Date: 20040518

Docket: A-435-03

Citation: 2004 FCA 187

CORAM:        LINDEN J.A.

NOËL J.A.

SEXTON J.A.

BETWEEN:

                                                    HER MAJESTY THE QUEEN

                                                                                                                                            Appellant

                                                                           and

                                                           CHARLES MALETTE

                                                                                                                                        Respondent

                                                    REASONS FOR JUDGMENT

NOËL J.A.

[1]         This is an appeal from a decision of the Tax Court of Canada (2003 DTC 1078) by which Beaubier J. held that in determining the fair market value of a donation to a public gallery, a discount to take into account the number of works donated (a so-called blockage, bulk, volume or market absorption discount) could not be applied.

Background and Facts

[2]         Pursuant to the Cultural Property Export and Import Act, R.S.C. 1985, c. C-51 (the Cultural Property Act), a person who donates an object to a designated institution may request a determination by the Canadian Cultural Property Export Review Board (the Board) of the fair market value of the object for purposes of fixing the amount of the charitable donation deduction which may be claimed by the donor against taxes payable pursuant to section 118.1 of the Income Tax Act, R.S.C. 1985 (5^th Supp.), c.2 (the Act).

[3]         Section 118.1 insofar as it is relevant provides:

[4]         Subsections 32(1) and 33.1(1) and (2) of the Cultural Property Export and Import Act provide in turn:

[5]         The respondent, his wife and his stepson availed themselves of these provisions by donating to the Art Gallery of Algoma, 981 individual works of art by a Canadian artist named Harold Feist and requesting that the Board determine their fair market value. The works had been purchased three months earlier from the artist at a price to be determined and which was eventually set at 25% of the value to be certified by the Board. As of the time of the hearing before the Tax Court, an amount of $50,000 had been paid towards the purchase price.

[6]         The Board initially determined the fair market value of the works to be $293,246. Upon a request for a redetermination the Board confirmed its earlier determination and issued a certificate reflecting the original valuation. The respondent's appeal to the Tax Court of Canada ensued.

[7]         The first expert to testify before Beaubier J. was Kathryn Minard, an accredited member of the International Society of Appraisers, who gave evidence on behalf of the appellant.

[8]         To determine the fair market value of the works, Ms. Minard proceeded in two steps. She first identified provisional fair market values for each work irrespective of volume, which totalled $821,427.50 in the aggregate. She then applied a volume or market absorption discount to each work (which ranged from 30% for works that were equivalent to works on canvass, to 90% for works on paper) to arrive at final fair market values totalling $141,402.34 in the aggregate (valuation report and valuation summary, Appeal Book, volume 1, tabs 10 and 10A).

[9]         Ms. Minard justified the application of this discount both by reference to the volume of works involved and the sales history of Feist's art work which revealed that on average he sold two works on paper and six paintings on canvas annually. She notes in her report that given this rate of absorption, it would have taken more than 400 years to sell all the works (valuation report, Appeal Book, volume II, tab 10, page 10).

[10]       Ms. Minard's opinion and in particular her opinion as to the market absorption discount to be applied in this case was supported by the opinion of Mr. Victor Wiener who was also recognized as an expert. No expert evidence was adduced by the respondent.

[11]       The parties formally agreed before Beaubier J. that the total fair market value of the works, in the event that no discount was to be applied, is $828,000. The respondent further conceded that if, as a matter of law, bulk discounts may be applied to donations of cultural property, then:

(i)             this was an appropriate situation to apply a bulk discount;

(ii)            the bulk discounts applied by Ms. Minard in her expert report were appropriate; and

(iii)           the appeal should be dismissed.

Decision Under Appeal

[12]       The Tax Court Judge held that a bulk discount could not be applied in determining the fair market value of the works. He therefore allowed the appeal and held that the fair market value of the works stood at the agreed amount of $828,000.

[13]       In reaching this conclusion, the Tax Court Judge relied on the fact that the legislation refers to the gift of an "object" in the singular (reasons, paragraphs 17 and 19). He also relied on the decision of Mogan J. in Whent v. The Queen, 96 DTC 1594, [1996] 3 C.T.C. 2542, which he read as holding that blockage discounts could not be applied in determining the fair market value of cultural property (reasons, paragraph 17).

[14]       Beaubier J. summed-up his reasons as follows:

[18]    It is in the light of Mogan J's analysis, its acceptance by the Federal Court of Appeal and the individual references to each "object" in the governing Canadian legislation, that the Court rejects the concept of a blockage effect with reference to a donation to a public gallery such as occurred here. Donations of art to public galleries often consist of a large number of works. Such donations are to be encouraged so that the works are presented and shown to the public. It is difficult to imagine that a donation of ten or many more paintings by a famous international artist such as Renoir would be discounted. Rather, they would be applauded generally. It is equally difficult to imagine that they would be subject to a block discount to determine their fair market value. On the contrary, the value of the gallery would be multiplied by the critics and the public.

Analysis and Decision

[15]       First, I note that the fact that a blockage discount would not apply to a donation of Renoir paintings, if that be the case, does not establish that such a discount is not appropriate in other circumstances. Indeed, the Tax Court Judge appears to have overlooked the respondent's concession that if a blockage discount can be applied as a matter of law, this was an appropriate situation in which to apply such a discount.

[16]       The need to apply such a discount is a function of supply and demand. When, for any reason, a large number of personal property items come on the market at the same time, a depressive effect on the value of the individual items can occur due to the fact that the number of items offered for sale exceeds the number of willing buyers. The difficulty usually lies in determining whether the circumstances justify the application of such a discount, and if so, in determining the extent of the discount to be applied.

[17]       In this instance however, both parties accept that as a result of the high number of works by Mr. Feist which would have come onto the relevant market at once and their historically low rate of absorption, the value of the works had to be discounted by the percentages determined by Ms. Minard to arrive at their respective fair market value. The only issue before Beaubier J. was therefore whether, as a matter of statutory construction, blockage discounts can be applied in ascertaining the fair market value of cultural property.

[18]       The respondent argues that the definition of "total cultural gifts" in subsection 118.1(1) of the Act directs that each object that is donated be valued individually. Since each item must be valued individually, there is no "bulk" to which a "bulk discount" can be applied. This, according to the respondent is the only question that is relevant to the disposition of the appeal (respondent's memorandum of fact and law, paragraphs 25 and 26).

[19]       I first note that the term "bulk discount" on which the respondent insists may be somewhat misleading in that it suggests that Ms. Minard did not determine the value of each work individually. As her report demonstrates, she did identify the fair market value of each

individual work using the two step approach described in paragraph 10 of these reasons and reflected in her report.

[20]       It is undisputed that blockage discounts are an accepted principle of proper valuation methodology. The two experts who testified, the three major accrediting bodies for the appraisal profession, the Appraisal Foundation and all the testimony regarding generally accepted valuation techniques are consistent on this one point - that blockage discount is an appropriate valuation methodology.

[21]       Bearing this in mind, I fail to see how the need to value each object individually, as the respondent contends, would preclude the application of a blockage discount. It seems clear that when the circumstances are such that a blockage discount must be applied, as is conceded in this instance, the fair market value of the individual works cannot be arrived at without this discount being applied.

[22]       Rather, the respondent's argument appears to be that in enacting section 118.1, Parliament contemplated a "fair market value" that differs from that notion as it is commonly understood by directing, in effect, that the fair market value of gifted cultural property be determined without regard to the depressive effect of volume on the relevant market.

[23]       This direction from Parliament is said to appear from the numerous references to an "object" in the singular throughout the relevant legislation (subsections 118.1(1) and (10), subsections 32(1), 32(5), 33.1(1), 33.1(2) of the Act and paragraphs 11(1)(a), (b), 29(3)(b), (c) of the Cultural Property Act are referred to) and the scheme of legislation which is said to support a more generous incentive than that which would result from the application of accepted valuation principles and methodology.

[24]       With respect to the constant use of the word "object" in the singular throughout the relevant legislation, I do not believe that anything turns on this having regard to section 33(2) of the Interpretation Act, R.S.C. 1985, c. I-21 which provides that, in construing federal statutes, "[w]ords in the singular include the plural, and words in the plural include the singular." Furthermore, as noted earlier, the respective fair market value of each gifted object in this case cannot be arrived at without the application of a blockage discount.

[25]       With respect to the scheme of the Act, I am unable to see how it authorizes a departure from accepted valuation principles and methodology. I note in this respect 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).

[26]       No doubt, donations of cultural objects are encouraged by means of a credit against taxes computed by reference to their fair market value and by the related capital gains exemption (see subparagraph 39(1)(a)(iii) of the Act). But nothing supports the contention that Parliament intended to further enhance these incentives by attributing to the gifted objects a value beyond that determined in accordance with accepted valuation principles and methodology.

[27]       Finally, the decision of Mogan J. in Wendt (supra) does not support the view that blockage discounts cannot be applied as a matter of statutory construction. It is true that in Wendt, Mogan J. refused to apply a blockage discount, but this was because he did not believe that such a discount was appropriate based on the evidence before him. In particular, he accepted expert testimony to the effect that the 216 art works in issue in that case could be sold on the relevant market over the two years during which the donations were made without there being a negative impact on individual prices (Wendt, supra, pages 1610 and 1611). Nowhere does Mogan J. suggest that blockage discounts cannot be applied as a matter of statutory construction.

[28]       I also note that the application of a blockage discount was not in issue in the ensuing appeal to this Court as the Minister did not challenge Mogan J.'s determination that a blockage discount was inappropriate in the circumstances of that case (see The Queen v. Wendt, [2000] 1 CTC 329).

[29]       I therefore come to the conclusion that a blockage discount is not precluded by the Act, and that the Tax Court Judge erred in law in holding otherwise. Having so concluded and given the respondent's concession, I would allow the appeal, set aside the decision of Beaubier J. and confirm the fair market value certified by the Board with costs in favour of the

appellant here and below.

                 "Marc Noël"                     

J.A.

"I agree.

A.M. Linden, J.A."

"I agree.

J. Edgar Sexton, J.A."

                          FEDERAL COURT OF APPEAL

    NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                                       A-435-03

APPEAL FROM A Decision of Mr. Justice Beaubier of the Tax Court of Canada, dated 13-AUG-2003.

STYLE OF CAUSE:                                       HER MAJESTY THE QUEEN and

CHARLES MALETTE.

PLACE OF HEARING:                  VANCOUVER, B.C.

DATE OF HEARING:                    06-MAY-2004

REASONS FOR JUDGMENT:                    NOËL J.A.

CONCURRED IN BY:                   LINDEN J.A.

SEXTON J.A.

DATED:                                           18-MAY-2004

APPEARANCES:

SOLICITORS OF RECORD: