Citation: 2009 TCC 590
Date: 20091113
Dockets: 2007-2495(IT)G
2008-1085(IT)G
BETWEEN:
ANDREW A. DONATO,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] The
appellant, Andrew Donato, is a cartoonist and artist who is well-known for his
editorial cartoons in the Toronto Sun. The
appeal relates to charitable donations of cartoons for which tax credits are
claimed based on the appraised fair market value of the works. The periods at
issue are the 1999 and 2001 taxation years.
[2] The
respondent does not dispute that charitable donations were made by the
appellant for the appraised amounts. The dispute does not concern the tax
credits. Rather, the respondent submits that the appellant realized taxable
capital gains when the works were gifted to charities.
[3] The amount
of taxable capital gains that are at issue are: (1) $197,156 for the 1999
taxation year, and (2) $96,331 for the 2001 taxation year.
[4] In
addition to this issue, there is a statute-bar issue in reference to the 1999
taxation year.
[5] For the
reasons below, I have concluded that the Minister is precluded by the statute-bar
provisions from assessing any capital gain for the 1999 taxation year. As for
the 2001 taxation year, I have concluded that the assessment is correct. The
basis for this conclusion is that the donated property was not personal-use
property of the appellant.
Factual
background
[6] The
appellant was one of the founders of the Toronto Sun newspaper, which began operations in 1971. Initially he was employed
as the art director, and beginning around 1975 he began to produce five editorial
cartoons a week. The cartoons were on topical subjects, and generally related
to matters that were being reported by the newspaper.
[7] In 1997, the
appellant ceased to be employed by the owner of the newspaper (“Sun Media”),
and contracted on a freelance basis to provide “services” for Sun Media consisting
of five cartoons weekly. The appellant was paid $2,000 per week for the 46
weeks in which his services were provided. This equates to $400 per cartoon.
[8] The
appellant is a skilled artist and he draws the cartoons the old-fashioned way
on paper. Most of the cartoons are done in black and white, but a coloured
cartoon is produced once a week.
[9] At all relevant
periods, the appellant retained copyright in the works, and possession. The
main right that Sun Media had was a right of first publication.
[10] Sun Media
also had a limited right to syndicate the cartoons, in which case the proceeds were
to be split with the appellant. This was an occasional occurrence that
generated a small amount of income.
[11] After
publication, the works were generally retained by the appellant and not held
for sale. The appellant had a practice of giving a cartoon, if requested, to
the person who had been the subject of a caricature. The appellant would charge
a modest amount for repeat requests, which generated a very small amount of
additional income.
[12] In
the 1980s, the appellant met a representative of the National Archives of
Canada. Through that connection, he decided to make a charitable donation of a
large portion of his cartoon collection to that institution. Other cartoonists
did the same.
[13] Since the
mid-1990s, the appellant has continued to make donations of his cartoons, but through
gifts to universities and other educational institutions. Mr. Rosen of Museum
Services made the arrangements for these donations, including arranging for
appraisals.
[14] This
appeal concerns a donation made in each of the 1999 and 2001 taxation years.
[15] The 1999
donation consisted of 405 cartoons given to Touro College in New
York City. The cartoons were individually appraised at varying
amounts averaging around $700 each. The total appraised value was $292,300, and
a tax receipt was
issued by Touro College for this amount.
[16] The 2001
donation was a gift of 305 cartoons to Brock University in St.
Catharines, Ontario. These cartoons were similarly appraised
for a total value of $193,662.50, and a corresponding tax receipt was issued by
Brock University.
The rectification order
[17] In 2005,
in response to proposed assessments, a rectification order was sought and obtained
from the Ontario Superior Court of Justice in relation to the donations. It is
useful for the purpose of this appeal to briefly describe some of the
background to this.
[18] The saga
begins in the mid-1990s, when the appellant decided to begin gifting his cartoons
to his spouse, Dianne Jackson-Donato. It was contemplated that the donations
would be made by Mrs. Jackson-Donato, and not the appellant.
[19] These
gifts were made based on the advice of the appellant’s long-time accountant, Gerald
Prenick. Also on the advice of the accountant, it was decided that the cartoons
would be kept at the Donato residence as opposed to the offices of the Toronto Sun where they had previously been
kept.
[20] Testimony
was provided as to non-tax reasons for these arrangements. Notwithstanding that
there may have been some non-tax benefit to having the cartoons kept at home, it
seems clear from the evidence as a whole that the main reason that gifts were
made to Mrs. Jackson-Donato was to ensure that the dispositions to charities
would qualify for the favourable tax rules applicable to personal-use property.
Mr. Prenick did not acknowledge this in his testimony, however. I found the
testimony of all the witnesses to be unconvincing on this point, but nothing
turns on it in this appeal.
[21] For the taxation
years at issue, the appellant executed deeds of gift in reference to the
donated works, and Mrs. Jackson-Donato executed deeds of gift to educational
institutions, for which she received tax receipts.
[22] Mr.
Prenick’s accounting firm prepared the relevant income tax returns for the
Donatos, which reflected the above transactions. As I understand it, tax
credits were claimed first by Mrs. Jackson-Donato to the extent that she could
use them, the balance were then claimed by the appellant to the extent that he
could use them, and the remaining balance was carried over to other years.
[23] The
sharing of the tax credits in this manner was based on what Mr. Prenick
understood to be the policy of the Canada Revenue Agency (CRA).
[24] On
October 6, 2003, following an audit of the appellant, the CRA proposed to issue
assessments for the 1999 and 2001 taxation years. Two adjustments were proposed
(Ex. A-1, Tab 12).
[25] The first
was an income inclusion to the appellant on the basis that the cartoons were
inventory. It was submitted by the CRA that business income was realized when
the cartoons were gifted to Mrs. Jackson-Donato.
[26] The
second proposed adjustment was a disallowance of the charitable donation tax
credits to the appellant. The reason given for the disallowance was that the
CRA policy regarding sharing tax credits between spouses did not apply in these
circumstances.
[27] The first
proposed adjustment was later modified slightly so that the income would be
assessed as capital gains and not business income. The amounts of tax and
interest would have remained very significant, however.
[28] In
response to what the appellant must have perceived as being a terrible outcome
to the audit, and based on legal advice, the Donatos decided to seek a
rectification order which would declare that the gifts from the appellant to
Mrs. Jackson-Donato were a nullity, so that the charitable donations were
actually made by the appellant. This would enable the appellant to use the tax
credits.
[29] The CRA did
not oppose the application and an order was issued by the Ontario Superior
Court of Justice on July 5, 2006.
[30] The order
provides in part:
1. THIS COURT DECLARES THAT, a mistake was
made when Donato gifted works of art to his wife, Mrs. Donato, […], which works
of art were subsequently donated by Mrs. Donato to Touro College and Brock
University (the “Recipients”), in return for receipts confirming these
donations […] (the “Receipts”);
2. THIS COURT ORDERS THAT, the works of art
contained within the Deeds of Gifts, that were donated by Mrs. Donato to the
Recipients as reflected by the Receipts, be deemed as though they were donated
directly by Donato to the Recipients, and that the Receipts be treated as such;
[…].
Subsequent
reassessments
[31] Subsequent
to the issuance of the rectification order, reassessments were issued to the
appellant for the 1999 and 2001 taxation years. It is these assessments that
are the subject of this appeal.
[32] In
general, the reassessments allowed the charitable donation tax credits to the
appellant in accordance with the rectification order, but they also included
taxable capital gains in respect of the donations.
Analysis
re the 2001 taxation year
[33] In the
2001 taxation year, 305 cartoons were donated to Brock University at an appraised value of $193,662.50.
[34] The only
question to be determined is the amount of the capital gain, if any, that was
realized by the appellant as a result of his donation to Brock University.
[35] It is not
in dispute that the donated property was capital property to the appellant, and
that the donation resulted in a deemed disposition at fair market value.
[36] A central
issue is whether the donated property was personal-use property of the
appellant.
[37] In
general, a disposition of personal-use property, as defined in the Act,
will not give rise to a capital gain as long as the property, or properties if
in a set, are disposed of for proceeds no greater than $1,000.
[38] The
relevant provisions of the Act are subsections 46(1) and (3) and the
definition of “personal-use property” in section 54. The relevant parts are
reproduced below.
"personal-use
property" of a taxpayer includes
(a) property
owned by the taxpayer that is used primarily for the personal use or enjoyment
of the taxpayer or for the personal use or enjoyment of one or more individuals
each of whom is
(i) the
taxpayer,
(ii) a person related to the taxpayer, or
(iii) where
the taxpayer is a trust, a beneficiary under the trust or any person related to
the beneficiary, […]
46.(1)
Where a taxpayer has disposed of a personal-use property […] of the taxpayer,
for the purposes of this subdivision
(a) the
adjusted cost base to the taxpayer of the property immediately before the
disposition shall be deemed to be the greater of $1,000 and the amount
otherwise determined to be its adjusted cost base to the taxpayer at that
time;
and
(b) the
taxpayer's proceeds of disposition of the property shall be deemed to be the
greater of $1,000 and the taxpayer's proceeds of disposition of the property
otherwise determined.
46.(3)
For the purposes of this subdivision, where a number of personal-use properties
of a taxpayer that would, if the properties were disposed of, ordinarily be
disposed of in one disposition as a set,
(a) have been
disposed of by more than one disposition so that all of the properties have
been acquired by one person or by a group of persons not dealing with each
other at arm's length, and
(b) had,
immediately before the first disposition referred to in paragraph 46(3)(a), a
total fair market value greater than $1,000,
the properties
shall be deemed to be a single personal-use property and each such disposition
shall be deemed to be a disposition of a part of that property.
[39] For
clarity, I would mention that effective for property acquired after February
27, 2000 the personal-use property rules are inapplicable to property that has
been acquired as part of a “donation arrangement” (subsection 46(5)). This
provision has no application here.
[40] The
appellant submits that the donated property was personal-use property, that
each property had a fair market value less than $1,000, and that the donated
property was not a set. As such, it is submitted that no capital gain was
realized when the property was donated by the appellant to Brock University.
[41] In
determining whether the cartoons are personal-use property, the relevant
inquiry is whether the cartoons were used primarily for the personal use or enjoyment
of the appellant or his spouse.
[42] The
conclusion that I have reached is that the property donated to Brock University in 2001 was not personal-use
property of the appellant.
[43] The creation
of the cartoons by the appellant was for the purpose of fulfilling his contractual
commitment to Sun Media to provide a daily cartoon for use in its newspaper. This
purpose is commercial rather than personal.
[44] Over the
years, a few of the cartoons were subsequently used for personal purposes. These
uses included: gifts to relatives or friends, the display of a few cartoons in
the home, a single use by the Donatos in a trivia type game with friends in
their home, and trading cartoons with other cartoonists for their work. There
was very little, if any, evidence linking these uses to cartoons that were
donated in 2001, and in any event the personal use was quite minor.
[45] It is
perhaps worth mentioning that at the present time the Donatos have a hanging system
in the home whereby cartoons that are displayed can be changed relatively
easily and inexpensively. This system was not in use until after the period at
issue. At the time, cartoons that were displayed in the home were generally
framed.
[46] The main
argument of the appellant was that the commercial exploitation of the cartoons
involved an intellectual property right, a copyright. It was not this property
that was donated to Brock
University. It was the tangible works of art
that were donated, and the two types of properties are separable, it is submitted.
[47] I agree
with several aspects of this submission. In particular, I accept that the copyright
is a separable right from the tangible art work. I also accept that the
appellant retained the copyright when the works were donated to Brock University. Further, I accept that
the Toronto Sun was given only a right to
publish.
[48] The
problem that I have with the appellant’s submission is that it misses the essential
issue, which is to determine the use of the donated property.
[49] The term
“used” in the definition of personal-use property has a broad meaning.
According to the Concise Oxford English Dictionary, eleventh edition, one of
the primary meanings is: “take, hold, or deploy as a means of achieving
something.”
[50] Based on
the evidence, the tangible works of art were used in connection with the Sun
Media contract, and this was the primary use of this property. Whether the
appellant also used intellectual property rights is not the appropriate question.
[51] It is
clear that the drawings created by the appellant were prepared for, and were
actually used in, fulfilling the appellant’s contract. Whether the reproduction
of the cartoons was done by the appellant or someone else does not matter. The
drawings were created for this purpose, and they were actually used in the
process of fulfilling that contract.
[52] In light
of this conclusion, it is not necessary that I consider the respondent’s
alternative argument that the minimum $1,000 adjusted cost base applicable to
personal-use property should be allocated among the cartoons on the basis that
they are a set.
[53] It is
also not necessary that I consider a further alternative argument by the
respondent that the collection of cartoons that were donated in 2001 is a
single property, with an adjusted cost base of $1,000.
[54] Although
I do not propose to consider the merits of this submission, I would briefly
comment concerning an objection in relation to it. Counsel for the appellant
strenuously objected to this argument being made on the ground that it had not
been raised in the pleadings.
[55] The basis
for the respondent’s argument is the following comment in The Queen v. Nash,
2005 FCA 386, 2005 DTC 5696, at paragraph 36:
[36] The issue of the application of the
personal use property provisions of section 46 of the Income Tax Act do
not arise. The property acquired and disposed of was, in each case, a group
of prints. The cost of acquisition and the fair market value in the case of
Ms. Quinn were the same. Ms. Tolley's cost of acquisition was $8,025 and the
fair market value was $8,625. The cost of Mr. Nash's acquisition was $8,667 and
the fair market value was $9,315. As the cost of acquisition and the fair
market value all exceed $1,000 for Ms. Tolley and Ms. Quinn, the personal use
property provisions do not affect the capital gain realized by them.
(Emphasis added.)
[56] I would
agree with counsel for the appellant regarding this objection. Counsel for the
respondent submits that the issue had been fairly raised in the reply, but I do
not agree.
Analysis
re the 1999 taxation year
[57] The
analysis above would apply equally to the donation made in the 1999 taxation
year, provided that the assessment is not statute-barred.
[58] The relevant
assessment was made on July 30, 2007, which is beyond the normal reassessment
period.
[59] The
respondent submits that the taxable capital gain for the 1999 taxation year can
be reassessed after the normal reassessment period because the failure of the
appellant to report this gain on the income tax return constituted a
misrepresentation due to neglect, carelessness or wilful default (Reply, para.
12). The relevant provision is s. 152(4)(a)(i) of the Act.
[60] The main
thrust of the argument is that the attribution rules require the appellant to
recognize the taxable capital gain that was realized when Mrs. Jackson-Donato executed
deeds of gift to Touro College.
[61] The respondent
has the onus with respect to this issue and for this purpose Mr. Prenick was
issued a subpoena to attend the hearing. Although his testimony was
unsatisfactory in many ways, I accept his statement that a capital gain was not
reported because the donated property was thought to be personal-use property.
[62] This was
not an unreasonable view to take in preparing the 1999 income tax return. At that
time, Mr. Prenick would reasonably have thought that the cartoons were owned by
Mrs. Jackson-Donato. She had not used the donated property for a commercial
purpose, as the appellant had done.
[63] Even if
Mrs. Jackson-Donato acquired the cartoons only for the purpose of donating them
to Touro University, it would be a reasonable position
to take that such property was personal-use property to her. Subsequent to the
relevant time, this conclusion was accepted by former Chief Justice Bowman in Klotz
v. The Queen, 2004 TCC 147, 2004 DTC 2236 (aff’d 2005 FCA 158, 2005 DTC
5279), at para. 61-67.
[64] That the
ownership of the donated property was in error, as evidenced by the
rectification order, was not foreseeable at the time. When the 1999 income tax
returns were prepared, neither the appellant nor Mr. Prenick would have thought
that the appellant owned the donated property at the time of the donation.
[65] The
respondent submits that the filing position was not supportable because the donated
property was only one property that had a fair market value greatly in excess
of $1,000. This property, it was submitted, was a group of cartoons.
[66] The
genesis of the respondent’s position is a comment by Rothstein J.A. in The
Queen v. Nash, 2005 FCA 386, 2005 DTC 5696, reproduced above. This case was
decided long after the 1999 tax return was filed. It certainly was not unreasonable
to take a different view at the relevant time.
[67] In my
view, there was no neglect, carelessness, or wilful default on the part of the
appellant in failing to report the taxable capital gain in his 1999 income tax
return. The Minister is precluded from assessing tax with respect to this item
after the normal reassessment period.
Disposition
[68] In light
of these findings,
(a) the appeal
with respect to the 2001 taxation year will be dismissed, and
(b) the appeal
with respect to the 1999 taxation year will be allowed, and the assessment made
on July 30, 2007 will be vacated.
[69] The
appellant has requested an opportunity to make written submissions on costs. In
light of this request, I would direct that each party file written submissions with
the Registry on or before December 4, 2009.
[70] Finally,
I wish to comment that I appreciated a chart that was included with the
appellant’s written submissions. The chart succinctly set out in chronological
order the main transactions and events that were relevant in this appeal. The
chart was of great assistance and much appreciated.
Signed at Toronto, Ontario this 13th day of November 2009.
“J. M. Woods”
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