Murray Schafer v. Minister of National Revenue, [1981] CTC 2261, 81 DTC 226

Guy Tremblay:—This case was heard in Toronto, Ontario, on October 2, 1980.

1. Point at Issue

The point at issue is whether the amount of $25,000 received in the taxation years 1977 ($15,000) and 1978 ($10,000) from the National Library of Canada by the appellant, a composer and musician, must be included in the appellant’s income. The respondent contends the said amount is income from a business. According to the appellant, the amount received should be treated as a disposition of listed personal property subject to capital gain resulting from a valuation day calculation. The sale price, according to the appellant, is approximately equivalent to the valuation of the material on December 31, 1971.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.01 In his testimony, the appellant explained that in 1977 he sold for $25,000 to the National Library of Canada different documents: original manuscripts, a copy of his diary, sketches and notes, etc.

3.02 The conditions of the sale and the 29 different items are described in the letter of the National Library of Canada dated August 25, 1977, and signed by Helmut Kallmann, chief, music division (Exhibit A-1). It reads as follows:

In order to clarify the points discussed with you over the phone a month ago concerning your manuscripts, I would like to propose the following agreement.

For the sum of $25,000, $15,000 of which will be paid immediately and the remainder in one year’s time, the following documents in your possession will be transferred and become the property of the Manuscript Collection of the Music Division of the National Library of Cananda:

1. one box containing approximately 15 (fifteen) youthful works, sketches as well as final versions;

2. Concerto for Harpsichord and Wind Instruments—(1954);

3. Polytonality— piano (1954);

4. Minnelieder—voice and wind quintet (1956) (several versions in pencil and ink);

5. Three Contemporaries—(1954-6) (several versions of these songs in pencil and ink);

6. Sonatina for Flute and Harpsichord—(1958) (corrected proofs);

7. Kinderlieder—voice and piano (1958) (corrected proofs);

8. Protest and Incarceration—songs with orchestra (1960);

9. The Judgement of Jael—orchestral cantata (1960);

10. Brebeuf—cantata for baritone and orchestra (1960);

11. Canzoni for Prisoners—orchestral suite (1960-1) (original ink manuscript);

12. Untitled Composition for Orchestra No 1—(1961) (original ink manuscript);

13. Untitled Composition for Orchestra No 2—(1961) (original ink manuscript);

14. No Longer than Ten Minutes—orchestra (1970) (pencil score);

15. Patria //—stage work (1970) (original ink manuscript);

16. In Search of Zoroaster— soloists and chorus (1971) (pencil manuscript of first version);

17. Miniwanka—youth choir (1971) (pencil manuscript of first version);

18. Psalm—large chorus (1971) (pencil manuscript of first draft);

19. Arcana—voice and instruments (1972) (sketches);

20. East—orchestra (1973) (original pencil score and sketches);

21. Patria /—stage work (1974) (pencil drafts, charts, notes, designs, ink manuscript of final version);

22. The Tuning of the World—book (1973-5) (original typescript of manuscript with hand-written corrections;

23. Hymn to Night—soprano, small orchestra and tape (1976) (pencil manuscript of first draft and final version with notes);

24. String Quartet No 2 (Waves)—(1976) (pencil manuscript of first and second versions, xerox copy of first draft with changes, ink manuscript of final version);

25. Train—youth orchestra (1976) (notes and sketches with original pencil manuscript);

26. Smoke—book (1976) (ink manuscript);

27. Adieu, Robert Schumann—chamber orchestra, voice and tape (1976) (manuscript of first draft, composition chart);

28. a copy of your Diaries to be made public only after your death;

29. any other sketches, notes etc of the above works not described to be added at your discretion.

It is also understood that the National Library will have the first opportunity to accept or reject any other materials from your collection of manuscripts and personal papers which you may choose to sell or donate at any future date. May I also assume that the Library can make dubbings of your collection of tapes of your own compositions at its own expense as soon as arrangements can be made. Stephen Willis suggested that you were agreeable to such undertaking.

3.03 The italicized items which total 26 of the 29 listed items are manuscripts, the publication of which can be found in 2 books and 24 musical compositions.

3.04 The first time (boxes of youthful works) are drafts or essays the appellant did between 8 and 20 years of age. He was born in 1933.

3.05 The appellant said that the turning point in his career was in 1967 when he wrote music for the world exposition in Montreal.

3.06 Many extracts from newspapers concerning the appellant (critiques, etc) were filed as Exhibit A-2.

3.07 No valuation was given of the documents as at December 31, 1971.

4. Law—Comments

4.01 Law

The relevant provisions of the Income Tax Act are sections 4 and 9, or 38 depending on the contention of the parties. These sections will be quoted later, if necessary.

4.02 Comments

4.02.1 It was outlined by the counsel for both parties that this case (where manuscripts of a person are sold before his death and sold by himself) is a unique case and that no court has judged a case like this before.

4.02.2 In the Board’s opinion, objects of this nature are not, in themselves, commercial objects such as sugar and liquor. They are not commodities. Moreover, the appellant did not buy them for resale. They are his own manuscripts and they were not written to be sold. The greatest part of them was written with the intent that the published matter would be for sale. In fact, published matter was sold. Income (royalties, etc) was declared and tax paid. Part of the manuscripts were not written with the intent that they be published and sold. The Board is referring to those manuscripts the appellant did from 8 to 20 years of age, and to the diaries. In fact the contents of those manuscripts were not published. The artist-musician is not like the artist-painter who paints to sell the original paintings.

4.02.3 In this case, the manuscripts were bought by the Library for two purposes: first, to assist students in the field that the appellant was interested, and second, to preserve all of the appellant’s original papers in perpetuity.

4.02.4 The National Library is not in itself a commercial party. The appellant is an artist who for the first time sells his manuscripts. The Board does not think that the present transaction can be called a commercial transaction resulting in business income in the sense of section 9 of the Income Tax Act.

4.02.5 At this point the Board wonders whether the question here is one of capital gain or a receipt on capital account.

The Board is inclined not to consider it as a receipt on capital account. Indeed, it is not like an indemnity, a gift, an inheritance, etc. The amount received is the result of a sale. The vendor received an amount of money from a purchaser who bought the manuscripts. There is a disposition of property. The result can only be a business income or a capital gain.

As decided above, it is not a business income. It can only be a capital gain.

4.02.6 In computing the capital gain, the Board must distinguish between the manuscripts which existed on December 31, 1971, and those which were done after this date.

According to the evidence, at least eight documents were done after 1971. They are the items 20 to 27 inclusive in Exhibit A-1 quoted in paragraph 3.02. It is possible that, among the documents included in items 28 and 29, a part of them was done after 1971.

In fact, it is essential to know which part of the total payment of $25,000 was for those documents done after 1971. The manuscript done after 1971 had practically no cost (paper, ink, etc) value when the appellant did them. Hence, the gain for those manuscripts is the total amount received for them.

4.02.7 No evidence was given about the amount paid for the documents done after 1971. No evidence was given either for the fair market value on December 31, 1971, for the documents done before 1972.

4.02.8 The parties have left the whole matter of valuation in the hands of the Board.

The burden of proof is on the shoulders of the appellant, and ordinarily it is not for the tribunal to break down the cost and the profit in a transaction when no evidence is given as in the present case. Normally, the appeal would be dismissed. The Board understands however, that in fact the evidence is quite difficult to give on this point. Also, the instant case is the first of this nature. It is a case of exception. Hence, the Board hereinafter makes the necessary computation. It can be considered as obiter dictum or as a suggestion for a settlement, or as a basis for a settlement, without contending that it is the best computation.

4.02.9 It is clear that the appellant’s contention to the effect that the fair market value of the documents on December 31, 1971 was the same as the sale price in 1977, that is $25,000, cannot be accepted. How, indeed, can one say that the manuscripts which did not exist in 1971 because they were done in 1972, 1973, 1974, 1975 and 1976, as indicated in Exhibit A-1, had a fair market value on December 31, 1971?

4.02.10 It is not possible to give a value to each item, each one indeed is not of the same nature (books, songs, diaries, notes, sketches, etc). However, let us suppose that each item has the same value and afterwards let us make corrections.

It is possible to say that according to the evidence about one third of the items were done after 1971 and two thirds before 1972. This means that about $8,333 was paid for the documents done after 1971, and $16,666 for the documents done before 1972. However, if one considers that the intention of the purchaser was to assist students, probably the documents written during the appellant’s adolescence and during the period when the first musical works were done (let us say up to 1958) have the greatest value. The students indeed are as the appellant was at the beginning of his career. Hence, the documents done at that time seem to be more appropriate for the students’ studies.

So the Board would break down the sale price as follows: $20,000 for the manuscripts done before 1972 and $5,000 for the manuscripts done after 1971.

4.02.11 However, what is the fair market value on December 31, 1971 of the documents for which $20,000 was paid in 1977?

The uncontradicted evidence is to the effect that the turning point in his career was in 1967 (para 3.05), five years before the enactment of the new /n- papers about the appellant in 1967 and after, as it appears from Exhibit A-2. Here are some extracts:

In 1967 Irving Lowens wrote in the Washington Star—

A few years ago, a young and virtually unknown Canadian musician, R Murray Schafer, published a short pamphlet called The Composer in the Classroom. Now in 1967, Schafer has emerged as one of the most significant creative figures on the Canadian scene.

In the Chicago Tribune, Peter Corner wrote on May 25, 1969—

“Requiems for the Party-Girl”, by the young Canadian composer R. Murray Schafer, is a powerhouse of a piece . .. Mr Schafer’s music is tense, terse, and tight. . . .

On January 27, 1971, one could read in the Canadian Music Centre:

A work by the Canadian composer R Murray Schafer is to be included in the 1971 World Festival of the International Society for Contemporary Music in London this June, the Canadian Music Council announced today.

R Murray Schafer, 38, is one of Canada’s leading young composers and his reputation is spreading rapidly and internationally.

4.02.12 From the evidence, it is the Board’s opinion, on one hand, that at the end of 1971, the appellant’s career was far from finished.

On the other hand, as the turning point of the appellant’s career was in 1967, the Board thinks the greatest part of the value of the documents done in the first part of his career was already acquired on December 31, 1977. Hence if we look at the sale price (or the price to which the Board arrived at) of $20,000 in 1977 for those documents done before 1972, it is the Board’s opinion that the amount of $15,000 would be a reasonable value for the said documents on December 31, 1977.

4.02.13 In sum, there is a capital gain of $10,000 ($5,000 for documents done after 1971, and $5,000 for documents done before 1972) half of which would be taxable.

Again, because of the difficulty of the evidence and in absence of evidence, the Board thinks it would be a reasonable settlement and recommends to the parties to accept it unless the appellant thinks that evidence could be given before the Federal Court. Again, it is because of the nature of the case that the Board made the computation and recommendation.

5. Conclusion

The appeal is allowed in part, that is, on the point that the profit of the disposition is a capital gain and not business income, and the matter is referred back to the respondent for reassessment on the basis of the recommendation given in the above reasons for judgment or on the basis of a settlement between the parties.

Appeal allowed in part.