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Citation: 2004TCC147
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Date: 20040213
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Docket: 2003-308(IT)G
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BETWEEN:
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FRANK KLOTZ,
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Appellant,
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And
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HER MAJESTY THE QUEEN,
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Respondent.
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AMENDED REASONS FOR JUDGMENT
Bowman, A.C.J.
[1] This appeal is from an assessment
made under the Income Tax Act for the appellant's
1999 taxation year.
[2] In filing his return of income for
that year the appellant included in his "total gifts" as defined
in subsection 118.1(1) of the Act under
subparagraph (a)(i) of that subsection the sum of
$258,400. He alleged that this amount was the fair market value
("fmv") of 250 original prints which he donated to Florida State
University ("FSU") on December 30, 1999 and was to be included in
the computation of his "total charitable gifts" as defined in
subsection 118.1(1) of the Act. He therefore claimed
a deduction in computing his tax payable using $258,400 as one of
the components of B in the formula in subsection 118.1(3).
[3] The Minister of National Revenue
disallowed the claim on the basis that the fmv of the prints was
at most $300 per print, or $75,000 in total, the amount paid by
the appellant. The Minister also took the position that the
prints were not personal use property. The Minister also assessed
penalties under subsection 163(2) of the Act. As a
separate allegation of fact the respondent says that the fmv of
the prints was only $50. This position was not pressed in
argument.
[4] The result of these various
positions is as follows:
(a) If the prints were personal use property
of the appellant with a fmv of $1,000 each, subsection 46(1)
deems the adjusted cost base ("ACB") to be the greater of $1,000
and the ACB otherwise determined, and the proceeds of disposition
otherwise determined. In the result the appellant realized no
capital gain or deemed capital gain because his ACB and his
proceeds of disposition are both $1,000 per print. He would
nonetheless get a charitable donation tax credit based on a fmv
of $1,000 per print.
(b) If the prints are not personal-use
property but nonetheless had, at the date of donation, a fmv of
$1,000 each he would still get his charitable donation tax credit
based on $1,000 per print, but he would also realize a capital
gain based on proceeds of disposition of $1,000
(subparagraph 69(1)(b)(ii)) and an ACB of $300.
(c) If the prints are personal-use property
with a fmv at the time of donation of $300 per print he would
realize no deemed capital gain because of subsection 46(1) but
his charitable donation tax credit would be based on $300 per
print and not $1,000. Subsection 46(1) obviously has no effect on
the operation of section 118.1.
(d) If the respondent's alternative position that
the prints had a fmv of $50 were sustained the charitable
donation tax credit would be reduced even more and there would
obviously be no capital gain regardless of whether the prints
were personal-use property. If they were personal-use
property the capital loss would be nil
(subparagraph 40(2)(g)(iii)). If they were listed
personal-use property the loss could be carried forward
against any gains from the disposition of listed personal
property.
[5] The parties entered into a
statement of agreed facts and in addition four witnesses were
called by the appellant: the appellant himself, Mr. Klotz,
Joan Krawczyk, a New York art dealer, and two experts
in the appraisal of art, Ms. Kathleen Laverty and
Richard-Raymond Alasko.
[6] The respondent called no
witnesses.
[7] I shall not reproduce in full the
lengthy statement of agreed facts. It forms part of the record if
the matter is appealed. It consists of 16 pages plus an appendix
and it incorporates 54 books of exhibits.
[8] In summary, the facts are these:
Mr. Klotz is one of about 660 individual Canadian taxpayers
who participated in a program called Art for Education or AFE.[1]
[9] Under the AFE program the Canadian
taxpayers acquired limited edition prints which they donated to
colleges and universities that were prescribed for the purposes
of paragraph 118.1(1)(f) of the Act. They bought
the prints from the promoters of the program for about $300 per
print and immediately donated them to the universities or
colleges and received a receipt for $258,400 or approximately
$1,000 per print, which they used to support a claim for a
charitable gift tax credit under subsection 118.1(3).
[10] The promoters of the program were
Galleries Consultants Ltd., an Ontario corporation, which changed
its name to AFE Consultants Ltd. ("AFEC"), Empyrean Galleries
Inc. ("Empyrean"), an Alberta corporation, and Curated Prints
Ltd. ("Curated"), a Delaware corporation which acted as bare
trustee for Empyrean. AFEC and Curated were associated
corporations.
[11] The way it worked in the case of
Mr. Klotz was that Curated, through a person
Hazel Hett, who retained Ms. Krawczyk, acquired prints
from artists or dealers. Ms. Krawczyk's instructions were
pay no more than US$50 and this was the price typically paid.
Novak Graphics Ltd., a Canadian source, was paid CDN$50, $55, $70
or $75 per print. Ms. Krawczyk testified that she was
sometimes able to acquire prints for less than US$50 - in some
cases as little as US$5, in others $20. Prints were acquired in
large quantities. In 1997, 1998 and 1999 when the program was in
effect, over 63,000 prints were acquired.
[12] In light of the prices for which
Ms. Krawczyk, on behalf of Curated, was able to obtain the
prints the other instruction to Ms. Hett may seem a little
strange. It was that the prints she acquired should have a value
of CDN$1,000 or more. I say strange because the man on the
Clapham omnibus might find it anomalous that a person could be
instructed to acquire prints having a value of at least CDN$1,000
for a price not exceeding US$50. But then, the man on the Clapham
omnibus would probably not be familiar with the art scene in
New York in the 1990s or the methods devised to make mass
charitable gifts of art a profitable endeavour.
[13] It may be useful to look at just what
Hazel Hett's contract provides. It reads as follows:
PERSONAL SERVICES CONTRACT
HAZEL HETT of 1457 Churchill Drive, WA 98281 agrees
to perform the following services to the benefit of Empyrean
Galleries Inc., a company duly incorporated under the laws of
Albeta. All services are to be performed in New York and
Washington State.
· Locate
suitable premises in New York City for the storage and
distribution of art.
· Arrange for
the purchase of fine art prints each having a value of $1,000 Cdn
or more. Such prints shall be delivered to the New York
warehouse.
· Arrange for
photography in New York of all art works delivered to the
warehouse.
· Design and
implement an inventory control system for the art inventory.
· Design and
implement a shipping program for the art.
· Locate and
hire the following:
2 qualified appraisers.
Packing and shipping staff as necessary
·
Arrange for the donation of art to qualified charities.
·
Assist in the design of the marketing brochures.
·
Assist in the designing of materials to educate the marketing
team.
EMPYREAN GALLERIES INC. in consideration for receiving the
services detailed above undertakes and covenants to perform the
following
· Reimburse
Hazel Hett for all expenses incurred related to the management of
the business within ten (10) days of the invoice being
submitted.
· Pay Hazel
Hett $300,000 CDN annually. Payments to start January 1,
1999.
· Parties may
extend such term annually, provided the parties have mutually
agreed to same prior to each anniversary date.
_______________________
______________________
Hazel
Hett
Date
_______________________
______________________
Empyrean Galleries
Inc.
Date
[14] In addition to the US$50 paid for the
prints by Curated to the artists or dealers, it had other
expenses:
(a)
A commission of $5 per print to the person who acquired the
prints for it;
(b)
The cost of storage, insurance and shipping of the prints;
(c)
A management fee of $125 or $135 per print to its associated
corporation AFEC. Since over 63,000 prints were donated under the
program the management fees would have amounted to over
$8,000,000; and
(d)
the cost of retaining the valuators Kathleen Laverty and
Roger Woltjen.
[15] Curated sold the prints to the 660
Canadian taxpayers for prices that generally ranged from $290 to
$320 per print. The price varied depending on the number of
prints purchased. The Statement of Agreed Facts sets out two
examples of the purchase invoices. Several versions were used in
1999. One version used in 1999 read in part:
1 - 9
Works:
Current Market Value (retail price at Galleries)
10 - 49 Works $500.00 CDN a piece
50 -99
Works
$350.00 CDN a piece
100 - 249
Works $320.00 CDN
a piece
250 +
Works
$300.00 CDN a piece
Each work will be from Curated Prints Ltd.'s inventory and
will have a minimum fair market value of $625.00 US as determined
by an independent appraisal to be provided on closing.
Another version read:
1 - 9
Works
Current Market Value
10 - 24 Works $500.00 CDN a piece
25 - 49 Works $360.00 CDN a piece
50 - 99 Works $345.00 CDN a piece
100 - 249
Works $320.00 CDN
a piece
250 +
Works
$300.00 CDN a piece
Just what 'Current Market Value' meant is uncertain.
[16] Some individuals associated with the
AFE program including the appraiser Ms. Laverty acquired
prints under the program and received discounts.
[17] Volume 5 of the 54 books of documents
is a document prepared by Kroll Lindquist Avey. It is
referred to as the Kroll Material. It consists of schedules
summarizing information about the prints donated by the Canadians
and about the prints donated by many other donors in the AFE
program in 1997, 1998 and in 1999. This document summarizes
material in 11 of the 54 books of documents relating to a
substantial number if not all of the works purchased in the
program.
[18] In summary there were 24 donation
recipients 23 of which are United States educational
institutions and one of which was an institution in Israel. There
were 63,074 prints donated in the program. There were numerous
artists and print names. It appears that most of the donors
bought enough to entitle them to the lower prices charged by
Curated.
[19] Mr. Klotz's donation to FSU
comprised 250 prints created by 30 artists. They were bought for
$75,000 on December 28, 1999 and donated on
December 30, 1999 for which he received a charitable
donation receipt of $258,400. He never saw the prints, never had
possession of them and had no role in choosing them. They were
shipped directly to FSU. He participated in the AFE program in
1998 as well to the extent of 333 prints, which he gave to
Providence College of Providence, Rhode Island and claimed a
charitable deduction based on a fmv of $381,350. That year is not
before the court.
[20] Mr. Klotz is senior vice president
of capital markets at a company Prebon Yamane. In 1997, 1998 and
1999 he earned a substantial income and is sophisticated in
financial matters. He brokers interest-rate derivative products
to financial institutions.
[21] He became involved in the AFE program
on the advice of his financial advisor, Mr. David Brill, who
had brought him similar programs in the past. He stated that he
trusted Mr. Brill. It is not entirely clear that
Mr. Klotz was aware that out of the $125 or $135 per print
management fee paid by Curated to AFEC, AFEC paid financial
planners who recommended the AFE program to the taxpayer 10 to 15
per cent of the price paid.
[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.
[23] He received substantial promotional
materials from the AFE program. They contain a page or two of
idealistic and somewhat hifalutin verbiage about the social
benefit of giving art to educational institutions but the bulk of
the material has to do with the tax advantages. Two opinions from
well-known law firms were received. The opinions are carefully
drafted but like most legal opinions that I have seen in respect
of transactions in which the reduction of tax is a significant
factor, they are more in the nature of a dissertation on the
various provisions of the Act in the government's arsenal
that might be used to attack the intended tax result. Such
opinions are stated to be subject to so many qualifications,
provisos and assumptions that it is difficult to see how a client
could derive much comfort from them.
[24] Mr. Klotz did not receive
Ms. Laverty's appraisal until after he had donated the art
works.
[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.
[26] The principal question here is: what
was the fmv of these prints at the date they were donated? It is
not suggested that they increased over 300 per cent in value
between December 28, 1999 and December 30, 1999. The argument is
that in December 1999 they were worth $1,000 and it is irrelevant
that Ms. Krawczyk or other purchasing agents managed to
persuade hundreds of artists or art dealers to part with
thousands of limited edition prints for US$50 (or less, sometimes
as little as US$5) or that Curated was able to sell over 63,000
prints to about 660 Canadians for about $300 per print.
[27] The basis upon which the $1,000 per
print value is advanced is the valuation made by
Ms. Laverty. A valuation was made as well by
Mr. Roger Woltjen. Although it was put in evidence it
was not tendered as an expert witness report and Mr. Woltjen
was not called as a witness. The other expert, Mr. Alasko,
was called to comment on the metholodogy of Ms. Laverty's
and Mr. Woltjen's reports. I excluded the portion of his
report dealing with Mr. Woltjen's report and I shall say
nothing more about Mr. Woltjen.
[28] Ms. Laverty is an art dealer and
appraiser. The report that she prepared on the value of the
prints donated by Mr. Klotz to FSU had an effective date of
December 28, 1999 and expressed a conclusion of value
of $265,900. This is higher than the amount in the receipt issued
by FSU, which followed the practice of issuing receipts in
amounts that were the lower of those expressed by
Mr. Woltjen and Ms. Laverty.
[29] Her report consisted of a
one-page letter to which were attached schedules detailing
the prints being valued containing the name of the artist, the
value assigned, the number in the series if there is a series and
the method of production (silkscreen, lithograph, linoblock,
aquatint or woodblock). I have picked at random one artist,
Stephen Davis, as an example and have reproduced below the
data relating to him set out in the schedule. I do not know what
the seven digit number on the left or the four digit number
preceded by the letter E are. Presumably they are some type of
identification.
Davis, Stephen
Untitled (Monoprints) - E7054
- Height x Width = [19.00 x 27.00 inches] or [48.26 x 68.58
cms]
Silkscreen
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3,034,099
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1 of 200
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$1,000
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3,034,100
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2 of 200
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$1,000
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3,034,107
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9 of 200
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$1,000
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3,034,119
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21 of 200
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$1,000
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3,034,125
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27 of 200
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$1,000
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Untitled black & white squares with drawing - E6987
- Height x Width = [19.00 x 27.00 inches] or [46.26 x 68.58
cms]
Silkscreen, mixed media
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3,033,764
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Unique
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$1,000
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3,033,773
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Unique
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$1,000
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3,033,776
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Unique
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$1,000
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3,033,786
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Unique
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$1,000
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3,033,792
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Unique
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$1,000
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[30] Of the 250 prints valued in the Klotz
donation, 201 are valued at exactly $1,000 each, 13 at $1,100, 16
at $1,200, 11 at $1,400, five at $1,500, three at $1,800 and one
at $2,000. One is struck by how many come in at exactly $1,000
each. Ms. Laverty's reports that are given to the donors
appear to be identical in every case except for numbers.
[31] Since this is a test case it is
appropriate that I reproduce in full the appraisal that was given
to Mr. Klotz.
HORIZON ART GALLERIES (1994) LTD.
Denman Place P.Stn. POBox 47055
VANCOUVER, BC V6G 3E] (604) 602-0440
DONOR: Frank Klotz
60 Chancery Lane Oakville, ON L6J 5P6
RECIPIENT: Florida State University
Inspection:
Dates: 21/11/97, 8/12/97, 20/1/98, 19/6/98,
9/11/98,
Location: Vancouver, BC; New York, NY;
2317199,29/10199,5/11/99,4112/99
Toronto, ON
Report date:
25/01/00
Condition: Good, unless otherwise stated
Item: 250 Original prints
Value Conclusion: $264,900.00
Cdn
Effective Date: 28112199 Purpose: Current Fair Market
Value (CFMV) for Donation
CFMV Definition: the highest price available in an open
and unrestricted market between a willing buyer and a willing
seller, who are both knowledgeable, informed and prudent, acting
independently of each other. Other definitions: AP
(artist's proof) HC (hors commerce) PP (printer's proof)
WP(working proof) BAT(bon a tirer)SP(state proof), TP(trial
proof)
Method: Market data approach with the relevant market being
retail gallery sales. The price assigned is the mode for the
highest and best use, arrived at through the analysis of retail
sales of like or similar properties, use of current published
price indexes, and market parallels comparing artist's
reputation and sales history, complexity and artistic exploration
of medium, costs of production, and size of the edition. Value
does not include any fees or taxes, nor does it take into
consideration any future events.
TERMS AND CONDTl7ONS
This appraisal is given subject lo the terms and conditions
hereinafter set forth, all of which are a part thereof unless
expressly set aside in writing on the pages of this Appraisal and
signed by all parties concerned.
The values expressed are based on the appraiser's best
judgment and opinion and are not a representation or warranty
that the items will realize that value if offered for sale al
auction or otherwise. The values expressed are based upon current
information on the dale made and no opinion is expressed as to
any future values nor, unless otherwise stated, as lo any past
values.
Stated values are given item by item unless stated as being
per grouping. The total of the individual item values shall not
be construed as an appraised value for the whole collection, but
merely as the addition of single items. Where values are given by
a grouping, the value for the group is for the whole and no
opinion is given as lo individual or proportionate values within
the group. Unless otherwise stated values expressed are based on
the general expertise and qualifications of the appraiser as lo
the purpose (value sought) and function (assigned use) involved
as well as lo the most appropriate market for the items listed.
Where particular detailed valuation information is relied
upon, it will be so stated in writing.
Where an appraisal is made on a sample of the whole, it AU be
so stated, and it will be based on the critical assumption that
the sample is representative and fair. While this appraiser
undertakes lo make even' reasonable effort lo ensure the
samples taken are representative and fair, no warranty is given
or implied that this is, in fact, the case.
Where the appraisal is based not only on the item(s), but also
on factual data or documentation supplied therewith, the
appraisal report shall so state by malting reference thereto and,
where appropriate, attaching copies of such data and
documentation to the appraisal. Should, in conjunction with this
appraisal, additional services of the appraiser by requested by
the client his agent or attorney, or the court (such as for added
lime researching other value purposes, pretrial conferences,
court appearances, depositions, court preparations,
etching.) compensation for same shall be al the customary
hourly rate charged by the appraiser at the time and shall be due
and payable by the client immediately upon receipt of a statement
for said work.
Unless otherwise noted. estimates of value are based only on
visual inspection with no tests of any kind having been
conducted. Unless otherwise noted, all prints are signed and
numbered. Measurements and details of medium, title and editions
were determined under "field conditions" and are,
therefore, approximate. All written data supplied by Curaled
Prints is assumed lo be correct and the appraiser has taken all
reasonable action to confirm the data's accuracy.
I certify that to the best of my knowledge and belief that the
facts contained in this report are true and correct. based on
full and fair consideration of all the facts available; that I
have personally examined the appraised property, or in the case
of print editions, I have examined one print from the edition,
that I have no past, present or future interest in the properly
appraised; that unless otherwise noted estimates of value are
based only on visual inspection with no test of any kind having
been conducted, that my fee for appraisal is not contingent upon
the value found; that. unless otherwise noted, no one provided
significant professional assistance to the person signing this
report: that this appraisal has been prepared in conformity with
and is subject lo the International Society of Appraisers'
Appraisal Report Writing Standard and to the ISA Code
of Ethics and to the Uniform Standard of
Professional Appraisal Practice (USPAP). Any departure from
these standards, the reasons for such departure. and its impact
on the appraiser's value conclusions were discussed with the
client in advance.
Unless otherwise noted, the appraised values are based on the
whole ownership and possessory interest undiminished by any
liens, fractional interest or and• other form of encumbrance
or alienation. This report is confidential and no change in the
report shall be
made by anyone other than the appraiser. The appraiser shall
have no responsibility for any such unauthorized changes. No
portion of this report, including the cover page, may be
reproduced copied or used in any manner by anyone other than the
client, his agent or stipulated third parties, without the
appraiser's consent.
The undersigned is an independent appraiser of contemporary
an
(Accredited Member, International Society of
Appraisers)
[32] The expert report filed in court was
somewhat more extensive. It explained her methodology. Her
definition of fmv is the traditional one.
[33] Because I am not prepared to accept her
conclusion of value I believe that in fairness I should set out
portions of her expert report and then give my reasons for
agreeing with the Crown's position, even though the Crown called
no witnesses. To call no expert witnesses in a valuation case can
be a risky manoeuvre. Nonetheless, the court is not bound to
accept any expert's opinion and ultimately the court must make
its own determination of value based on all of the evidence.
[34] Before I come to her report, however,
there is one point that was emphasized by counsel for the
respondent and it is Ms. Laverty's purchase in 1998 of 25
prints for $200 each and, in 1999, 10 prints for $200. She
donated them to an educational institution and claimed a
charitable donation tax credit, which was disallowed and
penalties were imposed. She has objected to the assessment.
[35] Counsel for the respondent suggests
that her evidence should be rejected because she is not objective
and has an interest in the outcome. Mr. Alasko - a highly
qualified expert - took a somewhat more benign view of
Ms. Laverty's lapse in judgement in becoming involved in the
AFE program. He considered that what she did was naïve but
that it did not in his view compromise the conclusion. He noted
certain respects in which her report did not conform to the
standards set by the Uniform Standards of Professional Appraisal
Practice. He did not however endorse the conclusions but said
they were "reliable in substance". He noted a number of
inadequacies but said "it's not the greatest report in the
world". He said "substantially I think that the report stands up.
It's thin but it stands up." The expression "damning with faint
praise" comes to mind.
[36] My impression of Mr. Alasko in the
witness stand and upon reading the transcript is that he was a
kind man who was not anxious to cause Ms. Laverty any more
embarrassment than she had already been caused. The most that he
could do was to give the report a very lukewarm endorsement. He
made it clear that he was not endorsing the conclusions.
[37] I am not prepared to reject
Ms. Laverty's report simply because of her rather minor
participation in the AFE program. My concerns with the appraisal
go beyond that. Counsel attacked her objectivity, independence
and credibility. I prefer to examine the report objectively. It
is, after all, the appraisal not the appraiser that is on trial
here.
[38] Her report reads in part as
follows:
Curated Prints ("CP") retained my professional services in
November, 1997 to examine and appraise original prints. CP was
considering acquiring original prints for resale and subsequent
donation to institutions qualified to receive charitable gifts.
Services were limited to estimating a fair market value based on
my experience (see Appendix B: Professional Profile. Professional
standards were observed. The standards established by the
International Society of Appraisers were applied. The engagement
was not contingent upon values assigned, and I had no interest in
the prints purchased by CP, including those prints later
purchased from CP by Mr. Klotz (the "Klotz Prints").
Under the terms of the retainer, many hundreds of prints were
personally examined and documented. The examinations and related
documentation and appraisal work was conducted over a series of
two and a half years. The examinations took place in
New York in November and December 1997, January, September
and November 1998, November and December 1999, and February 2000;
in Toronto in 1999, and in Vancouver in December 1999. The
examinations were in the presence of people contracted by CP to
source prints.
The works examined were usually from limited editions, and
were usually samples. Most of the prints were created by American
artists whose primary market is in the United States. It was
assumed, based on assurances from CP, that the condition of any
other prints from the same edition purchased by CP would be
excellent. Not all prints examined were assigned a value. For
those that were, the values estimated were expressed in US
currency, then converted from US$ to Cdn$ at the prevailing
conversion rates between 1US$ to 1.4 Cdn$ and 1US$ to 1.5
Cdn$.
The appraised values were conservative, in order to account
for the possibility of discounts offered by retail dealers. The
appraised values ranged from $250 Cdn to $1800 Cdn. The value
estimates were updated periodically throughout the term of the
retainer to account for changing market conditions. The value
conclusions for each individual print were submitted to AFE
Consultants Ltd. ("AFE"), a company understood to be assisting
individuals who purchased prints from CP with the donation of
those prints to educational institutions.
The assigned use of the appraisal was for donation purposes.
The definition of fair market value used was as follows:
"The highest price available in an open and unrestricted
market between a willing buyer and a willing seller, who are both
knowledgeable, informed and prudent, acting independently of each
other."
The sales comparison approach was used with the relevant
market being retail sales. The cost approach or the replacement
cost (comparable) was also taken into consideration. The estimate
of value was the mode (the most common value) for the highest and
best use of like or similar properties, using current price
indexes, dealers' suggested retail prices, and market parallels
comparing the artist's reputation and sales history, the
complexity and artistic exploration of medium, costs of
production, and the size of the edition. The fair market value
did not include fees or taxes, nor did it take into consideration
any future events.
B. Value Conclusions
The values assigned to each of the individual Klotz Prints are
shown in Appendix A. The values ranged from $1000 CDN to
$1800 CDN. For the 250 Klotz Prints:
Fair market value: $264,900 CDN as of December 28,
1999
C. Scope of Review
The process used to examine, document and research values for
the Klotz Prints began with the examination of prints as outlined
in the Introduction. At each of the viewing locations other than
Vancouver, the person who purchased prints on behalf of CP was
present. As a starting point for analysis, CP in most cases
provided a list of works with descriptions, photographs of each
work, and biographical material.
Each work (or a sample from the same print edition) was
examined and the following details and qualities were noted:
artist, title, date of production, size of paper, size of
image, quality of paper, print technique (see appendix C),
edition size, condition and quality of the image.
The complexity of the print was noted. The artist's biography,
price history, and price lists (current and past) were studied.
During the two and a half years that the examinations were
conducted, extensive time was spent visiting galleries, attending
auctions and art fairs, checking the resale market, reading trade
publications and conducting general research. Appendix D is a
chart summarizing by artist/print all of my research used to
determine market values for the Klotz Prints.
Numerous sources were used to conduct the research required in
order to estimate the fair market value of the Klotz Prints:
1) Representative galleries and
dealers: Retail inventory lists were reviewed and verbal
confirmation of recent sales of works by the artists from the
Klotz Prints was obtained.
2) Published price lists: Reliable sources to determine
artists' retail prices are from the publisher's/distributor's
suggested retail price lists. The price lists are readily
available to the individual consumer at many art fairs across the
United States, on the Internet, and at the galleries with
exclusive representation of an artist. In researching values for
the Klotz prints, published price lists were consulted.
3) Comparables: When qualities of one item are compared to
similar items by the same artists and/or to similar items by
other artists the values for the comparables are helpful in
estimating value. Comparables were sought for all of the Klotz
Prints.
4) Biographies: The artist's credentials were reviewed to note
the level of relevant education and gallery representation. The
dates and venues of exhibitions, lists of public and corporate
collections, and bibliographical sources were reviewed to help
associate an artist with his peer group. These associations help
establish a reasonable price range for an artist's works.
5) Art Fairs: International Art Fairs were attended on a
regular basis to maintain and develop knowledge of the print
market, which was used in appraising the Klotz Prints.
6) Trade magazines: Some publications such as Art in Print,
Art Business News, and gallery catalogues are sources of prices
for the most current work by artists. Other trade magazines such
Art in America confirm the importance of an artist through
reviews and articles. These publications, issued and reviewed
monthly contributed to the knowledge applied in evaluating the
Klotz prints.
Appendix E is a list of the sources used in the Klotz
appraisal.
[39] Ms. Laverty considered three approaches
to value: income, cost and market data. She rejected the income
and cost approach and chose the market data or sales comparison
approach. In using this approach she explained why she turned to
what she described as the "retail" market rather than the
"wholesale" market.
The research for the market data or sales comparisons began by
examining both the wholesale and the retail markets. There is a
wholesale print market but, as with other commodities,
transactions take place in the wholesale market only where
special conditions are met, one of which is the volume of prints
purchased. Wholesale transactions involving multiple prints are
made to the art trade, at prices not available to members of the
general public seeking to acquire a single print. Print
publishers, artists, and dealers who are continuing to promote
the artists' works have a vested interest in making sure that the
wholesale buyer would not be harming the current market for works
by the same artists. Any wholesale transaction would be
predicated on the protection of the market value that the
publisher/artist/ dealer had worked hard to build and
maintain.
The Klotz Prints were to be donated to an educational
institution for the benefit of its users. The review of the
larger publishing and distribution print businesses clearly
indicated that there are hundreds of thousands of prints being
created and available in the American retail market every year.
When compared to the total number of prints sold at retail
outlets between December 1997 and December 1999, the number of
prints CP sold at wholesale was a small percentage of the market,
and would not be large enough to have any impact on the retail
market. Although Klotz and others may have purchased their prints
at a wholesale cost, there exists a far larger market for the
prints at the retail level.
Cost and value are two different concepts. Cost is the price
paid, which, depending on the circumstances surrounding the
purchase can differ significantly from fair market value. The
latter is the highest price available in an open and unrestricted
market between a willing buyer and a willing seller, who are both
knowledgeable, informed and prudent, acting independently of each
other. The most common market where fair market value is
determined is the retail, not the wholesale market. The highest
and best use for each of the individual Klotz Prints is in the
retail.
The market data or sales comparison approach, which is the
analysis of similar sold properties, was the approach to value
considered to be the most useful in estimating values for the
Klotz Prints. The value assigned to each print was the mode (the
most common value) for the highest and best use of like or
similar properties, using current price indexes and market
parallels comparing the artist's reputation and sales history,
comparing the complexity and artistic exploration of medium, the
costs of production, and the size of the edition. The state of
the retail print market from December 1997 to December 1999 was
stable.
3. Relevant Markets Considered in Applying the Sales
Comparison Approach
The retail markets researched were both those of retail sales
and secondary market sales of international auctions and of
secondary market dealers. The auctions research did not provide
sufficient information about the value of the Klotz Prints. Price
lists from dealers were useful for sales comparison purposes. The
research established that artists whose works are readily
available at retail outlets created most of the Klotz Prints.
The American-retail print marketplace is very large, and is
characterized by many different business structures. The most
relevant of these for most of the Klotz Prints, which are all
original prints, is the printer to publisher to distributor
business structure. This structure has the ability to build and
sustain the print market so that through an orderly distribution
over a few years the maximum prices can be realized.
The artists who created the Klotz Prints fall primarily into
two basic groups, with some overlap. The following artists have
or had their works printed, published and marketed by others:
Asmar, Bratt, Diamond, Hall, Hardy, Jian, Jones, Kidder, King,
Izquerdo, Morris, Nesic, Slonem, Sonfist, Saito, Tobey, Walker,
and Zox. Companies who print and distribute and sell their
artists' works through a network of galleries and art auctions, a
system otherwise known as orderly distribution, control the
market for these artists. There is also a reasonable expectation
that a high percentage of a print run will sell within a few
years. Unforeseen market conditions, and unusual business
circumstances are some of the reasons to cause those expectations
not to materialize. These publisher/distributors use a suggested
retail price list, which is readily available to the consumer.
Artists in this group will produce upwards of six images a year,
generally in large print runs to accommodate the demand of a
chain of galleries that will range from two or three and up to
fifty or sixty. The life span of a print within this system may
only be five to six years before any remainders are shelved while
newer works are promoted in the galleries. The qualities of these
prints remain the same as when they were sold at their last
listed retail prices therefore their value does not diminish.
Their price is supported through the ongoing sales of similar
works by the same artists, through the facilities of the dealer
or publisher.
The second group of artists do their own printing but their
distribution/marketing is primarily left to dealer/distributors.
These artists are Consagra, Davis, Hewitt, Kent,
Marca-Relli, Mock, Poloukhine, Porter, and Storey. Their
prices are also supported by the dealer/distributor but, on a
smaller scale. These dealers will sell at retail or at discounts
to other dealers, using a sliding scale tied to volume buying.
These artists generally produce smaller print runs primarily
because their perceived front end demand is not as high as those
being promoted through large companies.
The information from the market research for sales of Labrie,
Szkola and Walker prints was minimal. Because direct sales
information was not found, the next closest comparisons were
sought for works with similar physical properties, complexity of
the technique, and the quality of the image.
For those artists with an established publisher/distributor
price history, published price lists, gallery price lists and
artist's price lists were examined. To establish the value
conclusion for each of the Klotz Prints the most weight was given
to values found for the same print, and then to values found for
similar works by the artist (size, medium, print method, image).
Where no values were found for a print then the values were
sought for comparable items and a reasonable value was assigned.
Some artists also produce and sell works in other media such as
drawings, paintings and sculpture. Information regarding current
prices of works in other media was used to assist in determining
current value for a print by the same artist.
Sales comparisons (prints with similar qualities by the same
artist or by other artists) were also sought by examining
evidence of current prices at the artist's representative
galleries, or price lists supplied by galleries, artists,
printers, publishers or in commonly used price guides.
Appendix E lists these sources. Confirmation of retail sales
prices from galleries, artists and international art fairs was
collected and noted. Some industry standards confirmed from art
fair research were that works by the same artist are available at
the same price through all dealers at the primary retail market
level, and that higher prices are place on larger works by the
same artist when medium and complexity are similar. An exception
to this is when an artist is in control of his own prices and is
selling through a small number of dealers. An example of this is
Mock's prints in Klotz's Prints.
When available the artists' biographical material was studied
for levels of professionalism. Works by artists with higher
quality professional education, and credible exhibition and
collection histories are more likely to retain or increase their
value than work by lesser artists. Most Klotz Prints were by
artists with a lengthy exhibition history and commercial dealer
representation.
4. Results of Analysis
All the Klotz Prints were assigned individual values, as
analysis confirmed that if distributed in an orderly fashion, the
highest and best use for the Klotz Prints was in the American
retail market where prints are most often sold individually. The
retail market value is the most relevant value because that is
the market available to the highest number of consumers, making
the retail price the most common price.
Klotz purchased these prints from CP at reduced prices based
on the size of his purchase. Wholesale opportunities are only
available to consumers who are buying large amounts, and are not
available to the average consumer. A seller wishing to attain the
highest price would choose a retail market.
It was on these principles that the conclusion was reached
that the most common market for the Klotz Prints was the retail
market, where the prints could be sold in an orderly manner for
their highest price, over a reasonable period of a few years.
[40] I have reproduced large portions of
Ms. Laverty's report because in fairness to her it is
important that I give my reasons for not accepting it. On paper
her report has a certain plausible ring to it. However, I reject
it for several reasons:
(a) Even if we accept that the proper
market to which one should look is the "retail" market, that is
to say the retail art galleries, principally those in
New York, the evidence does not support the conclusion that
recourse to that market justifies the fmv determined in the
report.
(i)
The evidence of actual sales of identical or similar prints is
virtually non-existent.
(ii)
Price lists of dealers are not a reliable guide to the price that
a willing purchaser and a willing vendor would agree upon.
(iii)
I do not think that what a New York art dealer might be asking
for a similar print by one of the artists whose works are in the
program proves anything about what scores of the same work would
fetch if they were all dumped on the market at the same time.
(iv)
The conclusion that over 80 per cent of the prints involved
in the Klotz donation (and probably in everyone else's) were
valued at precisely CDN$1,000 (which by an extraordinary
coincidence is the amount mentioned in subsection 46(1)) is
suspect, to say the least. I find it hard to believe that there
is no difference between the multiplicity of prints valued.
(v)
No differentiation was made with respect to the identity of the
artist, the medium used, the number of prints in a series, the
age of the prints, how long they had been lying around
unsold.
(vi)
Her evidence that the prints of some artists would fetch the
prices she determined if exposed for sale over a period of years
proves nothing about the fmv on December 30, 1999. It is moreover
conjecture unsupported by the evidence. I am prepared to assume,
without any real evidence, that, had we but world enough and
time, the odd print of a particular artist might eventually sell
for $1,000. I am not however prepared to leap from that
speculative assumption to the conclusion that on December 30,
1999, 100 of that artist's prints would sell for $100,000 in the
open market.
(vii)
Some of the prints that were obtained by Curated through
Ms. Krawczyk were obtained from dealers such as Szoke
Gallery, Novak Graphics and Alex Rosenberg Fine Arts at the
favourable prices authorized by her mandate. It is strange that
dealers would sell the prints to Curated or Ms. Krawczyk for
US$50 or less if there were a retail market out there ready to
buy the prints for $1,000 each. Although the evidence of actual
sales of identical or comparative prints is thin, if it exists at
all, I am prepared to assume that one of a particular artist's
prints may be offered for sale in a New York gallery for
$1,000 and perhaps somebody might even pay that for it. However,
one swallow does not make a summer and I have certainly not seen
a flock.
b) A possibly more fundamental problem with
Ms. Laverty's report is that in my view she picked the wrong
market. A great deal of time was spent in the evidence and in
argument on identifying and articulating the market to which an
appraiser should look in determining the value of these works of
art. Let us stop for a moment and ask ourselves just what we are
trying to do here. We are not valuing an individual print. We are
valuing 250 prints given en masse to a university. What is to be
valued is the totality of that gift and one must look to what
those 250 prints would fetch on the open market. The best
evidence of what 250 prints would sell for is what they in fact
sold for - $75,000. Now it will be objected that this is contrary
to the decision of Beaubier J. in Malette v. The
Queen, 2003 DTC 1078. The case is under appeal to the Federal
Court of Appeal and perhaps I should say nothing about it but
since counsel placed considerable reliance on it I shall mention
it briefly. It involved a gift of 981 paintings by a painter to a
public art gallery. The taxpayer valued the gift at $879,714 and
the Canadian Cultural Property Export Review Board valued it at
$293,246. The valuator for the Board valued each painting
individually then gave a bulk discount of 90 per cent
on the premise that the disposition occurred in the "tax shelter
market" in which the value consisted of 8 to 15 per cent of
the objects' fmv. Where she got this notion is not clear from the
record. The basis upon which the appellant and the painter
determined the price is equally mystifying. The price agreed to
was apparently 25 per cent of whatever the Board's
certificate would be.
[41] Beaubier J. rejected the block
discount, on the basis of the decision of Mogan J. in
Pustina, Whent and Zelinski v. The Queen, 96 DTC 1594 in
which he rejected the application of a block discount. His
judgment was affirmed by the Federal Court of Appeal.
[42] In Pustina, one of the issues
was whether the acquisition and sale of the Morrisseau paintings
was an adventure in the nature of trade. That position was
rejected and is not advanced here. The paintings were assembled
over two years for a total of $129,350, not en masse, and were
valued by the taxpayer's appraisers at $992,900 and the
respondent assessed on the basis of a value of $255,155.
Mogan J. valued them at $660,000. His finding of fact was
upheld by the Federal Court of Appeal. Mogan J. was faced,
however, with the respondent's own expert witness valuing the
paintings at $510,000. He chose not to ignore it (96 DTC
1609-1610) but considered all of the appraisals and arrived at a
figure that differed from all of them.
[43] Neither case is of much assistance
here. I am not applying a block discount to a retail value.
Indeed I would not know what figure I should apply a block
discount to. I do not regard the value of $1,000 per print or
more arrived at by the appellant as sufficiently reliable to use
as the starting point at which to apply a block discount even if
I were inclined to do so.
[44] I am simply looking at the best
evidence available to determine what the fmv of the gift of 250
prints is. The most contemporaneous and most comparable figure is
what Mr. Klotz paid Curated for them. One might question
whether even this figure is too high considering that the reason
Mr. Klotz paid even as much as he did was that he believed
that an expenditure of $300 would yield him a tax credit based on
$1,000. It is an interesting question that I need not consider
here whether the price paid for something is truly indicative of
fmv where the predominant component in the price paid is the tax
advantage that the purchaser expects to receive from acquiring
the object. I need not pursue this question because the Crown did
not suggest a lower figure. The US$50 figure (Ms. Krawczyk's
maximum price) that was mentioned in the reply was not pressed in
argument.
[45] The Crown's principal argument was that
the magnitude of the mass art donation program (63,000 prints in
1997-1999 sold by Curated alone) created its own market.
[46] The respondent's approach is in my view
more realistic. Mr. Alasko described the sale to the
appellant by Curated as a wholesale or bulk transaction. No doubt
the respondent would have preferred to have him say it was a
retail sale but in the final analysis it does not really matter
what one calls it. It is what it is. It was a sale of 250 prints
for $75,000 between two arm's length parties. The gift was a
virtually contemporaneous disposition of the same 250 prints.
What better evidence is there of what the 250 prints were worth
at that time? Why chase the will o' the wisp of an elusive and
largely hypothetical fmv through the trendy up scale art
galleries of New York and ignore the best evidence that is
right there before your very nose? The problem with the claim
here, whereby property is acquired for $5 to $50, sold to the
appellant for $300 and claimed to have a fmv two days later of
$1,000, is that it is devoid of common sense and out of touch
with ordinary commercial reality.
[47] Considerable argument was devoted to a
number of United States Tax Court decisions. That court has
had to deal with very similar arrangements. As I observed in
Aikman v. R., [2000] 2 CTC 2211, affirmed [2002] DTC 6874,
one must treat foreign authorities with caution, but they are
entitled to respect and they can be instructive where they deal
with essentially the same problem.
[48] A case that is very close to this one
is Lio v. Commissioner, 85 T.C. 56. Counsel for
the respondent quoted extensively from it and I find the
reasoning persuasive.
. . . we must first identify the market where the lithographs
at issue in this case are commonly purchased by the ultimate
consumers and ascertain the price paid for them in such market. .
. . The petitioners argue that lithographs are most commonly sold
to the public by art galleries and dealers at retail prices and
that, therefore, the prices charged by such galleries and dealers
for individual Nelson and Nierman lithographs are determinative
of fair market value. They maintain that since art galleries sold
an unspecified number of unframed Nierman lithographs from the
same editions as those at issue for $300 each in 1979, and since
some similar Nelson lithographs were sold by a mail order dealer
unframed at $150 each from 1975 through 1980 and by a gallery
framed for $260 to $325 each between December 1979 and February
28, 1980, they are entitled to charitable contribution deductions
of $300 for each of the donated Nierman lithographs and of $150
for each of the donated Nelson lithographs. We do not agree with
the petitioners' definition of the appropriate market.
Lithographs may be purchased by individuals from galleries or
from those dealers that sell each lithograph separately, but such
are not the only sources for purchasing lithographs. Indeed, the
facts of this case demonstrate that most of the lithographs of
the types at issue were not purchased from such sources. During
1976, 1977, and 1978, AAA was the sole distributor of the Nelson
lithographs, and in 1977 (the Lios' taxable year in issue),
it sold 12,225 of them. Ninety-eight percent of such sales were
made to individuals in lots of 50 to 400 each. Likewise, in 1978
and 1979, Lublin, which was the sole American distributor of the
Nierman lithographs, sold 63 percent (1,473) of such lithographs
in those years to Greenwich, and Greenwich sold all of such
lithographs in large quantities to individuals. Thus, the sales
of these lithographs by galleries and small dealers constituted a
miniscule part of the market; most of the sales were made by AAA
and Greenwich. Moreover, most of the sales by the galleries and
small dealers were of one or only a few lithographs at a time;
whereas, Dr. Lio purchased 150, and Dr. Orth
purchased 100, of the lithographs. Although the petitioners made
bulk purchases of the lithographs in issue, there is no evidence
that individual lithographs could not have been purchased for the
same price from AAA and Greenwich. Hence, the sales by AAA and
Greenwich must be taken into consideration when we seek to find
the prices most commonly paid by the individuals who purchase
these lithographs for their own use or for gifts to museums.
Clearly, on the facts before us, AAA and Greenwich acted as
art dealers, and the petitioners purchased the lithographs as
individual customers. The sales of the lithographs to the
petitioners were as much sales to "ultimate consumers"
as the sales by art galleries and dealers to other individuals
upon which the petitioners rely. It is common knowledge that a
consumer can pay a wide range of retail prices for the
same item depending on where he chooses to shop and how much
investigating he does of the various sources of a particular
item. . . . We do not construe the term retail as used in
this context to mean that where a consumer has a choice of
several sources for an item, only the most expensive source is a
retail sale and all other sources are wholesale. Rather, the sale
to the ultimate consumer is any sale to those persons who do not
hold the item for subsequent resale . . . and the most
appropriate market for valuation purposes is the most active
marketplace for the particular item involved. In the present
case, the most active marketplace for Nelson and Nierman
lithographs was the marketplace in which the petitioners
purchased them.
[49] It should be noted that in the United
States there is a specific regulation referring to the market in
which the item is "most commonly sold to the public". Such a
criterion is not statutorily imposed in Canada. In determining
fmv we are not directed to any particular market.
[50] Another instructive authority in the
United States Tax Court is Samuel E. Hunter v.
Commissioner, 51 TCM (CCH) 1533 at 1537:
Petitioners' explanation of the differential between the
amount they paid for the prints and the prints' claimed fair
market value is that Mr. Ackerman's close relationship
with Marlborough enabled him to purchase the prints at a
substantial discount from the retail price which he, in turn,
passed on to petitioners. According to petitioners, Sovereign,
through Mr. Ackerman, purchased the prints from Marlborough at
approximately one-sixth of the retail price. Sovereign
transferred the prints to Rocquencourt, who then sold the prints
to petitioners at approximately one-third of the published retail
value.
Sovereign, through Mr. Ackerman, was able to acquire the
prints at a substantial discount from Marlborough's published
retail price due to the fact that prints were old and constituted
excess inventory in the hands of Marlborough. It is clear to us
that the transaction between Rocquencourt and petitioners was at
arm's length, involving as it did a 100 percent markup by
Rocquencourt. The record is devoid of any explanation of why
Rocquencourt would sell the prints to petitioners for less than
fair market value. Neither Sovereign nor Rocquencourt purported
to be a nonprofit organization. If Rocquencourt sold the prints
for approximately one-third of what it might otherwise have
obtained, as petitioners claim, then such from an economic point
of view, makes no sense. As we found in
Chiu v. Commissioner, supra, we also find here no
credible explanation as to why petitioners would be able to
acquire the prints at substantial discounts from value. Thus, we
believe that the fair market value of the prints in
October, 1978 (as well as in December, 1979) was the
price paid for them by petitioners.
[51] Counsel also referred to Goldstein
v. Commissioner, 89 T.C. 38, and to Chiu for
the propositions that neither price lists nor a few isolated
gallery sales establish fmv. These propositions seem to me to be
rather self-evident and require no further authority.
[52] The United States and Canadian
authorities are both clear that the best evidence of value is the
actual sale of the very property.
[53] In Chiu v. Commissioner, at 2960
the Court stated:
In this case, however, we have what has been described as the
most reliable evidence of value, to wit, sales of the same
property within a short period of time prior to the valuation
date. In another context, the Court of Appeals for the Sixth
Circuit, the court to which our decision in this case is
appealable, has recently stated that "[i]n determining the fair
market value of property, little evidence could be more probative
than the direct sale of the property in question."
In Hunter, the U.S. Tax Court stated at p.1537:
Petitioners presented a plethora of evidence, including
written appraisals of each artist's work and the testimony of
three expert witnesses. Neither the appraisals nor the expert
witnesses were persuasive. All experts failed to consider the
price paid for the prints by petitioners.
The most probative evidence of the fair market value of the
prints is the amount petitioners paid for them, especially as
their acquisition occurred only one year prior to the time of
contribution.
[54] The Federal Court of Appeal in
Global Communications Limited, 99 DTC 5377 at 5385-6
said:
. . . Moreover, the sale from Petroseis to Karon [for $2
million cash] must be deemed to be a sale at fair market value,
since the parties were clearly at arm's length. How, then,
did the so-called experts arrive at a fair market value for the
data of $15 to $19 million? Obviously, Global's appraisers were
not prepared to look at the price paid for seismic data on the
open market. According to the Minister's uncontradicted
evidence, seismic data trades at about 10% of the value at which
it is appraised.
In my opinion, appraisals which ignore cash transactions are
simply self-serving opinions designed to inflate the value of
seismic data and, therefore, must be rejected for tax
purposes....
* * *
Global responds by asserting that only its four appraisers
(three were retained prior to the purchase, another at trial) had
practical valuation experience, and that the Minister's
expert witness lacked this practical perspective. In my opinion,
the appraisal evidence submitted by Global is fatally flawed. The
fact that Global's appraisers adopted the view that the price at
which Petroseis sold the data to Karon had no effect on the value
which they placed on the data defies both commercial and common
sense.
[55] In Aikman, supra, I stated:
The intent or expectation of obtaining a tax advantage does
not vitiate the charitable gift. Nonetheless an appellant in such
circumstances runs a risk that the Board or the court may
conclude that the best evidence of fair market value is the price
at which the object was bought.
[56] I continue to be of that view. It is
one thing serendipitously to pick up for $10 a long lost
masterpiece at a garage sale and give it to an art gallery and
receive a receipt for its true value. It is another for Curated
to buy thousands of prints for $50, create a market at $300 and
then hold out the prospect of a tax write-off on the basis of a
$1,000 valuation. Mr. Mathew presented the appellant's case
with consummate skill and persuasiveness but ultimately his case
foundered on the shoals of common sense.
[57] I turn now to the question whether the
prints were personal-use property. The significance of this is
that if I had agreed with the appellant's valuation of $1,000 per
print but held that the prints were not personal-use
property the appellant would have lost the benefit of
paragraph 46(1)(a) and would have realized a capital
gain of the difference between his actual cost of $75,000 and his
deemed proceeds of $258,400. The reason this question was not
relevant on assessing was that since the Minister's assumed value
of the prints ($75,000) was equal to the appellant's cost, no
capital gain or loss would have arisen on the Minister's theory.
I raise parenthetically the rather interesting question what the
court could do if it had agreed with the appellant's value
(thereby supporting the tax credit claimed under subsection
118.1(3)), but held that the prints were not personal-use
property, so that a capital gain of $183,400 arose. I have not
calculated the comparative benefit of the tax credit and the
detriment of the loss of the protection afforded by subsection
46(1). It is of course trite law that the court cannot increase
the tax assessed. In light of the conclusion I have reached, it
is not necessary for me to deal with the question.
[58] Personal-use property is not
comprehensively defined. Section 54 of the Act however
provides, in English and in French:
"personal-use property" of a taxpayer includes
(a) property owned by the taxpayer that is used
primarily for the personal use or enjoyment of the taxpayer
or for the personal use or enjoyment of one or more
individuals each of whom is
(i) the
taxpayer,
(ii) a person
related to the taxpayer, or
(iii) where the taxpayer is a trust, a beneficiary under
the trust or any person related to the beneficiary,
(b) any debt owing to the taxpayer in respect of the
disposition of property that was the taxpayer's
personal-use property, and
(c) any property of the taxpayer that is an option to
acquire property that would, if the taxpayer acquired it,
be personal-use property of the taxpayer,
and "personal-use property" of a partnership includes
any partnership property that is used primarily for the
personal use or enjoyment of any member of the partnership
or for the personal use or enjoyment of one or more
individuals each of whom is a member of the partnership or
a person related to such a member;
|
« biens à usage personnel »
Sont compris parmi les biens à usage
personnel :
a) les biens qui appartiennent au contribuable et qui
sont affectés principalement à l'usage ou
à l'agrément personnels du contribuable
ou à l'usage ou à l'agrément
personnels d'une ou plusieurs personnes qui
sont :
(i) le contribuable,
(ii) une personne
liée au contribuable,
(iii) lorsque le
contribuable est une fiducie, un
bénéficiaire de cette fiducie ou
toute personne
liée au bénéficiaire;
b) toute créance du contribuable relative
à la disposition de biens qui étaient
réservés à son usage personnel;
c) tout bien du contribuable qui consiste en une option
relative à l'acquisition de biens qui seraient,
si le contribuable les acquérait, des biens
réservés à son usage personnel.
Dans le cas d'une société de
personnes, le terme vise également les biens de la
société de personnes qui sont affectés
principalement à l'usage ou à
l'agrément personnels d'un ou plusieurs
associés de la société de personnes ou
d'une personne liée à cet
associé.
|
"Listed personal property" is defined in section 54 as
follows:
"listed personal property" of a taxpayer means the taxpayer's
personal-use property(1) that is all or any portion of, or any
interest in or right to, any
(a) print, etching,
drawing, painting, sculpture, or other similar work of art,
(b) jewellery,
(c) rare folio, rare
manuscript, or rare book,
(d) stamp, or
(e) coin;
[59] An initial question is what purpose is
served by the words following "including" since as a bare minimum
personal-use property would include property that is used
for the personal use or enjoyment of the taxpayer.
[60] The function is to expand the ambit of
the ordinary meaning of personal-use property, (which would
certainly include property used by a taxpayer for his own
personal use and enjoyment) to cover
(a)
property used for some other purpose, such as business, but used
primarily for personal use and enjoyment.
(b)
Property used by related persons or beneficiaries of a trust.
(c)
Debts arising from the disposition of personal-use property.
(d)
Options to acquire personal-use property
(e)
Property owned by a partnership but used primarily for the
personal use or enjoyment of partners or related persons.
The legislative draftsperson was apparently concerned that
personal-use property by itself would not cover a number of the
enumerated items.
[61] This leaves the question whether
personal-use property, by itself and apart from the
extended meaning in section 54, is confined to property owned by
a taxpayer and used for the taxpayer's personal use or
enjoyment.
[62] I think there are two possible
approaches. The first involves asking the question "What is
clearly not included in the expression 'personal-use
property'"? Obviously it would exclude inventory, land or
depreciable property or eligible capital property used in a
business or to earn income - indeed any property used or held for
an income-earning purpose, whether the income be from
property, business, employment or any of the specifically
enumerated sources in the Act. I shall refer to this broad
category of property as "income property".
[63] On the first approach we would have
"income properties" and everything else. Everything else would be
personal-use property.
[64] The second approach, which the Crown
espouses, involves a more restrictive definition that is to say
the property must actually be used or enjoyed by the taxpayer.
"How", the respondent asks rhetorically "can these prints be used
for Mr. Klotz's personal use or enjoyment when he never saw
them, and never had physical use and possession of them?"
Essentially, therefore, the respondent's approach envisages three
categories of capital property - income property, property
actually physically possessed and used or enjoyed personally by
the taxpayer and everything else. The respondent contends that
the prints fall into the "everything else" category.
[65] This is a somewhat difficult question
of statutory interpretation involving, among other things, the
question whether the words "personal-use property" in addition to
being broadened by the words following "includes" can also be
restricted by those words so that the property must be used or
enjoyed personally by the taxpayer. I do not think that as a
matter of construction it is appropriate to ascribe such a
function to an "including" provision. This has not traditionally
been the purpose of such provisions. Maxwell on The
Interpretation of Statutes, Twelfth Edition, at page 270
discusses such provisions:
It is common for a statute to contain a provision
that certain words and phrases shall, when used in the statute,
bear particular meanings.
Sometimes, it is provided that a word shall
"mean" what the definition section says it shall mean: in this
case, the word is restricted to the scope indicated in the
definition section. Sometimes, however, the word "include" is
used "in order to enlarge the meaning of words or phrases
occurring in the body of the statute; and when it is so used
these words or phrases must be construed as comprehending, not
only such things as they signify according to their natural
import, but also those things which the interpretation clause
declares that they shall include." In other words, the word in
respect of which "includes" is used bears both its extended
statutory meaning and "its ordinary, popular, and natural sense
whenever that would be property applicable."
Thus, by section 10(1) of the Income Tax
Ordinance of Trinidad and Tobago: "For the purpose of
ascertaining the chargeable income of any person, there shall be
deducted all outgoings and expenses wholly and exclusively
incurred during the year preceding the year of assessment by such
person in the production of the income, including- . . .
(f) annuities or other annual payments whether payable
within or out of the colony." The Judicial Committee held that an
annual payment might be deducted under paragraph (f)
notwithstanding that it was not an expense incurred in the
production of income, the effect of "including" being to
comprehend in "outgoings and expenses incurred in the production
of income" payments which would not fall within the natural
meaning of those words.
By section 74(1) of the Shops Act 1950: "'retail
trade or business' includes the business of a barber or
hairdresser, the sale of refreshments or intoxicating liquors,
the business of lending books or periodicals when carried on for
purposes of gain, and retail sales by auction, but does not
include the sale of programmes and catalogues and other similar
sales at theatres and places of amusement." "I think it is
plain," said Somervell L.J., "that the words which follow
'includes' describe activities about which, at any rate, there
might have been disputes whether they came within the words
'retail trade or business.'" The words therefore comprehended
both what they naturally meant (primarily, because of the word
"retail," the supply of goods rather than services) and those
activities specially mentioned in the definition section.
[66] I prefer the appellant's interpretation
which would include the prints in personal-use property. My
reasons are:
(a) The respondent's approach uses the words after
"including" in a manner that I do not think is appropriate in
that it seeks to restrict the words that the provision seeks to
expand. If Parliament wanted to restrict the meaning of
personal-use property and also expand its meaning it is
capable of using language to express that intent. One may assume
that not having done so it did not intend to restrict the
meaning. After all the expression "personal-use property"
is not an expression with a readily ascertainable meaning that is
common in everyday parlance.
(b)The appellant's interpretation is more consistent with the
scheme of the Act (Highway Sawmills Ltd. v. M.N.R.,
[1966] S.C.R. 384 at 393; Glaxo Wellcome Inc. v. R.,
[1996] 1 C.T.C. 2904 affirmed [1999] 4 C.T.C. 371.
Personal-use property is not confined to subsection 46(1).
One important function in the Act is to provide that
capital losses on the disposition of personal-use property
are not allowed as deductions. Why the Crown would want to put a
restrictive definition on it is hard to understand.
(c) The Crown's restrictive definition would lead to an
anomaly. It would mean that a piece of jewellery inherited by a
taxpayer and put in a safety deposit box or an inherited painting
that the taxpayer stored in the attic or gave away would not be
personal-use property but if the taxpayer wore the jewel or
hung the painting on the wall it would be. It would involve a
requirement that one examine in every case just what a taxpayer
did with such a property. Whatever may be the conceptual merits
of the Crown's position, it has certain practical problems.
(d) The definition of listed personal property includes the
very items with which we are concerned here. It is true that such
items must still be personal-use property and it would be
contrary to rules of logic and statutory interpretation to reason
backwards from the definition of listed personal property to the
conclusion that prints are personal-use property. All I
take from the definition of listed personal property is an
indication that prints are capable of being personal-use
property.
[67] I have concluded that the prints are
personal-use property. Even if I had accepted the narrower
interpretation advanced by the Crown I would still have held that
the prints were personal-use property. One way of using an
object is to give it away, whether the motive be altruistic,
charitable or fiscal.
[68] Finally, I come to the question of
penalties. The penalties were based upon the premise that the
appellant's claim was made in circumstances amounting to gross
negligence. I have already held that the value of the gift to FSU
was overstated by a significant amount. Does this amount to a
misrepresentation that is attributable to gross negligence?
Counsel argued that the appellant did not make the sort of
enquiries that he should have and that he knew or ought to have
known that the prints were over valued. It is important to
emphasize that failure to exercise due diligence is not the same
as gross negligence. Gross negligence connotes a much greater
degree of negligence amounting to reprehensible recklessness.
[69] In a recent case Urpesz v. The
Queen, 2001 C.T.C. 2256 the following was said at
pages 2259 to 2261
As it happens, the authorities on this branch of the law are
legion. One might start with the numerous pages under
subsection 163(2) of the Act in the CCH Canadian Tax
Reporter or the DeBoo Canada Tax Service. A recent case is
Farm Business Consultants Inc. v. The Queen,
96 DTC 6085, in which the Federal Court of Appeal
upheld a decision of this court (95 DTC 200). At
pages 205-6 this court said:
I am cognizant of the fact that
subparagraph 152(4)(a)(i) has as its purpose the
opening up of returns for statute-barred years where items of
income, for a wide variety of reasons, are omitted or misstated,
whereas subsection 163(2) is a penal provision and that in
applying it if there is doubt as to the type of conduct to which
the misrepresentation is attributable the benefit of that doubt
should be given to the taxpayer. In Udell v. M.N.R., 70
DTC 6019 Cattanach, J. said at page 6025:
There is no doubt that section 56(2) is a penal
section. In construing a penal section there is the unimpeachable
authority of Lord Esher in Tuck & Sons v. Priester,
(1887) 19 Q.B.D. 629, to the effect that if the words of a penal
section are capable of an interpretation that would, and one that
would not, inflict the penalty, the latter must prevail. He said
at page 638:
We must be very careful in construing that section because it
imposes a penalty. If there is a reasonable interpretation which
will avoid the penalty in any particular case, we must adopt that
construction.
and at page 6026:
I take it to be a clear rule of construction that
in the imposition of a tax or a duty, and still more of a penalty
if there be any fair and reasonable doubt the statute is to be
construed so as to give the party sought to be charged the
benefit of the doubt.
See also Holley v.
M.N.R., 89 DTC 366 at 369; De Graaf v. The Queen, 85
DTC 5280.
A court must be extremely
cautious in sanctioning the imposition of penalties under
subsection 163(2). Conduct that warrants reopening a
statute-barred year does not automatically justify a penalty and
the routine imposition of penalties by the Minister is to be
discouraged. Conduct of the type contemplated in paragraph
152(4)(a)(i) may in some circumstances also be used as the
basis of a penalty under subsection 163(2), which involves the
penalizing of conduct that requires a higher degree of
reprehensibility. In such a case a court must, even in applying a
civil standard of proof, scrutinize the evidence with great care
and look for a higher degree of probability than would be
expected where allegations of a less serious nature are sought to
be established.3 Moreover, where a penalty is imposed
under subsection 163(2) although a civil standard of proof is
required, if a taxpayer's conduct is consistent with two
viable and reasonable hypotheses, one justifying the penalty and
one not, the benefit of the doubt must be given to the taxpayer
and the penalty must be deleted.4 I think that in this
case the required degree of probability has been established by
the respondent, and that no hypothesis that is inconsistent with
that advanced by the respondent is sustainable on the basis of
the evidence adduced.
_________________
3 Cf.
Continental Insurance Co. v. Dalton Cartage Co., [1982] 1
S.C.R. 164; 131 D.L.R. (3d) 599; 25 C.P.C. 72, per Laskin, C.J.C.
at 168-171; D.L.R. 562-564; C.P.C. 75-77; Bater v. Bater,
[1950] 2 All E.R. 458 at 459; Pallan et al. v. M.N.R., 90
DTC 1102 at 1106; W. Tatarchuk Estate v. M.N.R., [1993] 1
C.T.C. 2440 at 2443.
4 This is not
simply an extrapolation from the rule in Hodge's Case
(1838) 2 Lewin 227; 168 E.R. 1136, applicable in criminal matters
such, for example, as section 239 of the Income Tax Act
where proof beyond reasonable doubt is required. It is merely an
application of the principle that a penalty may be imposed only
where the evidence clearly warrants it. If the evidence is
consistent with both the state of mind justifying a penalty under
subsection 163(2) and the absence thereof - I hesitate to use the
words innocence or guilt in these circumstances - it would mean
that the Crown's onus had not been satisfied.
I have obtained great assistance in this matter from two
decisions of Strayer J. in Venne v. The Queen,
84 DTC 6247 and De Graaf v. The Queen,
85 DTC 5280. None of the cases I have mentioned were
referred to by counsel.
At page 6256 in the Venne decision Strayer J.
said:
With respect to the
possibility of gross negligence, I have with some difficulty come
to the conclusion that this has not been established either.
"Gross negligence" must be taken to involve greater
neglect than simply a failure to use reasonable care. It must
involve a high degree of negligence tantamount to intentional
acting, an indifference as to whether the law is complied with or
not. I do not find that high degree of negligence in connection
with the misstatements of business income. To be sure, the
plaintiff did not exercise the care of a reasonable man and, as I
have noted earlier, should have at least reviewed his tax returns
before signing them. A reasonable man in doing so, having regard
to other information available to him, would have been led to
believe that something was amiss and would have pursued the
matter further with his bookkeeper.
[70] I have concluded that this is not an
appropriate case for a penalty under subsection 163(2). The
AFE program was admittedly aggressive. Counsel submitted that
Mr. Klotz was cavalier about checking the values. Cavalier
may be an accurate enough expression. Counsel noted that he
sought no independent advice and did not pay sufficient attention
to the advice in the legal opinions that he examined to the
effect that he should independently verify the appraisals.
[71] Counsel's criticism of Mr. Klotz
has some validity. He was careless about verifying the value.
Nonetheless a penalty under subsection 163(2) for gross
negligence is a punishment for reprehensible behaviour. Here he
relied upon his financial advisor Mr. Brill. He had what on
the face of it was an appraisal by a qualified appraiser. He had
two legal opinions which, however qualified they might be, would
be taken by the average layman as implicitly putting the
imprimatur of two major law firms on the program.
[72] In light of these considerations, I am
allowing the appeal and referring the assessment back to the
Minister for reassessment solely for the purpose of deleting the
penalties under subsection 163(2).
[73] I shall defer the issuance of the
formal judgment for two weeks to permit counsel to make
representations as to costs. The Crown has been successful on the
issue of valuation, but not on the issue of personal-use
property or penalties. Moreover, I should like to have some
representations on the question of who should bear the costs of
preparing 54 books of documents. Counsel are requested to
communicate with the court with respect to a suitable method of
making representations, whether in open court, by writing or by
telephone conference.
Signed at Ottawa, Canada, this 13th day of February
2004.
Bowman, A.C.J.
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