Citation:
2015 TCC 95
Date:
20150417
Docket: 2014-670(IT)I
BETWEEN:
ERIC
DE SANTIS,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Hogan J.
I. Overview
[1]
The appellant is appealing
from reassessments in which the Minister of National Revenue (the Minister)
reduced the value of donations of bottles of wine for the 2009, 2010 and 2011
taxation years, by the following amounts:
|
Taxation
year
|
Donations deducted by the appellant
|
Donations disallowed by the Minister
|
|
2009
|
$1,050
|
$697
|
|
2010
|
$1,100
|
$756
|
|
2011
|
$8,550
|
$5,878
|
[2]
In addition, for the 2011
taxation year, the appellant reported a capital gain of $5,500 in his income
tax return relative to a donation of a bottle of wine appraised at $6,500. In his assessment, the Minister reduced
the taxable capital gain by $2,235 in order to take into account the adjustment
mentioned above.
II. Factual background
[3]
The appellant is a wine
enthusiast. During the years
at issue, the appellant made donations of bottles of wine to the charity
Fondation du Centre de santé et de services sociaux de Gatineau (the Foundation).
[4]
The Foundation is a Canadian
registered charity located in Gatineau, Quebec.
[5]
The donations made by the
appellant were used to help the Foundation fundraise through its annual premium
wine auction. The funds
raised in this way every year made it possible to support the Centre de santé
et de services sociaux de Gatineau in reaching its goals, namely, improving the
health and wellness of members of the community it serves.
[6]
The auction took place under
the authority of the Société des alcools du Québec (SAQ), and the wines sold
were rare wines, not available in its stores.
[7]
The bottles of wine were
sold in lots. No guarantees
were provided on the lots either by the Foundation or by the auctioneer.
In addition, all the lots had to be awarded to the
highest bidder.
[8]
The wines donated to the Foundation
are appraised by Alain Laliberté. He is a wine appraiser and sommelier with a degree from the
Faculté d’œnologie de Bordeaux. However, he is
not a chartered appraiser despite his extensive knowledge of the subject.
[9]
In 2009, the appellant
donated to the Foundation three bottles of wine appraised by Mr. Laliberté at
$350 each. He therefore received an official tax receipt for a total of $1,050
and enclosed it with his income tax return for the 2009 taxation year.
[10]
The appellant testified that
he had attended the auction and that the three bottles of wine were sold
in a lot with two other wines, which did not belong to him, for a total of
$800. The lot of five bottles
of wine was appraised at $1,700.
[11]
In February 2010, the
appellant received an appraisal note from Mr. Laliberté regarding the 2009
donations confirming that the three bottles of wine in question were appraised
correctly.
[12]
In addition, in 2010, the
appellant donated to the Foundation three bottles of wine appraised by Mr.
Laliberté at a total of $1,100.
[13]
In the winter of 2011, the
appellant received an appraisal note from Mr. Laliberté regarding the 2010
donations confirming the value attributed to the appellant’s three bottles
of wine.
[14]
At the hearing, the
appellant stated that, in 2011, he went through a very difficult personal
situation during which he used the care and support of the network of the
Centre de santé et de services sociaux de Gatineau. That was the reason why he decided to make a more substantial
donation to the Foundation that year.
[15]
Thus, the appellant donated
seven bottles of wine for the annual auction. The wines were appraised by Mr. Laliberté at a total of
$8,550. One of the seven bottles of wine
donated was appraised at $6,500; therefore, the appellant reported a capital
gain of $5,500 for that taxation year.
[16]
In the winter of 2012, the appellant received an
appraisal note from Mr. Laliberté regarding the 2011 donations confirming
the value attributed to the appellant’s seven bottles of wine.
[17]
In his notices of
reassessment, the Minister reduced the total value of the bottles of wine
donated by the appellant by a factor of 3.2, which resulted in the donation
amounts of $328 for the 2009 taxation year, $344 for the 2010 taxation year and
$2,672 for the 2011 taxation year.
III. Issues
[18]
The issues raised by the respondent are as
follows:
(a)
What is the fair market
value of the wine donated by the appellant?
(b)
What is the taxable capital
gain with regard to the wines donated by the appellant in 2011?
IV. Analysis
(1) Rules of evidence in
informal procedure
[19]
First, a preliminary issue
that the Court was faced with during the parties’ arguments must be clarified. Counsel for the respondent raised the
issue that the evidence filed by the appellant, more specifically, Mr.
Laliberté’s appraisal notes, were unreliable. He has argued that the rules of
hearsay evidence apply even though the appeal is governed by the informal
procedure.
[20]
The rule on evidence
management in cases before the Court that are governed by the informal
procedure is stated in subsection 18.15(3) of the Tax Court of Canada Act:
|
18.15(3)
Notwithstanding the provisions of the Act under which the appeal arises, the
Court is not bound by any legal or technical rules of evidence in conducting
a hearing and the appeal shall be dealt with by the Court as informally and
expeditiously as the circumstances and considerations of fairness permit.
|
18.15(3) Par
dérogation à la loi habilitante, la Cour n’est pas liée par les règles de
preuve lors de l’audition de tels appels; ceux-ci sont entendus d’une manière
informelle et le plus rapidement possible, dans la mesure où les
circonstances et l’équité le permettent.
|
[21]
This provision was recently
interpreted by the Federal Court of Appeal in Madison v. Canada. It had to be determined whether the judge
of the Tax Court of Canada had erred in refusing to admit in evidence the notes
taken by the appellant during a telephone conversation relevant to the
dispute.
[22]
Justice Sharlow overturned
the trial judge’s decision, finding that an error of law had been made, as
indicated in the following excerpt:
More importantly in the present context, it is
an error of law to exclude hearsay evidence in a Tax Court proceeding conducted
under the informal procedure rules without first considering whether it is
sufficiently reliable and probative to justify its admission, taking into
account the need for a fair and expeditious hearing (Selmeci v. Canada,
2002 FCA 293, at paragraph 8).
[23]
In Selmeci v. Canada, the Federal Court
of Appeal confirmed the broad discretionary power of a Tax Court of Canada
judge in his or her assessment of the evidence under the informal procedure. Justice Malone stated that, in enacting
section 18.15 of the Tax Court of Canada Act, parliament “did not intend to
eradicate the normal rules of evidence under the Informal Procedure”. He stated that, rather, the provision was
intended “to provide Tax Court Judges with the necessary
flexibility to enable them to deal as informally and expeditiously with an
appeal as the circumstances of the case and considerations of fairness allow”.
[24]
Accordingly, to respond to
the respondent’s argument, the rules of hearsay evidence clearly cannot be
disregarded merely because the hearing was conducted under the informal
procedure. It is, nonetheless, well established in the case law that a Tax
Court of Canada judge has broad discretion with respect to assessing the
reliability of a piece of evidence and of the need for this evidence. It would therefore be an even bigger
error for the judge to reject evidence on technical legal grounds without
considering whether the evidence is sufficiently reliable and probative to
justify its admission.
(2) Applicable burden of
proof
[25]
The respondent also argues
that, when a taxpayer seeks a deduction in computing the tax payable, the onus
is on him or her to establish that he or she is entitled to that deduction.
[26]
In Hickman Motors Ltd. v. Canada,
the Supreme Court of Canada established the principle that, in appealing the
Minister’s assessment, the taxpayer has the initial burden of making a prima
facie case demolishing the Minister’s assumptions in support of the
assessment. If the taxpayer
succeeds in this, the burden of proof shifts to the Minister, who must then
establish the correctness of the assessment on the balance of probabilities.
Only after the Minister has discharged his burden of
proof, the taxpayer must then again prove his version of the facts by a
preponderance of evidence.
[27]
In House v. Canada, the Federal Court
of Appeal applied the principles stated in Hickman Motors. The Court stated that a prima facie
case based on the credible testimony of a taxpayer was sufficient with or
without supporting documents to enable the taxpayer to discharge the burden of
demolishing the Minister’s assumptions. Justice
Nadon relied, inter alia, on Amiante Spec Inc. v. Canada in stating that
principle.
[28]
Thus, the Federal Court of
Appeal overturned the decision of the Tax Court of Canada on the ground that
the trial judge had not applied the correct burden of proof with regard to the
Minister’s assumptions:
As stated
earlier, the appellant’s burden was that of mounting a prima facie case
“demolishing” the Minister’s assumptions. In other words, the
appellant’s burden was to demonstrate that the Minister’s assumptions were
incorrect, not to establish that he had not received $305,000 in 2003. . . .
[Emphasis added.]
[29]
Accordingly, the appellant’s
burden of proof must not be different from that imposed by that principle
stated by higher courts and well established for several years.
[30]
At this stage of the
analysis of the evidence, the Court must determine whether the appellant had
successfully rebutted the Minister’s assumptions in support of the assessments
by mounting a prima facie case. Three approaches are possible to determine this. The taxpayer may discharge the burden of making a prima
facie case by showing that one or more of the Minister’s assumptions were
wrong, showing that the assumptions are not relevant to the assessment or
establishing that the Minister did not in fact make the assumptions that he
claims he based himself on when assessing the taxpayer.
[31]
The appellant has discharged
his or her burden of proof when he or she has produced credible and
uncontradicted evidence on one of these points.
(3) Evidence presented
[32]
The taxpayer tried to prove
the following assumption of the Minister to be incorrect:
[Translation]
(d) As of the date of the donations, the fair
market value of the wines donated by the appellant was at most $328 for the
wines donated in 2009, $344 for the wines donated in 2010 and $2,672 for the
wines donated in 2011.
In other words, the Minister assumed that the appraisals of the wines
donated by the appellant had been increased by a factor of 3.2 in order for the
tax credit to correspond to the fair market value of the wine, as it appears
from paragraph 5 of the Reply to the Notice of Appeal.
[33]
This assumption of the
Minister is compatible with the information in some documents provided by the
Canada Revenue Agency (CRA) and filed in evidence by the appellant. First, the auditor in this case explains
in a letter addressed to the appellant that he had found that, on average, the
fair market value provided by the appraiser, Mr. Laliberté, was more than
three times higher than the sale price at the auction. According to him, a factor of 3.2 was applied by Mr. Laliberté,
to increase the tax credit so that it corresponds to the fair market value of
the bottle.
The auditor relied on section 2 of Mr. Laliberté’s
document entitled [Translation] “Wine appraisal
procedures for charitable purposes”, reproduced in part below:
[Translation]
2. Researching
information from different sources in order to establish an average market
price for northeastern North America, which is divided into various jurisdictions
and as many different taxation systems as there are states and provinces.
. . .
This average market price is then
multiplied by a factor of 3.2 to round off the final appraisal. Why 3.2? Simply because on average the real remaining value of the
tax credit is equivalent to the average market price but does not take into account the costs to consider if a
wine is only available in the United States or even in Europe or Asia, as is
the case for most wines.
[Emphasis added.]
[34]
In the above-mentioned letter,
the auditor states that the method Mr. Laliberté used to appraise the wine
takes into account the international market,
while the most relevant market was that of the auction at which the wine was
sold. The auditor states the following in the audit
report:
. . . The fact is the bottles were donated in the National Capital
Region and then auctioned in the National Capital Region. While the National Capital Region may not
command the same prices as other major cities, this does not preclude it from
being the “relevant market”. The same bottle sold at auction in New York,
Toronto and the National Capital Region will fetch vastly different prices
because they are each a different market; each with
different demographics and economic variables. Over ten charities in the Ottawa
area hold fine wine auctions each year. Within a four year period 2001-2004 our
auditors took a sample of 3569 bottles – this represents only a fraction of the
bottles sold during this period. It is our position that a market has been
created by virtue of these annual wine auctions.
[35]
Finally, in the audit
report, the auditor specifies that, given that the wines in question were sold
mainly in lots, the various lots are the property to be appraised:
. . . the courts
are clear that one cannot value all assets separately then simply sum the total
of each to arrive at a group value – which was done. The courts also recognize
that selling assets in groups devalues the assets and a discount factor must be
applied – which was not done.
[36]
Thus, the auditor simply
reduced the fair market value determined by Mr. Laliberté by a factor of
3.2, basing himself on Mr. Laliberté’s appraisal procedure document, as
clearly shown in the audit report:
According to the appraisers’ [sic] evaluation methodology, the
average fair market value (FMV) of the bottles of wine donated to the CSSS
Fondation wera [sic] multiplied by a factor of 3.2 to increase the tax
credit to the FMV of the bottles. In addition, the prices the bottles fetched
at auction represent less than 31.25% (1/3.2) of the FMV determined by the
appraiser. . . . In
consequence, we have readjusted the FMV of the bottles of wine donations [sic]
by the factor of 3.2. . . .
We readjusted the capital gains by a factor of
3.2 as a result of the the [sic] revaluation [sic] of the wine
bottles FMV as per paragraph 39(1).
[37]
The appellant disputes that
assumption of the Minister on the five grounds outlined below.
[38]
First, the appellant claims
that the Minister was wrong with regard to the factor applied by Mr. Laliberté. He argues that Mr. Laliberté applied
a factor of 2.2 or even 1.8, not 3.2, to an average market price.
[39]
The appellant added that the
Minister erred regarding the reason for the increase of the fair market value
established by Mr. Laliberté. He argues that applying the factor was necessary, not to
make the tax credit amount correspond to the fair market value, but rather to
take into account the costs to consider when a wine is only available in the
United States, Europe or Asia.
[40]
The appellant is relying on
Mr. Laliberté’s appraisal procedures document, which states the following:
[Translation]
The following costs are
included in my multiplying ratio of 3.2, which does not apply to all of the
wines because it varies depending on the value of the bottle. If they are less costly, the ratio may be
lowered to 2.2, or even 1.8.
1. Capital investment
2. Customs fess
3. Transportation
4. Storage
5. Insurance
6. Sales tax
7. Various acquisition
fees
8. Brokers’ fees
9. And, especially, the rarity of the product after 10-20
or 30 years of distribution
[41]
Accordingly, the appellant
argues that the Minister based his assumption that Mr. Laliberté inflated
the market value of the wines by multiplying it by a factor of 3.2 on an
unreasonable selective reading and an erroneous interpretation of Mr. Laliberté’s
appraisal procedures.
[42]
Second, the appellant claims
that the Minister erred in not taking into account the SAQ mark‑up that applies
to importing foreign wines. The
appellant argues that the average market price used by Mr. Laliberté was a
market value on the international market. The
appellant maintains that, consequently, a substantial SAQ mark-up must
necessarily be added in Quebec.
[43]
He relies on the SAQ’s 2014
annual report,
which discusses the breakdown of an imported wine’s sale price. It states that the mark-up and the
specific tax on any foreign bottle of wine in Quebec represent about 50% of the
retail price. However, it is indicated in a
footnote that [Translation] “the mark-up makes
it possible to assume the costs of sale and marketing, distribution and
administration and to make a net profit”.
[44]
Third, the appellant claims
that the Minister erred in alleging that Mr. Laliberté did not apply an
adjustment factor that took into account the fact that the bottles were sold in
lots. The appellant argues
that the bottles of wine he donated were donated individually to the Foundation
even though they were sold in lots at the auction.
[45]
He maintains that he had no
say in the Foundation’s choice to group certain wines together in lots and
that, in any case, his gifts were not massive, and therefore the market
adjustment factor set out in the case law does not apply.
[46]
Fourth, the appellant claims
that the Minister failed to precisely identify the property to be appraised.
[47]
The appellant relied on the
audit report, which states that “[t]he CRA did not attempt to value the
bottles – there were simply too many to undertake such a task”.
[48]
The appellant argues that,
had the Minister conducted such an appraisal, he would not have decided on a discount
factor of 3.2.
[49]
However, in the audit
report, the auditor justifies the CRA’s choice as follows: “Rather we analyzed
the methodology used and found it does not conform to generally accepted
analytical methodologies, which has resulted in the appraisals not meeting
established standards of professional appraisal practice”. The
auditor adds the following:
The method used by Alain Laliberté to obtain fair market value described
in his own appraisal procedures is . . . a very mechanical process, and as
outlined in by Associate Chief Justice Bowman in Maréchal v. The Queen,
2004 TCC 464,
Where the Board or the Court has the obligation of
determining the FMV of a property and faced with several different figures, it
does not fulfill that obligation by picking the highest. It is not bounded by
any valuation and is not obliged to pick any one. Its obligation is to do the
best it can to arrive at a true value, difficult as this may be. . . . It is
not a mechanical process. It is one that requires weighing all of the material
before it and applying its best judgment to arrive at the correct result.
[50]
The appellant referred to
the analysis of sale of premium wines at auction. On page 121, we can see the result of the sale of the
appellant’s three bottles of wine donated in 2009 and appraised at $1,050 in
total. It is noted that these bottles were included at the auction in lot 63
with two other bottles appraised at $300 and $350. The lot of five bottles was sold for $800, while it was worth
$1,700 overall. The appellant argues that the
sale price here reflects a factor of about 2.1, not 3.2.
[51]
In his arguments, counsel
for the respondent acknowledged several times that the factor of 3.2, assumed by the
Minister was incorrect for the 2009 taxation year.
[52]
Finally, the appellant
claims that the relevant market for the purposes of assessing the fair market
value of the bottles of wine cannot be that of the premium wine auction held by
the Foundation close to a year after the gift. He argues that you had to pay $50 to take part in the
auction, that the bottles of wine were sold in lots and that the Foundation was
obliged to award all of the lots.
[53]
He maintains that the Foundation’s
auction cannot therefore be considered an unrestricted market.
V. Conclusion
[54]
As mentioned earlier, the
taxpayer must discharge his initial burden to demolish the Minister’s
assumptions when he or she mounts at least a prima facie case.
[55]
In my view, the evidence
presented by the appellant in this case complies with the prima facie
standard.
[56]
Let us recall that one of
the Minister’s assumptions in this case is that the appraisals of the bottles
of wine donated by the appellant were increased by a factor of 3.2 so that the
tax credit could correspond to the fair market value of the wines. The
appellant rebutted that assumption by making a prima facie case
establishing (i) the incorrectness of the alleged ground for applying a factor
as well as the actual factor applied; (ii) the incorrect identification of the
property in question; and (iii) the error made in determining the relevant
market.
[57]
None of the evidence filed
by the appellant was contradicted by the respondent. Accordingly, I am of the view that the appellant rebutted the
Minister’s assumptions regarding the factor of 3.2.
[58]
The burden of proof having
thus shifted, it was the respondent’s turn to establish by the preponderance of
the evidence that the Minister’s assessments were well-founded. In this case, the respondent filed no
evidence and was unable to raise the smallest doubt about the credibility of
the appellant’s testimony. Therefore, the
appellant appears to be entitled to succeed in this appeal.
[59]
For these reasons, I allow
the appeal and order the assessments at issue to be vacated.
Signed at Ottawa, Canada, this 17th day of April 2015.
“Robert J. Hogan”
Translation certified true
On this 3rd day of
June 2015
Margarita
Gorbounova, Translator
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