Other

The sole issue in the Appellants’ appeals was the fair market value (“FMV”) of art that was purchased and subsequently donated by the Appellants in a buy-low-donate-high art donation program that was in operation from 1998 to 2003. The participants would pay a specified price (e.g., $3,500) for a “unit” (i.e., grouping) of 11 prints (which came out of unsold inventory of the vendor or had been purchased by it at a cost of less than about 1/7 of that price). Of the unit, they selected one to keep and donated the other 10 to a charity which gave a donation receipt for, say, $10,000. A group purchased by a particular participant would not be the same as a group donated to the charities, as employees of the promoter group (“Artistic”) would split up the groups so that different prints within these groups would be donated to a variety of charities.

After accepting (at para. 70) the submission of the Crown that “the shuffling or shifting of prints would not affect the market value,” Rossiter CJ noted (at para. 71) that “It is evident that what was purchased by the donor were groups of prints, eleven in total.”

In finding that the donated works’ FMV was their purchase price rather than their higher appraised value, he stated (at paras. 74, 90, 96):

Although the participant experts did their best to explain why the donated value was higher than the price actually paid, … I refer … to the statement … in Klotz “…it is devoid of common sense and out of touch with ordinary commercial reality”. It is as simple as that!

It appears … that the appraisers deliberately turned away from other markets. … [T]hey did not comply with the USPAP standards. … (1) they did not refer to prior sales of the property; (2) there is no reference to providence; (3) there was multiples of the same print bought and dated; (4) there was no reference to the price paid by the donors; (5) the use of the art was not considered; and (6) no consideration was given to the impact of the flooded market place.

The Appellants attempted to establish the art was appraised individually. I believe this was done solely for the purposes of documenting the tax shelter being sold to the public. … [T]he appraisals … are unreliable and not credible… . The artwork was acquired in bulk, pedaled in bulk, sold in bulk, packaged in bulk and delivered in bulk – bulk being eleven (11) pieces at a time.

The RRSPs of the two taxpayers and for 117 other investors were defrauded. They were induced to purchase undivided interests in mortgages for an aggregate amount of $7 million, bearing interest at 12%, secured by mortgages on land with a value of around $5,000. Those proceeds immediately disappeared.

D'Arcy J first found that each purchased interest qualified as a qualified investmetn, and then found that there was no income inclusion in the RRSP annuitants’ income under s. 146(9)(b), on the basis that such mortgage interests had a fair market value that equaled rather than being less than the cash consideration paid by the RRSPs therefor, stating (at paras. 64, 68) that:

[T]he appellants purchased those interests as willing buyers from an arm’s length seller and ... neither the appellants nor the seller (U-Have) were under any compulsion to buy or sell. The appellants were two of a number of arm’s length buyers who purchased interests in the Zowtra Mortgage. ...

In summary, they paid fair market value for the interests in the Zowtra Mortgage. They paid a price negotiated with an arm’s length vendor, namely Mr. Rusnak and his companies. The fact that they paid a price similar to the price paid by 117 other individuals evidences that they negotiated the price in “a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm’s length”.

Whether the acquisition by Barrick Gold of Placer Dome (“Placer”) triggered Western Australia stamp duty of A$55 million on the lands of in Western Australia of an Australian subsidiary of Placer Dome turned on whether, on a global consolidated basis, the value of all of Placer Dome's land (defined to include mining tenements and improvements) equalled or exceeded 60% of the value of all its property.

The post-acquisition balance sheet of Placer valued its land assets at $5.694 billion, and recognized goodwill of $6.506 billion, being the excess of the acquisition cost (grossed-up for liabilities) over the fair value of the specifically identified tangible and intangible assets.

In rejecting the proposition that sufficient value could thus be assigned to the goodwill to avoid a conclusion that Placer did not exceed the 60% threshold, the plurality stated (at paras. 78, 87, 141 and 143):

The accounting approach in Murry [(1998) 193 CLR 605] was described as "the difference between the present value of the predicted earnings of the business and the fair value of its identifiable net assets". That methodology is not the same as comparing the fair value of Placer's identifiable net assets to the purchase price of the business, the accounting approach adopted by Barrick.

Murry did not broaden the legal concept of goodwill to include sources which did not generate or add value (or earnings) to the business by attracting custom. …

… [A]t the acquisition date, there were no sources of goodwill that could explain the $6 billion gap which was attributed by Barrick to goodwill. That unexplained gap suggests that the DCF calculations used by Barrick's valuers to value Placer's land, its principal asset, were wrong. … [T]he danger identified by the majority in Murry of attributing a value to goodwill which actually inheres in an asset was readily apparent. …

At the acquisition date, Placer was a land rich company which had no material property comprising legal goodwill. … [italics in original]

One of the taxpayers (Morrison) participated in a charitable gift program (the “CGI Program”) under which he purchased pharmaceuticals for a cheque of $9,500 and then donated the pharmaceuticals to a registered charity and received a charitable receipt for $56,502.80. CRA reassessed on the basis that the pharmaceuticals had a fair market value (“FMV”) of $1,759.35 (based on pricing indicated by the International Drug Price Indicator Guide), so that the balance of the claimed amount of the gift-in-kind by him was denied. The gift-in-kind had been valued by the promoter based on data such as Ontario list prices for the pharmaceuticals (e.g., the Ontario Drug Benefit Formulary/Comparative Drug Index as prescribed under the Ontario Drug Benefit Act). However, the Crown expert evidence was that Canadian pharmacies actually paid up to 80% less than the wholesaler catalogue prices for generic pharmaceuticals. Moreover, the pharmaceuticals were delivered outside Canada in bulk.

In confirming this assessment, Owen J found (at para. 127):

… Since the pharmaceuticals were not (and could not be) imported into Canada for sale, the approach to valuation adopted for the CGI Program is patently flawed since it is using a Canadian market (Ontario) to value generic pharmaceuticals that cannot be sold in that market.

The taxpayer made shareholder loans to two companies, and then disposed them to a related company for less than their book value, deducting the difference as a business loss. Before finding that the loss was non-capital in nature (see summary under s. 18(1)(b) - Capital Loss v. Loss), Graham J found that the taxpayer's valuation of the loans at the time of disposition matched their fair market value in light, inter alia, of evidence of the companies' poor financial condition. The Minister had not argued the point, having only made the assumption that the fair market value was equal to book value. Although one of the loans were subsequently repaid in full, this occurred because of an unexpected offer for that company's assets.

A lacquer-manufacturing corporation (“Antoni”) indirectly owned by the taxpayer’s brother imported one of its product lines from an Italian company pursuant to an exclusive distribution agreement with it, and used the services of the taxpayer’s company (“LCR”) to distribute those products in Canada and the U.S. and provide after-sales service. Shortly before the sale of all the assets of Antoni to an arm’s length purchaser (“Chemcraft”), Antoni purchased all the assets of LCR. Lamarre ACJ affirmed the Minister’s finding that as the purchased LCR assets did not include any valuable goodwill (notwithstanding that LCR earned a significant portion of the combined profits), s. 160 applied to this purchase (and to a subsequent dividend paid by LCR to the taxpayer) on the basis that Antoni, which was a tax debtor, had paid more that the purchased assets’ fair market value.

In so finding, she noted that although goodwill “is a residual category of property which can encompass various diverse elements” (para. 90, TaxInterpretations translation), there was no evidence of a distributorship agreement with LCR that could not be terminated on short notice or that the LCR name, which was acquired by Chemcraft, was of any value to it, and that the asset sale agreement between LCR and Antoni had not listed goodwill as a transferred asset

The taxpayers were participants in a leveraged donation scheme, in which courseware licenses were purchased by a corporation ("Phoenix") from a Florida corporation ("Infosource") which also packaged and sold such licences in the course of its business, contributed by it to a purported Trust, purportedly distributed under s. 107(2) to the participants and then purportedly gifted by them to a registered charity with charitable receipts being issued which assigned a value to the donated licences of several hundred times their previous cost to the corporation (para. 125). After finding that the taxpayers' claimed charitable tax credits should be disallowed for lack of donative intent (see summary under s. 118.1 - total charitable gifts), Pizzitelli J found that the valuation in the charitable receipts was unsupportable for any number of reason, including basic common sense.

One particular deficiency in the scheme promoters' valuation was the failure to consider the effect of the supply of licences on the market. The market in question was the "charitable donation market" in Canada. The reason the courseware preparer was willing to sell the licences so cheaply was because it recognized that the licences would be distributed in Canada to persons who would otherwise be unable to purchase them (para. 105). Within such a narrow market, failing to consider the impact of approximately 3 million licences distributed through the donation scheme was (para. 123):

...contrary to the definition of fair market value, where buyers and sellers would be informed and supply and demand would be an essential element... .

Furthermore, such expert erred in treating retail sales by Infosource as a relevant comparable for valuing the licences here as they essentially had been acquired on a wholesale basis – so that the modest price paid to Infosource represented the licences' fair market value.

The appellant ("RCF") was a non-Australian partnership which was assessed on the basis that its gain from the sale of a "member ship interest" in an Australian company ("SBM") with two underground gold mines in Western Australia was from "taxable Australian real property". The SBM membership interest qualified as TARP "if the sum of the market value of [SBM]'s assets that [were] taxable Australian real property exceed[ed] the sum of the market values of its assets that [were] not taxable Australian real property." The primary judge below had found that the SBM membership interests were not TARP, in part, on the basis that the mining information of SBM (a non-TARP asset) had a substantial value in light of the substantial exploration cost that would be required to reproduce this information, as well as the substantial present value of the mining production that would be foregone during the three to five year exploration and evaluation process and that the valuation of the mining rights (a TARP asset) should be discounted by the same factors.

In rejecting this approach on appeal, the Court stated that the market values of the various assets should be made:

on the hypothesis of a simultaneous sale to the one purchaser with the capacity to use those assets in combination in a gold mining operation as their highest and best use. …[A]ll the experts…agreed that in the case of a simultaneous sale to the one purchaser, the hypothetical purchaser could expect to acquire the mining information and plant and equipment for less than their re-creation costs with little or no delay.

Accordingly, it appeared that the Commissioner was successful, although the parties could make submissions on the final calculations.

The appellant ("RCF") was a Caymans limited partnership with mostly US-resident partners, which was assessed under the "taxable Australian real property" rules on its gain from the sale of an Australian company ("SBM") with two underground gold mines in Western Australia. The SBM shares qualified as TARP "if the sum of the market value of [SBM]'s assets that [were] taxable Australian real property exceed[ed] the sum of the market values of its assets that [were] not taxable Australian real property." After already having decided in RCF's favour on the basis that the gain was Treaty-exempt, Richard Edmonds J further found that the SBM shares were not TARP, so that the gain also was not assessable under the TARP rules.

In reaching this conclusion, he found that:

• the plant and equipment, to the extent it was fixtures, was fixtures to the land (which was not owned by SBM and, therefore, was not TARP of SBM) and not to its mining rights (which were TARP): para. 112
• the mining information of SBM (which was not TARP) had a substantial value in light of the substantial exploration cost that would be required to reproduce this information, as well as the substantial present value of the mining production that would be foregone during the three to five year exploration and evaluation process (para. 105, 132)
• the question of what a hypothetical purchaser would pay for the mining information, being anything in the range of nil (being what it could be sold for by itself) to the full replacement cost (including foregone production as noted above), was indeterminate – however, "the fair valuation is one which shares equally between the holder, and the potential user, of the relevant asset the benefit to the user of immediate acquisition of the asset" (para. 157, see also 106, 129), so that the mining information was valued at the mid-point between the two extremes
• similarly, the plant and equipment should be valued "by dividing the notional ‘bargaining zone' equally" (para. 159, see also 107) between its replacement cost and its minimal scrap value
• it was not necessary to address whether any value should be assigned to goodwill as the SBM non-TARP assets were more valuable even without doing so
• it was inappropriate to add an asset value representing the excess of the market capitalization of SBM (which was a listed company) over its discounted cash flow valuation (para. 111, 121)

The taxpayer was incorporated by a non-resident individual carrying on a proprietorship. It then acquired assets of the proprietorship (comprising cash and accounts receivable) for a total of $118,342 and assumed accounts payable of $118,342 (for a difference of $63,015). The Minister assessed the taxpayer for failure to remit Part XIII tax under s. 215(1) on the basis that the proprietor was deemed to receive a dividend 0f $63,015 (perhaps under ss. 15(1) and 214(3)(a), although Angers J referred instead to s. 212.2).

The taxpayer did not establish that the $63,015 difference corresponded to a transfer of goodwill. Angers J. noted that there was "no information concerning a client's list or regarding reputation, location, or brand loyalty" (para. 19). Whatever goodwill existed was personal goodwill towards the proprietor rather than commercial goodwill towards the proprietorship, and therefore was not transferable. He then stated (at para. 21):

[T]he question to ask to determine whether goodwill is personal is this: if the person withdraws from the business will any goodwill remain?

Free parking for school employees was found to be a taxable benefit which should be valued at fair market value. The Minister's and taxpayers' valuations both used the direct comparison approach, which determines value by checking prices for similar products or services. Paris J. rejected comparisons to parking lots that were far away from the school, and ones that were close to busy streets. Of all parking places that experts compared, the only reasonable ones were in two nearby apartment buildings. Paris J. took the average of their prices, less 10%, as the fair market value of the benefits; experts for both sides agreed that, being outdoors, the school parking was worth 10% less than in the comparable apartments.

The taxpayers donated paintings to a museum. In upholding the Minister's valuation (less than 10% of the taxpayers') and rejecting a submission that the museum represents a "special purchaser" (a buyer willing to pay more than others because of a special need or interest), Bédard J. noted that a special purchase can raise the fair market value of property, but the existence of such a buyer must be well supported in evidence.

Bédard J. also noted that, in a very small market, the hypothetical sale of the property in question might itself amount to a substantial increase in supply, which would reduce the property's marginal fair market value accordingly.

C. Miller, J. followed the Nash decision in finding that quantities of art purchased by the taxpayers and immediately donated to charities had a fair market value equal to their purchase price. In rejecting the taxpayers' submission that the fair market value determination should be based on the retail market (i.e. what the art might be sold for to the public by galleries), he stated (at para. 25) that this argument "ignores the reality that the buyers/donors have no access to that retail market, other than through a gallery" and that he could speculate "that the buyers/donors might go knocking on the galleries' doors to sell in bulk, but this would not yield the retail price the gallery would sell the art for, only the wholesale price the gallery would buy the art for".

The taxpayers purchased groups of paintings (approximately 40 or 50 in each year) for consideration that represented a substantial mark-up over the cost to the vendor ("CAAS") and that included a 15% retainer fee paid to CAAS for arranging for the donation of the paintings (almost immediately after their purchase by the taxpayers) to charities at an appraised value over three times the taxpayers' purchase price.

The Minister assessed on the basis that the fair market value of the donated paintings was equal to their cost to the taxpayers excluding the retainer fee.

In confirming this basis of reassessment, Campbell, J. found that the almost contemporaneous purchase transaction by the taxpayers were the best evidence of the paintings' fair market value and, with respect to the retainer fee, noted (para. 28) that "if the Appellants had decided to retain the art and not donate it, they would not have incurred this 15% retainer fee".

The taxpayer and others purchased a sublicence of futures trading software which was then utilized for that purpose by a company connected with the licensor of the software under an agency agreement with the taxpayer. Before going on to find that the fair market value of the sublicensed software to the taxpayer was equal to his purchase price therefor, Bell J. indicated that the analogy of the taxpayer's valuation expert to a lobster trap was helpful, stating (at p. 2663):

"The engagement by the purchaser of someone to use the lobster trap is analogous to the engagement of an agent to use the license. He submitted that the lobster trap, just as the license, earned value on its own."

An 11.12% interest in a gold mine that the taxpayer purchased was to be valued, for purposes of s. 69(1)(a) of the Act, on the basis that the whole mine, which was estimated by the Crown's expert to have a resource of 246,700 ounces (proven and probable - 29,600; possible - 25,100; and drill indicated - 192,000), and that that resource should be valued at $25 per ounce. The inferred ounces included in the valuation of the taxpayer's expert were too speculative.

In accepting the valuation used by the taxpayer with respect to her donation of art to a registered charity, Bell J. adopted (at p. 3359) the definition of fair market value used by the taxpayer's expert, namely, "the highest price reasonably expected if an asset is sold in the normal method in the ordinary course of business in a market without undue stress composed of willing buyers and sellers". The taxpayer's submission that cost alone is not necessarily determinative of market value, and that in this case no blockage discount was applicable since the market was large enough to absorb the prints donated by the taxpayer, also was accepted.

A sculpture by a well-known Quebec sculptor was purchased in December 1999 by the taxpayer for $1,300 plus taxes and commission and was donated by him to a Canadian museum. The valuation by the Canadian Cultural Property Export Review Board of the sculpture at $5,000 (rather than $8,000, as contended by the taxpayer) was confirmed. The reports that were tendered on behalf of the taxpayer did not "contain within themselves the type of evidence that would justify the conclusion that this work of art has appreciated in value by 500 percent" (p. 3233) including the absence of any recent sales of similar ceramic sculptures by that sculpture.

Archambault J. concluded that the fair market value of Canadian rights to software acquired by a partnership was lower than the figure suggested by the expert for the Minister (and substantially lower than that advanced by the partnership). In particular, he found that a discount rate of 40% to 45% should be used in discounting projected future cash flows to be generated by the property given that the partnership only had limited territorial rights, a short life and many features were required to be added to the software in order to make it competitive with existing competitive products.

The fair market value of custom software that a New Zealand company had developed to run its steel mill was found to have a fair market value equal to the amount shown in the New Zealand company's records as being the cost, plus a 70% adjustment factor to reflect the fact that most companies' tracking systems do not record between 30% and 70% of the real effort that goes into software. The capital cost to the taxpayer of the software was reduced from the purchase price to this amount.

A donation of 981 paintings by the taxpayer to a public gallery was to be valued for purposes of s. 32 of the Cultural Property Export and Import Act on the basis of the fair market value of each work of art without any discount for blockage.

The taxpayer assigned a commission of $3.9 million that was to be paid on a deferred basis by a limited partnership in consideration for the taxpayer having helped secure $49 million in equity capital that was to be invested (largely on as deferred basis) in the limited partnership, which was slated to purchase an office tower property approximately six months later, to a Cayman Islands corporation that was an indirect shareholder and with which it did not deal at arm's length, for cash consideration of $41,300. It was assessed for Part XIII tax on the basis that the fair market value of the commission was $2,458,700.

In allowing the taxpayer's appeal, Bell T.C.J. noted that there was no signed agreement respecting the commission and apparently no oral agreement or understanding between the taxpayer and the limited partnership promoter as to the terms and conditions of such agreement, that the general partner of the partnership was without significant assets, that no commission would be payable until the partnership acquired the property and there was significant uncertainty as to whether such acquisition would occur.

In determining the principles to be applied in determining the fair market value of "game engines" acquired by a partnership (i.e., the cores of computer games that when a graphic element was added thereto would be functional computer games), Rip T.C.J. indicated that: the fact that the vendor ("ASC") granted to developers of the engines the right to use elements of the source code of the engines on a royalty-free basis was not a detraction from the value of the engines because such licence-back agreements would not cause the engines to produce more revenues; that in the absence of evidence as to the value of each specific engine purchased, it would be necessary to assess what average game sales would be; that in determining average game sale the unsuccessful track record of ASC to date should be taken into account; that in determining such average it would not be appropriate to take into account the possibility of one or more of the eleven engines being a "hit" given that valuation should be performed on a conservative basis; and that the expected decline in the market for engines using 16-bit platforms should be also taken into account; and that the calculations should find after-tax values.

The V-day value of a nursing home was determined using a capitalized earnings approach.

Part of the consideration for assets purchased by the taxpayer was the issue by it of special shares with an aggregate stated capital of $1,000. The articles of incorporation provided that the corporation would pay a dividend on the special shares on December 31, 1987 at the rate of $60,909 per day from the date of issue (April 3, 1987) to that date, namely, an amount of $16.57 million. In finding that the portion of the assets acquired through the issue of the special shares should be considered to have a cost to the taxpayer of $1,000, Rip T.C.J. stated (at pp. 2510-2511) that "it is the directors who determine the stated capital of shares and the consideration for the issue of the shares", and further noted that the date of payment of the dividend might have been delayed indefinitely until the directors determined to pay it.

In considering the fair market value of a "Cyclo-Crane" (a lighter-than-air, heavy lift vehicle) that the taxpayers had donated to the Canadian Museum of Flight and Transportation, Bowman TCJ. stated (at p. 1886) that "what it cost historically to produce a prototype, or what it might cost to reproduce it, might have nothing to do with what price the object would command on the open market".

Mogan TCJ. accepted (at p. 1612) the unanimous opinion of the taxpayer's expert that the retail gallery market rather than the auction market was the best market to obtain the highest price for the paintings of a contemporary artist. He went on to find that the paintings should be valued at $2 per square inch, rather than the approximate amount of $3 per square inch which the artist's works subsequently commanded when he had established an exclusive distributorship relationship with a Toronto gallery, given that in the years in question the personal life of the artist was at a low ebb (including alcoholism) and many of his works were being sold at distress prices on street corners in Thunder Bay.

An option to acquire land with an exercise price equal to the fair market value of the land at the date of grant of the option, plus interest at the prime rate between the date of grant and date of exercise of the option, had a fair market value of nil.

In determining the fair market value of the goodwill of a business of reconditioning and selling boats and other nautical products, Archambault TCJ. applied a relatively low capitalization rate of 4.0 to normalized earnings in light of the yield on long-term federal government bonds of 9.5%, the competitive nature of the business, the risk of expropriation of the premises occupied by the business, and the lack of expertise on the part of the staff.

Woolf, J. noted that for the purpose of determining the arm's length value of ethane, "the parties are agreed that an arm's length contract for ethane for petrochemical or other purpose which was to continue for a period of time would undoubtedly have three provisions: first of all, a base price which was the price which should reflect the initial price which would be paid in an arm's length transaction; secondly, an escalator, which is designed to ensure the base price keeps up with the market price as time passes; and finally, a reopener provision to cover the situation if there is a change of circumstance."