Citation: 2010TCC142
Date: 20100318
Docket: 2008-2997(IT)I
BETWEEN:
ROBERT D. G. LOCKIE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Webb, J.
[1]
This appeal arises as a
result of a disagreement with respect to the fair market value of gel pens,
toothbrushes and school packs acquired by the Appellant for $2,850 and then “donated”
by the Appellant to In Kind Canada (a registered charity) who issued a receipt
to the Appellant for $15,078 for these items. In the Reply to the Amended
Notice of Appeal (which is dated January 15, 2010 and which was filed after the
Appellant filed an Amended Notice of Appeal) the Respondent raised the new
issue of whether the Appellant had a donative intent and hence whether the
Appellant had made a gift to In Kind Canada when the items were given to this
charity. This issue was not raised in the original Reply that was filed on November
27, 2008 and hence was first raised after the expiration of the normal
reassessment period.
[2]
In addition to the
products purchased by the Appellant and given to In Kind Canada, there was a
separate group of products purchased by the Appellant for $3,800, transferred
to his spouse, and then given by his spouse to In Kind Canada who issued a
receipt to the Appellant’s spouse for $20,043 for these items. The Appellant
elected that he would be deemed to have received proceeds of disposition equal
to the fair market value of the products in relation to this transfer of
products to his spouse. Since it is the position of the Appellant
that the fair market value of these products was $20,043 and that his adjusted
cost base was $3,800, he reported a capital gain of $16,243. The Appellant chose
to structure this transaction in this way (with the Appellant reporting the
capital gain) because his spouse was in a higher tax bracket.
[3]
There are three main
issues in this appeal:
a.
did the Appellant have
a donative intent when he gave the products to In Kind Canada (and hence
did he make a gift to this charity);
b.
if the Appellant did
make a gift to In Kind Canada, what was the fair market value of the products
given to In Kind Canada by the Appellant; and
c.
what was the fair
market value of the products transferred by the Appellant to his spouse?
[4]
Before the issue of
whether the Appellant had a donative intent is addressed, there are two
preliminary issues. The first is whether the Respondent can raise this new
argument in the Reply to the Amended Notice of Appeal. The second preliminary issue
is, if the Respondent can raise this new argument, whether the Appellant or the
Respondent will have the onus of proof in relation to the facts related to this
argument.
[5]
The right of the
Respondent to raise a new argument in support of an assessment is governed by
the provisions of subsection 152(9) of the Income Tax Act (the “Act”).
This subsection provides that:
(9) The Minister may advance an alternative argument in support of
an assessment at any time after the normal reassessment period unless, on an
appeal under this Act
(a) there is relevant evidence that the taxpayer is no longer able
to adduce without the leave of the court; and
(b) it is not appropriate in the circumstances for the court to
order that the evidence be adduced.
[6]
In reassessing the
Appellant, the Canada Revenue Agency assumed that the fair market value of the
products was $579 and allowed the Appellant to claim a credit for a charitable
donation based on a donation of $579. Therefore the position of the Respondent
(and the basis of the reassessment) was that the Appellant did have a donative
intent and did make a gift, albeit a substantially smaller gift that the Appellant
had claimed, but still a gift. If the Appellant did not have a donative intent
then he did not make any gift to the charity and hence would not be entitled to
any credit for a charitable donation in relation to this transfer of property
(and hence would not be entitled to the $579 amount that was allowed as the
amount of the gift).
[7]
The Federal Court of
Appeal in The Queen v. Anchor Pointe Energy Ltd., 2003 FCA
294, [2004] 5 C.T.C. 98, 2003 DTC 5512 and in The Queen v. Loewen,
2004 FCA 146, dealt with the issue of whether the Crown could raise a new
argument or a new basis for assessment after the expiration of the normal
reassessment period. In each case the new argument or basis, if it would have
been the basis for the reassessment, would have resulted in a greater tax
liability than was reassessed.
[8]
In Anchor Pointe,
the taxpayer claimed an amount as Canadian exploration expenses in relation to
the acquisition of certain seismic data. The taxpayer was reassessed to reduce
the amount claimed as Canadian exploration expenses on the basis that the fair
market value of the seismic data was less than the amount claimed by the
taxpayer. The new argument that the Crown wanted to raise was that seismic data
purchased for resale did qualify as Canadian exploration expenses (and
therefore presumably that no amount should have been allowed as a deduction for
Canadian exploration expenses).
[9]
In Loewen, the
taxpayer had claimed capital cost allowance in relation to the acquisition of
certain software. The taxpayer was reassessed to reduce the amount allowed, in
part, on the basis that the fair market value of the software was less than the
amount determined by the taxpayer. One new argument that the Crown wanted to
raise was that there was “no income earning purpose” (and hence no amount would
have been allowed as a deduction for capital cost allowance if this would have
been the basis for the reassessment).
[10]
In each case the new
arguments were inconsistent with the basis for the reassessment and if the new
arguments would have been the basis for the reassessment, the tax liability of
the taxpayer would have been greater. In each case the Crown was not asking to
increase the tax liability of the taxpayer by raising the new argument but only
using the new argument to support the tax liability as assessed. In each case the Federal Court of Appeal held that the
Crown could, pursuant to the provisions of subsection 152(9) of the Act,
raise the new argument.
[11]
In this case, although
the argument that the Appellant did not have a donative intent is inconsistent
with the basis on which the Appellant was reassessed, and if this would have
been the basis for the reassessment it would have resulted in the Appellant not
being able to claim any amount as a gift to a charity, the Crown is allowed to
raise this new argument provided that it is not being used to increase the tax
liability of the Appellant from the amount as reassessed. Counsel for the
Respondent acknowledged that this argument was not being used to increase the
Appellant’s tax liability from the amount as reassessed. Therefore if I should
find that the Appellant did not have a donative intent and did not make a gift
to In Kind Canada, then the amount that the Appellant would be allowed to claim
as a gift to a charity in relation to the transfer of the assets to In Kind
Canada would be the $579 amount that was allowed on the reassessment of the
Appellant.
[12]
The next issue that
arises in relation to this argument is whether the Appellant or the Respondent
has the onus of proof with respect to the facts related to this argument. In Anchor
Pointe Energy Ltd., supra, Justice Rothstein (as he then was) also stated
that:
23 The
pleading of assumptions gives the Crown the powerful tool of shifting the onus
to the taxpayer to demolish the Minister's assumptions. The facts pleaded as
assumptions must be precise and accurate so that the taxpayer knows exactly the
case it has to meet.
[13]
In Loewen, supra,
Justice Sharlow also made the following comments:
9 It
is the obligation of the Crown to ensure that the assumptions paragraph is
clear and accurate. For example, the Crown cannot say that the Minister
assumed, when making the assessment, that a certain car was green and also that
the same car was red, because it is impossible for the Minister to have made
both of those assumptions at the same time: Brewster, N C v. The Queen,
[1976] CTC 107 (F.C.T.D.).
10 Nor
is it open to the Crown to plead that the Minister made a certain assumption
when making the assessment, if in fact that assumption was not made until
later, for example, when the Minister confirmed the assessment following a
notice of objection. The Crown may, however, plead that the Minister assumed,
when confirming an assessment, something that was not assumed when the assessment
was first made: Anchor Pointe Energy Ltd. v. Canada, 2003 DTC 5512
(F.C.A.).
11 The
constraints on the Minister that apply to the pleading of assumptions do not
preclude the Crown from asserting, elsewhere in the reply, factual allegations
and legal arguments that are not consistent with the basis of the assessment.
If the Crown alleges a fact that is not among the facts assumed by the
Minister, the onus of proof lies with the Crown. This is well explained in Schultz
v. Canada, [1996] 1 F.C. 423 (C.A.) leave to appeal to S.C.C. refused,
[1996] S.C.C.A. No. 4.
[14]
Paragraph 11 of the
Reply to the Amended Notice of Appeal states, in part, that:
11. In determining the appellant’s tax
liability for the 2003 taxation year, the Minister made the following assumptions
of fact:
…
c) on October 28, 2003, the
Appellant donated the products to In Kind Canada (“IKC”);
[15]
Paragraph 15 of this
Reply states that:
15. The appellant was not driven by a donative
intent when he dealt with CEI and IKC.
[16]
The fact that the Appellant
was not driven by a donative intent (which presumably is only relevant if the
result of such a finding of fact would be that the Appellant did not make a
gift to In Kind Canada) as alleged in paragraph 15 of the Reply is inconsistent
with the assumption made that “the Appellant donated the products to In Kind
Canada”. It is also clear that the fact alleged in paragraph 15 was not one of
the facts that the Minister had assumed in assessing the Appellant. As a result
the Minister bears the onus of proving this fact.
[17]
The Respondent, in
relation to the argument that the Appellant did not have a donative intent,
relied mainly on the promotional materials distributed by Charitable
Enterprises Inc. (“CEI”). CEI was the promoter of the plan. CEI (or a related
company) had approached In Kind Canada, a registered charity, to determine what
products charities needed. In Kind Canada is a
registered charity that accepts donations of products and distributes these
products to other charities. CEI also had access to manufacturers in China who could produce certain products cheaply. CEI was
trying to match a need for certain products with its source of low cost
products in China. In this case, the match was found for
toothbrushes, gel pens, and school packs.
[18]
In the pamphlet
produced by CEI there is an entire page devoted to the “Financial Aspects of a
Gift in Kind Donation”. The “Financial Aspects” are described in a table that
has the following information:
Summary of Tax
Savings (Ontario Resident)
|
Purchase price of goods for donation
|
5,000
|
10,000
|
|
Donation receipt based on the Fair Market
Value (FMV)
|
25,000
|
50,000
|
|
Tax credits on donation amount (46%)*
|
11,500
|
23,000
|
|
Less tax on capital gain (FMV – cost x
50% x 46%)*
|
4,600
|
9,200
|
|
Net tax credit received by Donor
|
6,900
|
13,800
|
|
Less purchase price of donated goods
|
5,000
|
10,000
|
|
Net return to Donor in excess of the
donation amount
|
1,900
|
3,800
|
|
Return on purchase of goods for donation
|
38%
|
38%
|
|
If you have capital losses, these may be
applied against the capital gain
|
|
Net return to donor where capital losses
applied **
(tax credit less purchase price)
|
6,500
|
13,000
|
|
Return on investment (donation) where
losses applied
|
130%
|
130%
|
Notes
* Assumes top marginal tax rate
** Where the donor has capital losses equal to the capital gain,
the net return to the donor will increase
Tax credits on the donation amount assumes taxable income
[19]
The position of the
Respondent is that the Appellant was motivated by the attractive return on
investment (38% to 130% depending on the capital losses available) and not by a
donative intent. It is the position of the Respondent that the Appellant wanted
to make money from his acquisition and subsequent giving of the products and
not to make a gift.
[20]
The Appellant stated that
he was not motivated by the indicated return on his “investment” but rather by
his own desire to benefit charities since he had recently been informed that
his sister has multiple sclerosis. The Appellant indicated that he was
concerned about charities that spent a significant amount on overhead. However,
he did not conduct any investigation to determine how much In Kind Canada spent
on overhead and this did not prevent him from completing these transactions.
[21]
Justice Iacobucci of
the Supreme Court of Canada in Symes v. The Queen, [1994]
1 C.T.C. 40, 94 D.T.C. 6001, [1993] 4 S.C.R. 695, stated as follows:
74 As in other areas of law where purpose or intention behind
actions is to be ascertained, it must not be supposed that in responding to
this question, courts will be guided only by a taxpayer's statements, ex post
facto or otherwise, as to the subjective purpose of a particular expenditure.
Courts will, instead, look for objective manifestations of purpose, and purpose
is ultimately a question of fact to be decided with due regard for all of the
circumstances.
[22]
In the years prior to
the year in question the following amounts were the amounts that the Appellant
had claimed as charitable donations (and these amounts are set out in the Reply
to the Amended Notice of Appeal):
|
Taxation Year
|
Donation Claimed
|
|
1998
|
$0
|
|
1999
|
$0
|
|
2000
|
$0
|
|
2001
|
$0
|
|
2002
|
$664
|
[23]
The Appellant did not
dispute that these were the amounts that had been claimed in his tax returns
for these years as charitable donations but stated that since his wife was the
higher income earner, she claimed most of the charitable donations in her
return. The Appellant did not provide any details of the amounts that would
have been claimed by his spouse. His explanation that his spouse was the higher
income earner throughout these years (he indicated that she was making
substantially more than he was) and therefore that she would have claimed the
charitable donations, could explain why he did not make any claim for 1998 to
2001 for charitable donations but does not explain why he claimed $664 for
charitable donations in 2002.
[24]
The amount of cash that
the Appellant paid to participate in the program ($2,850) was over four times
the total amount that the Appellant claimed as a charitable donation in 2002.
The Appellant is a tax preparer who, in 2003, was the manager at Deveau
Accounting. One of his roles at Deveau Accounting was to review this particular
charitable donation program. It seems to me that an accounting firm would be
attracted to the proposed return on investment.
[25]
For the Appellant to
suggest that he was not motivated by the apparent very attractive return on
investment as proposed by CEI and that his participation in this program was
motivated by the fact that his sister had multiple sclerosis stretches the
Appellant's credibility to the point where I do not accept his testimony in
this regard. I do not accept that he was not motivated by the very attractive
return on investment as outlined by CEI in their brochure. I find that he was
motivated by the proposed return on his investment.
[26]
The next question is
whether this profit motive is sufficient to find that the Appellant did not
make a gift to In Kind Canada in 2003. In The Queen v. Friedberg,
[1992] 1 C.T.C. 1, 135 N.R. 61, 92 D.T.C. 6031, Justice Linden of the Federal
Court of Appeal stated that:
4 The Income Tax Act does not define the word “gift”, so
that the general principles of law with regard to gifts are utilized by the
courts in these cases. As Mr. Justice Stone explained in The Queen
v. McBurney, [1985] 2 C.T.C. 214, 85 D.T.C. 5433, at page 218 (D.T.C.
5435): “The word gift is not defined in the statute. I can find nothing in the
context to suggest that it is used in a technical rather than its ordinary
sense.” Thus, a gift is a voluntary transfer of property owned by a donor to a
donee, in return for which no benefit or consideration flows to the donor (see
Heald, J. in The Queen v. Zandstra, [1974] C.T.C. 503, 74 D.T.C.
6416, at page 509 (D.T.C. 6420)). The tax advantage which is received from
gifts is not normally considered a “benefit” within this definition, for to do
so would render the charitable donations deductions unavailable to many donors.
[27]
In Klotz v. The
Queen, 2004 TCC 147, 2004 D.T.C. 2236, [2004] 2 C.T.C. 2892, Associate Chief Justice Bowman (as he
then was) stated that:
22 One thing is clear, albeit probably irrelevant to what has
to be decided here, and it is that Mr. Klotz's motivation in participating in
this program was purely the anticipated tax benefit. The broadening of the
cultural or intellectual horizons of the students at FSU was not a factor. He
never asked what FSU was going to do with the prints. In 1999, FSU received
1,450 prints from various donors and presumably issued receipts for at least
$1,450,000.
25 It is unnecessary for me to deal at any greater length
with the donor. Mr. Klotz made a mass donation of limited edition prints
to FSU. He did not see them or have them in his possession. He was indifferent
as to what they were or who they went to or what the donor did with them. His
sole concern was that he receive a charitable receipt. None of this is relevant
to the issue. A charitable frame of mind is not a prerequisite to getting a
charitable gift tax credit. People make charitable gifts for many reasons: tax,
business, vanity, religion, social pressure. No motive vitiates the tax
consequences of a charitable gift.
[28]
The Respondent referred
to the decision of Justice Little of this Court in McPherson v. The
Queen, 2006 TCC 628, [2007] 2 C.T.C. 2277, 2007 D.T.C. 326 as support
for the position of the Respondent that the Appellant did not make a valid
gift. However, it is clear from the decision of Justice Little that the
taxpayer in that case did not make a gift because he expected to receive a
“kickback”. Justice Little stated as follows:
22 It is trite law (and common sense) that the anticipation
and receipt of a cash kickback equal to 75% of the donation vitiates the gift.
(See Friedberg v. R., supra.)
23 Based on the detailed evidence outlined above I have
concluded that the amounts transferred by the Appellant to A.B.L.E. in 1996 did
not constitute a gift because the Appellant expected to receive a kickback
equal to 75% of the amount that he contributed.
[29]
In Webb v. The
Queen, 2004 TCC 619, [2005] 3 C.T.C. 2068, Justice Bowie held that the
taxpayer did not make a gift to a charity that appears to be the same charity
as in the McPherson case. Justice Bowie stated that:
15 Nevertheless the evidence satisfies me that Mr. Webb made
the payment of $30,000, as I have already said, at least in anticipation of the
future return of a large portion of his gift back to him, either from ABLE or
through an indirect channel, in addition to the receipt itself.
16 Much has been written on the subject of charitable
donations over the years. The law, however, is in my view quite clear. I am
bound by the decision of the Federal Court of Appeal in Friedberg v. R.*,
among others. These cases make it clear that in order for an amount to be a
gift to charity, the amount must be paid without benefit or consideration
flowing back to the donor, either directly or indirectly, or anticipation of
that. The intent of the donor must, in other words, be entirely donative.
17 The circumstances that I have referred to lead me to
conclude that there was nothing donative at all about Mr. Webb's payment to
ABLE. His intention was to receive a tax credit for a charitable donation, as
well as a substantial refund of the amount he had given, such that when the two
were aggregated they would exceed the $30,000 for which he wrote the cheque.
(The * refers to a footnote that was in the text as written by
Justice Bowie.)
[30]
In Norton v. The
Queen, 2008 TCC 91, 2008 D.T.C.2701, [2008] 5 C.T.C. 2499, Justice
Archambault also found that there was no gift. This case also dealt with the
same charity who provided a refund of a portion of the amount contributed as in
McPherson and Webb.
[31]
In this case the
Appellant did not receive any consideration from In Kind Canada or from any
other person involved with the program. The Appellant only obtained a receipt
from In Kind Canada which was based on what CEI and In Kind Canada had
determined as the fair market value of the products. He did not receive any
consideration or any benefit other than the benefit of a credit under the Act
in relation to the amount of the donation to In Kind Canada.
[32]
Although the Appellant
was motivated by his potential return on investment, since the only benefit
that flowed to the Appellant is the amount of the credit that he will receive
under the Act (which credit, as claimed by the Appellant, was based on
the fair market value of the property that he transferred to In Kind Canada as
determined by CEI and In Kind Canada but which will be determined by the actual
fair market value of these products), this benefit alone, in these
circumstances, cannot vitiate the gift. Therefore I find that the Appellant did
make a gift to In Kind Canada when he donated the products to this charity in
2003.
[33]
The next question that
must be determined is the amount of this gift (which will be the fair market
value of the property that the Appellant donated to In Kind Canada). While the
Appellant was reassessed on the basis that the fair market value of this
property was $579, during closing arguments counsel for the Respondent changed
the position of the Respondent and submitted that the fair market value of this
property should be equal to the amount paid by the Appellant to acquire it
($2,850).
[34]
It is the position of
the Appellant that the fair market value of the gift was $15,079 calculated as
follows:
|
Product
|
Retail Price
per unit as determined for the purposes of issuing the receipt
|
Discount
applied
|
FMV per unit
as used in Issuing the Receipt
|
|
Toothbrushes
|
$4.54
|
30%
|
$3.178
|
|
Gel Pens
|
$2.79
|
35%
|
$1.8135
|
|
School Packs
|
$92.95
|
0%
|
$92.95
|
Fair Market Value as determined for the products
donated by the Appellant:
|
Product
|
Quantity
Donated
|
FMV per unit
as used in Issuing the Receipt
|
FMV as used
in Issuing the Receipt
|
|
Toothbrushes
|
1,728
|
$3.178
|
$5,491.58
|
|
Gel Pens
|
5,184
|
$1.8135
|
$9,401.18
|
|
School Packs
|
2
|
$92.95
|
$185.90
|
|
|
|
|
$15,078.66
|
[35]
The position of the
Appellant is that the fair market value of the items that were donated to In
Kind Canada should be based on the retail selling price of these items minus a
discount to reflect the fact that the Appellant was donating a significant
number of the items. In The Queen v. Nash, 2005 FCA 386, 2005
D.T.C. 5696, [2006] 1 C.T.C. 158, Justice Rothstein (as he then was) of the
Federal Court of Appeal stated that:
8 The well-accepted definition of fair market value is
found in the decision of Cattanach J. in Henderson v. Minister of
National Revenue (1973), 73 D.T.C. 5471 (Fed. T.D.), at 5476:
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.
Although Cattanach J. expressed the caution that his words did not
constitute an “exact” definition, the extent to which his words have been
adopted in the jurisprudence without change over some thirty years suggests
that his approach, although not necessarily exhaustive, is now considered to be
the working definition.
[36]
The Appellant filed an
expert’s report related to the methodology applied in determining the fair
market value of the products donated by the Appellant to In Kind Canada. In the
report the heading preceding paragraphs 16 and 17 is CEI’S PROCESS TO DETERMINE
THE PACKAGE FAIR MARKET VALUE. Paragraphs 16 and 17 then discuss the procedures
undertaken by the CEI representatives in relation to the determination of the
fair market value. This suggests that the fair market value was determined by
CEI and not by In Kind Canada.
[37]
CEI entered into an
agreement with In Kind Canada on July 15, 2003 in relation to these proposed
transactions. Article 5.3 of this agreement provides in part that:
IKC will be the sole and exclusive determinant of the price for
which charitable receipts will be issued.
[38]
It seems to me that
since In Kind Canada was the registered charity that issued the receipt that
indicated that the fair market value of the products donated by the Appellant was
$15,079, it would be the responsibility of the charity to determine the fair
market value. Debbie Bianco, who worked for In Kind Canada in 2003, was
responsible for determining the fair market value of the products. She
testified that she did some research. She reviewed some flyers and
advertisements for toothbrushes and gel pens. She also reviewed the work
completed by the representatives of CEI. Keith Ly, who worked for CEI also
testified and he described the work that he did in purchasing various toothbrushes
and gel pens that he thought were comparable products from various retailers. Although
In Kind Canada did some research to confirm the amounts as proposed by CEI, In
Kind Canada accepted the amounts as proposed by CEI. As noted above, the fair
market value of the toothbrushes was determined by CEI to be approximately
$3.18 each and the fair market value of the gel pens was determined by CEI to
be approximately $1.81 each.
[39]
It seems to me that the
critical question that must be addressed in determining the fair market value
of the products that were donated to In Kind Canada is whether the retail
market is the appropriate market to be used for this purpose. This issue is
addressed in the expert's report in the section titled COMMENTS ON THE APPROPRIATE
MARKET. Paragraphs 26 to 31 of this report are as follows:
26. The indication of the relevant market is an
important issue as well in applying the definition of fair market value. For
the purposes of this report and for reasons outlined in the following
paragraphs, we have assumed that the appropriate market is either one of the
following:
a) the market in which the Donors would purchase
the goods included [sic] the Package outside of the Donation Program;
or,
b) the market in which IKC would purchase the
goods included in the Package.
27. Further, we have assumed that the market in
which CEI purchased the goods on behalf of the Donors, the wholesale market, is
not relevant as discussed below.
28. The Donors are individuals who are not in the
business of manufacturing, wholesaling, or retailing of the products contained
in the Package. Accordingly, they do not have the ability to acquire similar
products at prices that would be paid by wholesalers or retailers. Comparable
products are readily available and are not unique in nature. In order to donate
similar products to IKC (or a similar charity) in the absence of the Donation Program,
they would likely purchase them from retail stores such as Business Depot, Grand
& Toy, Shoppers Drug Mart, possibly dollar stores (assuming they sold items
of similar quality which may not be the case), etc. To our knowledge, the Donors
have no contacts overseas that would permit them to acquire the goods directly
from the manufacturer as was done by CEI for the purposes of the Donation Program.
29. In our view, it would not be realistic to
expect that the Donors would be able to negotiate to pay the price charged by a
manufacturer or wholesaler of such goods given the one-time nature of the
purchase and the number of products purchased. Further, given the nature of the
items in the Package (i.e., consumables that are readily available in numerous
locations), selling of the quantity of gel pens and toothbrushes in the Package
would not result in a “flooding of the market” for such products. In other
words, we do not believe that selling of the items would result in significant
downward pressure in the prices beyond a reasonable level of volume discounts.
Specifically, given the relatively large quantities of the toothbrushes and gel
pens contained in the Package, we expect that the Donors would negotiate a
volume discount with the retail stores.
30. We have not reviewed IKC’s or any charity’s
purchasing program or the potential volume discounts that they could achieve. Accordingly,
we cannot comment on whether IKC or other charities which ultimately utilized
the goods in the Package would acquire the toothbrushes, gel pens and school kits
in a market other than the retail market. However, we have been advised by CEI that
the charities that ultimately benefited from the Package (as well as others)
were not large enough or did not have any characteristics that would permit
them to acquire the goods in the same market or at the same prices as CEI.
(We have not been provided with details regarding the volumes purchased by CEI
or the agreements between CEI and the vendors of the products that were included
in the Package and similar packages of donated items.)
31. We believe that, in general, the highest price
for the Package would be obtained by selling each of the goods (or groups of
goods) separately to individual consumers. However, this approach would likely
entail higher costs than by selling the entire Package. Further, the entire Package
was donated to IKC to be used by various charities. Accordingly, assuming
that IKC (and/or the charity which ultimately utilized the goods) purchased
such products from the retail market in similar quantities, we believe that the
most appropriate market to be considered in determining the fair market value
of the Package is the retail (consumer) market for similar quantities of each
product in the Package; in particular, the total cash amount that would be paid
by IKC or the relevant charity to acquire a similar Package.
Further, we believe it is appropriate to apply volume discounts in calculating
the fair market value of each product in the Package and the discounts utilized
by CEI are not unreasonable in quantum based on the quantities purchased by the
Donors.
(emphasis added)
[40]
The statement that the
charities could not have acquired the products at the same price as CEI is
accurate but not complete. The donors (including the Appellant) did not acquire
the products at the same price as CEI. John Groscki (who appears to be the
owner of CEI and the related companies involved in the transactions) confirmed
that the company selling the products to the donors (including the Appellant)
marked these items up 3 or 4 or more times from the amount paid by CEI (or a
related company) to the manufacturers of the products.
[41]
Since the relevant
transaction is the donation of the property to In Kind Canada, it does not seem
to me it is relevant whether the donors would have otherwise acquired the
products in the retail market. The transaction that is relevant is the
acquisition of the products by In Kind Canada and therefore it seems to me that
the relevant market would be the market which In Kind Canada would have
acquired products if the products would not have been donated by the donors to
In Kind Canada. The assumption made in paragraph 31 of the expert’s report
referred to above is that “IKC … purchased such products from the retail market
in similar quantities”. It seems to me that the identification of the market in
which In Kind Canada would have purchased such products is critical to the
determination of the fair market value of the products donated to In Kind
Canada. Once the assumption that “IKC … purchased such products from the retail
market” is made, the conclusion that the most appropriate market is the retail
market seems obvious and inevitable. However, the critical question is whether
the retail market is the correct market in this case.
[42]
During her testimony,
Melanie Russell, the expert witness, did not directly address the assumption
made in paragraph 31 of her report that “IKC … purchased such products from the
retail market”. The following are excerpts from her testimony at the hearing:
Q. Okay.
Now what were your thoughts with respect to the second market that you
mentioned which would be the market in which In Kind Canada could purchase the
goods that were included in a package?
A. So
the other piece that I considered was what price would be paid by IKC or the
charities that benefited from these toothbrushes and gel pens.
I
did not speak to any of the charities or In Kind Canada, so I don't have any
first‑hand knowledge of how much they would have purchased or normally
purchased were it not for the donation program. However, my understanding or
what I was advised was particularly with respect to the particular charities
that benefited, their quantities were not huge for pens or toothbrushes or
whatever was used. So similar to Mr. Lockie and Ms. Lockie, I expect that they
would be able to get some kind of volume discounts, but again they wouldn't
have the ability to go to manufacturer of pens or toothbrushes to get the
wholesale price.
Q. Okay.
Did you have any additional comments with respect to the market in which the
charities would be purchasing the products?
A. Paragraph
30, 31 on page nine, if you go back to the definition of fair market value and
it being the highest price, obviously the highest price for that package would
be obtained if, from someone like Business Depot, Staples, selling one pen or a
package of 12 pens for example. But because the reality is that the package is
more than just one pen or 12 pens, I think that while the appropriate market is
the retail or consumer level, but volume discounts need to be considered to
match the quantities that were sold and bought.
And during
cross examination:
Q. The
lower price. And why is it that it never occurred to you in this report that
CEI would be the appropriate or the transaction that transpired between Mr.
Lockie and EMI and the CEI donation program that was being promoted wouldn't be
the proper market to evaluate these items in terms of fair market value?
A. It's
an assumption on, if you go to ‑‑ there's an assumption that you've
already pointed out on paragraph 34.
Q. Thirty‑four, yes.
A. Page ten.
Q. Mm‑hmm.
A. (c)
so the underlying assumption is that the donation program does not create a
market on its own and the definition of fair market value, being the highest
price would exclude the investment market.
Q. That's
what you need mean by (c)? Donation program should not be considered to be an
investment market. An investment market is meant to be just a market.
A. Correct.
It doesn't create a market on its own.
…
A. I
made the assumption that the IKC or the charities would not have access or
don't have access to the wholesale market.
[43]
It seems to me that the
transactions in this case were not part of the normal transactions of In Kind
Canada and that In Kind Canada would not, in the normal course of their
activities, have purchased these items in these quantities. Debbie Bianco testified as follows:
Q. Okay. And maybe you can just give us a brief description
of the operations of In Kind Canada at that time. What was it about?
A. Oh, In Kind Canada was a fabulous idea actually. It
started out, John Page and an associate of his starting the business and they ‑‑
what In Kind Canada actually did was they took donations from the general
public and businesses, mainly businesses in terms of they start out with things
like desks and chairs and instead of putting those desks and chairs into
landfills, we put them into charities. The charities absolutely loved this
because they didn't have access to these materials and it lessened the blow on
their bottom line.
Q. All right. And how did the distribution of these products
work? How did you identify the charities?
A. In Kind Canada had a fairly sophisticated in the world of
charitable industry database system that would be the program allocation people
would input the donation, fair market value would have, would be attached by a
piece of paper and that would then go into the database. We would then go into
our database of over 1200 charities that were member charities at the time and
we would know or they would tell us via their wish list what they wanted or
needed in their operations or for their programs. And then we would then tell
them to go and get it or come and collect it.
…
Q. And the items that In Kind Canada distributes to its
member charities, are they ‑‑ what percentage of those, I guess,
are donated items or is there a percentage that In Kind Canada purchases and
then redistributes?
A. In Kind Canada was never in the business of purchasing anything and distributing
anything. Everything that we distributed to our member organizations were
donated.
[44]
John Groscki is a
chartered accountant and appears to have been the person who owned or
controlled CEI and the related companies that were involved in these
transactions. It also appears that he was the person who created this structure
of transactions. John Groscki wanted to gain experience in importing goods from
China and introducing such products into the Canada
market. Sometime either in 1995 or later he started attending trade shows or
visiting factories in China with some friends that he had met in 1995.
He created the brand name “RYT” that was used for the toothbrushes, gel pens
and products in the school packs. In 2003, in developing this donation program,
he was looking for opportunities to acquire products at a low cost from
manufacturers in China and for which the retail price in Canada was several times the cost of acquiring the product
from the manufacturer.
[45]
One of the initial
steps that John Groscki took in establishing the plan was to contact In Kind
Canada to determine what types of products would be of interest to the charity.
The proposal was that John Groscki, through one of his companies, would arrange
for a steady supply or stream of products to the charity who would issue
receipts to donors for an amount that would be approximately five times the
amount that the donor paid to the particular company that sold the product to
the donor. It was important that In Kind Canada was part of the structure from
the beginning since the products that were being imported would ultimately end
up in the hands of In Kind Canada. The Appellant was only one of many persons
who participated in this program.
[46]
CEI entered into an
agreement with In Kind Canada dated July 15, 2003 (which was approximately
three months before the Appellant entered into the transactions related to this
appeal). Paragraph 5.3 of this agreement provides as follows:
5.3 Confirmation of Goods To Be Received As Donations:
CEI will confirm with IKC the type and quantity of Product that IKC wishes to
receive as donations. Prior to shipment, IKC will deliver written confirmation
to CEI of the Product its [sic] wishes to receive and the price at which
it will provide charitable receipts to donors in respect to the delivered Product.
IKC will be the sole and exclusive determinant of the price for which
charitable receipts will be issued.
[47]
John Groscki explained
the significance of this paragraph as follows:
Q. Can you
explain the purpose of that paragraph?
A. Again,
we're going to undertake to purchase merchandise in China in very large quantities
so it's rather critical that we've agreed as to what items are going to be
donated so that we know ahead of time that yeah the charity says yeah, we can
use these, we want these. That's sort of straightforward. They know the
quantities we're going to get so we're confirming they're going to get them so
that's fine.
And then
prior, it's important that IKC work with us in it terms of due diligence and
that it's important they do their due diligence as well in terms of market
pricing, receipting, et cetera.
[48]
CEI (or a related
company) was importing the products by the container. His estimate was that
they would be importing dozens of containers of products. There would be
980,000 to just over a million pens in one container. From the evidence
presented at the hearing it appears that all of the toothbrushes, gel pens and
school packs imported by CEI went to In Kind Canada either through the donation
program or as part of the school supplies that were sold to In Kind Canada
after the Federal Government announced that changes would be made to the Act
in relation to the determination of the fair market value of items acquired and
then donated to charities. This announcement terminated the donation program.
At the time of the announcement (which was made in early December 2003) John
Groscki estimated that there were 20 to 30 containers of merchandise that he
still had to purchase. He described this as follows:
A. When the
program ended or when the law changed that I could no longer sell the
merchandise the way we were selling it, as I said at that point in time, we
hadn't had such opportunity to fully commercialize any of the products we were
bringing in. So when the program was terminated, sort of retroactively in terms
of ability to receipt charitable items, we were forced basically at that time
to purchase approximately, I don't know, 20 to 30 containers of merchandise
totaling I think 1.2, $1.3 million.
[49]
His companies were
importing other products in addition to the gel pens, toothbrushes and school
packs and it appears that all of the products were channelled into In Kind
Canada. The agreement between CEI and In Kind Canada also included article 5.7 which
provides that:
5.7 Cash Donation Paid to IKC Upon Release of Funds From
Escrow: When IKC issues donation receipts for delivered Product,
IKC will receive (a) in respect to the first $10,000,000 of total donations
paid by donors, a cash donation equal to 2% of the total donation amount paid
by donors; and (b) in respect to all donation amounts paid by donors in excess
of the first $10,000,000, IKC will receive an amount to be negotiated in excess
of the said 2%.
[50]
John Groscki’s
explanation of why In Kind Canada would be paid the amount as contemplated by
this paragraph is as follows:
Q. Can
you explain why CEI would be paying an amount of money or this particular
amount of money to In Kind Canada?
A. Basically,
IKC is acting as a conduit for our company as well, in that, the goods that are
being donated are not going to go strictly to IKC charities. Because from our
standpoint, the donors are free to donate items to any charity in Canada. IKC
basically is handling goods on our behalf, bringing them into Canada.
In addition,
they're going to be incurring other expenses related to our business because at
times we're going to be getting quantities out of those various containers as
well. And we understood they would be incurring additional expenses as a
result of this. And I think IKC had been struggling to get along at that time,
so to me it looked like it was reasonable compensation for additional expenses
that IKC would incur in handling the volumes of items that were going to be
coming to them.
[51]
While the agreements
provided that the Appellant could donate the goods to any charity or retain
them (there were three options provided in the agreement – to donate the
products to a charity, to retain ownership, or to transfer ownership) it seems
obvious that the logical choice for the Appellant (or for any other
participant) would be to donate them to In Kind Canada as the Appellant (or any
other participant) knew or expected that In Kind Canada would be issuing a
receipt for approximately five times the amount that the Appellant paid for the
products. The third option (to transfer ownership) was the one chosen by the
Appellant to transfer ownership to his spouse who then donated the products to
In Kind Canada.
[52]
Whether the products
took the direct route from CEI to the Appellant to In Kind Canada or the
indirect route from CEI to the Appellant to his spouse to In Kind Canada,
it seems obvious that the products would be donated to In Kind Canada and this
would be obvious even before the documents were executed. CEI had a checklist
of documents that were to be completed by the Appellant. The checklist included
a Deed of Gift to a Charity. Although this document was undated, it appears to
have been executed at the same time as the other documents (the Purchase
Agreement (pursuant to which the Appellant acquired title to the products) and
the Purchaser’s Transfer Agent Agreement (pursuant to which the Appellant
appointed Canadian Charity Distribution Inc. (a company related to CEI) as his
agent to receive, store, package and deliver the products to the charity)).
[53]
The products were
imported by CEI by the container load. While the donors acquired title to
smaller lot sizes (which title was conveyed to In Kind Canada) the products
went directly from CEI (or a related company) to In Kind Canada. As noted
above, the donors appointed Canadian Charity Distribution Inc. (a company
related to CEI) as their agent to receive, store, package and deliver the
product to the charity. The products were acquired by the donors on behalf of
and for the benefit of In Kind Canada. The role of the donors was to provide
the cash to fund the purchase of the products. If In Kind Canada would have had
sufficient cash and would have been willing to purchase the products from CEI,
then there would not have been any need to flow the product through the donors.
[54]
The flow of product can
be illustrated as follows:
[55]
It seems to me that the
retail market is not the appropriate market to use in determining the fair
market value of the products donated to In Kind Canada. The donors were a
conduit in the pipeline for the products that flowed from the manufacturer to
CEI (or a related company) to the donors to In Kind Canada. John Groscki
described the role of the donors as:
So at the end
of the day we were basically making donors into wholesale distributors or
distributors of products, one way or the other to charities.
[56]
It seems to me that if
In Kind Canada were to acquire the products from someone other than the
Appellant, that it would acquire these products directly from CEI (or a company
related to CEI). The arrangement between CEI and In Kind Canada was in
place before the Appellant acquired the products. It seems to me that, contrary
to the assumption made by Melanie Russell, that In Kind Canada did have access
to the wholesale market as it clearly had an arrangement with CEI, who was the
importer, before the Appellant and the other donors acquired the products.
Since CEI were “basically making donors into wholesale distributors or
distributors of products”, CEI could have make In Kind Canada
a wholesale distributor.
[57]
CEI would presumably be
indifferent or would prefer to sell the products directly to In Kind Canada for
the same amount that it received from the Appellant (and the other donors). CEI
would receive the same revenue whether it sold the products to the Appellant for
$2,850 or to In Kind Canada for $2,850 but would have lower costs if the
products were sold directly to In Kind Canada as there would be less paperwork
and no need to spend time acquiring products that were considered to be
comparable. As a result it seems obvious that the alternate source of product,
if In Kind Canada were to acquire the products from someone other than the
Appellant, would be CEI and not the retail market. CEI, in the normal course of
its business, sold the package of products to the Appellant for $2,850 and it
seems logical, since CEI would be in the same or a better position if it sold
the same products to In Kind Canada for $2,850, that CEI would also sell the
same products to In Kind Canada for $2,850.
[58]
In Nash, supra,
Justice Rothstein (as he then was) made the following comments in relation to
the selection of the market in determining the fair market value of particular
items:
19 It is wrong to assume, as did Ms. Tropper and the trial
judge, that the fair market value of a group of items is necessarily the
aggregate of the price that could be obtained for individual items in the
group. That might be so in some cases, but it is necessary to carefully
consider the circumstances in which the groups are being acquired and disposed
of in order to make that determination.
20 If the evidence is that the groups are not sold in the
same market as individual items, the fair market value of the groups will not
be the aggregate of the fair market value of the individual items. For example,
if items are sold in large volumes in a wholesale market, the fair market value
of the volumes sold in that market will be less than the aggregate of the
values of the items considered individually that make up those volumes. If that
were not the case, there would be no wholesale market. The wholesalers would
sell their large quantities in the retail market to obtain the aggregate of the
retail prices for the individual items for the large quantities they sold. But
that does not occur because consumers will not purchase the large quantities
the wholesalers are selling. There are other differences between a wholesale
and retail market such as convenience and other services to the consumer
provided by retailers but not by wholesalers. That is why there is a difference
between prices in the retail and wholesale markets.
21 On the other hand, if the evidence is that the groups of
items are acquired and disposed of in the same market as the individual items,
it may be that the fair market value of the groups is the aggregate of the fair
market values of the individual items. Generally, shares of common stock might
be valued in this way.
…
29 Where there is a gap between the time an asset is acquired
and disposed of, the cost of the asset will normally be an unreliable basis for
estimating fair market value. But where the dates of acquisition and
disposition are very close in time, barring evidence to the contrary, the cost
of acquiring the asset will likely be a good indicator of its fair market
value.
[59]
The Federal Court of
Appeal concluded in Nash that the fair market value of art prints
acquired in large quantities and then donated to a charity was the amount paid
by the purchaser of such prints. In my opinion, in this case, the correct
amount to be used as the fair market value of the products is the amount paid
by the Appellant. In effect the Appellant was acquiring these products on
behalf of and for the benefit of In Kind Canada. Arrangements were put in place
before the products were acquired by the Appellant that In Kind Canada would
accept the products and would issue the appropriate receipt. The products were
delivered directly by CEI (or a related company) to In Kind Canada. Since the
Appellant acquired these products in an arm’s length transaction from CEI (or a
related company) the amount paid by the Appellant to acquire these products is,
in my opinion, the fair market value of these products acquired by In Kind
Canada and hence the amount of the gift made by the Appellant to In Kind
Canada. As noted above it seems obvious that if In Kind Canada were to purchase
these products that it could have purchased them directly from CEI (or a
related company) for the same purchase price as paid by the Appellant.
[60]
The focus of the
Appellant’s evidence and argument was on the fair market value of the products
donated by the Appellant to In Kind Canada. There was also another transaction
in which the fair market value of the products is relevant. The Appellant
purchased a group of products from CEI (or a related company) for $3,800 and
then transferred these products to his spouse. In relation to the transfer of
the products to his spouse the Appellant claimed that the fair market value of
the products was $20,043. No explanation was provided by the Appellant for the
more than fivefold increase in value in relation to this transaction. It
appears that he was also relying on the retail market comparisons to determine
the fair market value of the products that he transferred to his spouse. However,
it seems to me that the fair market value of the products acquired by the
Appellant and transferred to his spouse is the amount that the Appellant paid
for these products as it seems obvious that his spouse could have acquired
these products from CEI (or a related company) for $3,800. Why would the
Appellant’s spouse pay him $20,043 for the same products that she could acquire
from CEI (or a related company) for $3,800? There is no reason why the retail
market should be used as a comparative market for this transaction as it seems clear
to me that CEI (or a related company) would have been willing to sell the
products to the Appellant or his spouse for $3,800.
[61]
As a result there is no
need to analyze the products submitted into evidence as comparable toothbrushes
and gel pens. However, I would like to make a couple of comments in relation to
the toothbrushes. The position of the Appellant is that the retail selling
price in 2003 of a comparable toothbrush was $4.54. Since the receipts for
toothbrushes that were purchased showed retail prices ranging from $1.49 to
$4.99 this would mean that it was the position of the Appellant that the
toothbrushes that were included in the products would be comparable to the
higher quality toothbrushes on the market in 2003. John Groscki also noted that:
…So knowing
that, we tried to select items that had a long‑term market potential in Canada
and our focus then was on quality and packaging in every sense. In other words,
we wanted to be recognized and known for quality and we wanted to establish as
many markets as possible.…
…
… We're
trying to buy the very best product we can buy and so at the end of the day, my
understanding is we ended up paying probably 30, 40, 50 percent more than the
lowest price that had been available to us in China.
[62]
On the back of the
packaging for the toothbrushes three points are stated. The second and the
third point are, as written, as follows:
Bends to absorb excess pressure reducing the rick [sic] of
damage to gums
For total contorol [sic] of your cleaning
[63]
If the quality of the
spelling is indicative of the quality of the product, then CEI has not
succeeded in its goal of importing a high quality product.
[64]
There was also evidence
of two retail purchases of the toothbrushes that were part of the donation
program. One purchase was made at the Salvation Army store in Hamilton, Ontario. The items purchased were introduced into
evidence with the receipt showing that 12 of the toothbrushes were purchased on
August 31, 2005 for $3.49 (before taxes). No explanation was provided of the
circumstances related to this purchase. This purchase would suggest that the
retail price of the toothbrushes was $0.29 (before taxes) each in 2005.
[65]
The other purchase that
occurred at the retail level was made by the Appellant in Quebec City on September 29, 2006. The Appellant stated that he
paid between $3 and $3.50 for this toothbrush. He did not have the receipt for
this purchase. This purchase was still significantly less than the $4.54 amount
that was used as the retail selling price of the toothbrushes.
[66]
It appears that at
least some of the toothbrushes did make it to the retail market but the retail
selling price varied widely from $0.29 to $3 - $3.50 per toothbrush. Since the
retail transactions in the toothbrushes took place in 2005 and 2006, they would
not, however, have been of any assistance in 2003 in determining the retail
price of the toothbrushes at that time.
[67]
The appeal is allowed,
without costs, and the matter is referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis that:
a.
the fair market value
of the 1,728 toothbrushes, 5,184 gel pens and 2 school packs donated by the
Appellant to In Kind Canada was the amount that the Appellant paid for these
items, $2,850;
b.
the Appellant did not
realize a capital gain as a result of donating these products to In Kind
Canada;
c.
the Appellant is
entitled to a credit under section 118.1 of the Act on the basis that he
made a gift of $2,850 in donating these products to In Kind Canada, a
registered charity;
d.
the fair market value
of the products acquired by the Appellant and then transferred by him to his
spouse, Danielle Deveau-Lockie was the amount that the Appellant paid for these
items, $3,800; and
e.
the Appellant did not
realize a capital gain as a result of transferring the products to his spouse,
Danielle Deveau-Lockie.
Signed at Ottawa, Ontario, this 18th day of March, 2010.
“Wyman W. Webb”
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