Kaul v. The Queen

Kaul v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2019-01-18
Neutral citation
2019 TCC 17
File numbers
2012-754(IT)G, 2013-1882(IT)G
Judges and Taxing Officers
Eugene P. Rossiter
Subjects
Income Tax Act
Decision Content
Docket: 2012-754(IT)G
BETWEEN:
WILLIAM KAUL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of Ian N. Roher, 2013-1882(IT)G on December 7, 8, 12 and 13, 2017 and
January 16, 2018, at Toronto, Ontario
Before: The Honourable Eugene P. Rossiter, Chief Justice
Appearances:
Counsel for the Appellant:
Irving Marks
Adam Brunswick
Matthew Sokolsky
Ellad Gersh
Counsel for the Respondent:
Jenna L. Clark
Erin Strashin
Amit Ummat
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1998, 1999 and 2000 taxation years are dismissed, with costs, in accordance with the attached Reasons for Judgment.
The appeal for the 2000 taxation year with respect to the Appellant, William Kaul, shall be sent back for reassessment on the sole basis that the capital gains claimed by him for this taxation year be deleted.
Signed at Ottawa, Canada, this 18th day of January, 2019.
“E.P. Rossiter”
Rossiter C.J.
Docket: 2013-1882(IT)G
BETWEEN:
IAN N. ROHER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on common evidence with the appeals of William Kaul, 2012-754(IT)G on December 7, 8, 12 and 13, 2017 and
January 16, 2018 at Toronto, Ontario
Before: The Honourable Eugene P. Rossiter, Chief Justice
Appearances:
Counsel for the Appellant:
Irving Marks
Adam Brunswick
Matthew Sokolsky
Ellad Gersh
Counsel for the Respondent:
Jenna L. Clark
Erin Strashin
Amit Ummat
JUDGMENT
The appeals from the assessments made under the Income Tax Act for the 1998, 1999, 2000, 2001, 2002, 2003 and 2004 taxation years are dismissed, with costs, in accordance with the attached Reasons for Judgment.
The appeals for the 2001, 2002 and 2003 taxation years with respect to the Appellant, Ian Roher, shall be sent back for reassessment on the sole basis that capital gains claimed by him for those years be deleted.
Signed at Ottawa, Canada, this 18th day of January, 2019.
“E.P. Rossiter”
Rossiter C.J.
TABLE OF CONTENTS
I. Introduction 1
II. Facts and Evidence 2
Artistic Program 3
Origin of the Artistic Program – Sloan and Pearlman 5
Source of the Art 6
The Appraisal and Donation Process 6
Jeffrey Sackman 8
Edith Yeomans 8
Charles Rosoff 12
April Cornell 13
III. Issues 14
IV. Applicable Law 15
V. Analysis 18
Nash and Klotz - Differences 19
1) The Artwork was donated in groups 19
2) The Artwork donated was pre-existing 23
3) Positive Evidence of a pre-existing retail market 23
4) Explanation for Donated Value Higher Than Price Actually Paid 23
5) Henderson Estate Test 24
a) Open and Unrestricted Market 24
b) Art Assessed at Fair Market Value? 24
c) Art Valued as Individual Pieces or as a Group? 31
VI. Conclusion 31
Citation: 2019 TCC 17
Date: 20190118
Docket: 2012-754(IT)G
BETWEEN:
WILLIAM KAUL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
Docket: 2013-1882(IT)G
AND BETWEEN:
IAN N. ROHER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rossiter C.J.
I. Introduction
[1] William Kaul and Ian Roher (the “Appellants”) are the two remaining lead litigants in a group of related appeals before the Court. The sole issue in the appeals is the fair market value of art that was purchased and subsequently donated by the Appellants in an art donation program that was in operation from 1998 to 2003 (the “Artistic Program”). The Artistic Program was promoted and operated by a number of entities over the years including Artistic Ideas Inc., Artistic Expressions Inc. and Artistic Ideals Inc. (hereinafter collectively referred to as “Artistic”).
[2] The Artistic Program operated as described in the facts hereinafter.
[3] The issue is what is the fair market value of the art donated by the Appellants on the donation date? Expert evidence is fundamental to determining the fair market value of the donated art.
[4] When this matter came to trial the Appellants attempted to adduce expert reports prepared by two appraisers, Ms. Edith Yeomans and Charles Rosoff, both of whom had been retained by Artistic to provide appraisals for the Artistic Program during the relevant years (the “Appraisers”). The reports were excluded by a ruling of this Court. There was a confidential motion presented to Justice D’Arcy of the TCC which I was not privy to. Following Justice D’Arcy’s ruling most of the lead litigants, save and except the Appellants, had settled their appeals with Canada Revenue Agency (“CRA”). Before continuing with their appeals, the Appellants brought a motion seeking an advance ruling as to whether the appraisers could testify as “participant experts” as to the original appraisals for the truth of the contents (the “Appraiser’s Reports”). I rendered a decision on June 2, 2017 allowing or otherwise directing pursuant to Rule 145 of the Tax Court of Canada Rules (General Procedure), SOR/90-688 as amended (the “Tax Court Rules”) that Ms. Yeomans may testify as a participant expert with respect to the content of her Appraisal Report that she had already compiled during her involvement in the Artistic Program. As for Mr. Rosoff, there was not sufficient evidence before the Court at time to make a similar direction although it appeared that he prepared a similar appraisal as Ms. Yeomans.
[5] The trial proceeded with evidence from both Ms. Yeomans and Mr. Rosoff as “participant experts”. For the reasons following I would dismiss the appeals.
II. Facts and Evidence
[6] Trial evidence came in through the following witnesses:
A. Mark Pearlman (“Pearlman”), one of the directors and principals of Artistic;
B. Paul Sloan (“Sloan”), an American businessman and art dealer who supplied the art used in the Artistic Program;
C. Jeffrey Sackman (“Sackman”), one of the original Appellants in the group appeal who participated in the Artistic Program;
D. Edith Yeomans (“Yeomans”), an appraiser of art used in the Artistic Program;
E. Charles Rosoff (“Rosoff”), an appraiser of art used in the Artistic Program; and
F. April Cornell (“Cornell”), the Executive Director of the Ontario Foundation for Visually Impaired Children (“OVIC”), one of the charities which received art donated by the Artistic Program.
The testimonies of the witnesses were largely consistent with the findings of Justice Paris in Artistic Ideas Inc. v Minister of National Revenue, 2008 TCC 452 (the “GST Proceeding”).
[7] The parties also submitted a Partial Agreed Statement of Facts, setting out many of the undisputed facts in this case.
Artistic Program
[8] Artistic was conceived and marketed to Canadian taxpayers as a tax savings investment vehicle.
[9] The Artistic Program operated in two phases. From the inception of the Artistic Program in the fall of 1998 to February 28, 2000, participants typically paid approximately $3,500 for a group or unit of 11 works of art. After February 28, 2000, participants in the Artistic Program paid up to $3,750 for their selection of art.
[10] Typical Artistic promotional material for the 1998 taxation year set out the following information:
1. Minimum investment amount: $3,500
2. Donation receipt: $10,000
3. Tax Savings: $5,029 (43% return)
[11] Prior to February 28, 2000, a participant in the Artistic Program would buy art in a group or unit of 11 prints, 10 of which would go to a charity of his or her choice that was pre-arranged by Artistic. The extra art piece would be retained by the participant personally. A participant never had the choice of purchasing just a single print. According to Pearlman, only art that was appraised to have a fair market value of $1,000 Cdn or more would be included in any particular group. Regardless of the actual appraisal, charitable donation receipts would be issued based on a fair market value of $1,000 per print donated, even if a print was valued at higher than the $1,000 threshold. This was done to avoid the application of any capital gains tax in respect of the donations by taking advantage of the personal-use property provisions existing at the time.
[12] After February 28, 2000, due to amendments in the personal-use property provisions, art donations were no longer exempt from the application of capital gains tax. Participants would still purchase art by group, but the size of any particular group shrank while the price per group increased. Charitable donation receipts were then issued based on the actual appraised fair market value of the art. Participants would pay the capital gains tax based on the difference between the price they paid in respect of the art and the value indicated on the donation receipts.
[13] According to Pearlman’s testimony, in both phases, a group purchased by a particular participant would not be the same as a group donated to the charities. Most of the time, when multiple groups were purchased, Artistic employees would split up the groups so that different prints within these groups would be donated to a variety of charities. There was a small exception - if a participant purchased only a single group, then that entire group would be donated to a single charity untouched, aside from the one retained by the participant. Apparently this did not happen often. Usually purchases were for multiple groups or units. Pearlman testified that this was done out of the concern that the prints might be perceived as being purchased and donated in bulk, and thereby having a deflating impact on the fair market value of the prints, which was determined based on the value of the prints transacted individually at the retail market level.
[14] At all times, Artistic personnel were also allowed to make substitutions to the prints in any particular group. According to Pearlman, such substitutions were mostly done for the purpose of replacing damaged pieces with other pieces of equal value. Occasionally, substitutions were made to replace pieces that were missing or otherwise unavailable in the inventory.
[15] The Artistic Program was marketed by word of mouth to participants through, mostly their financial advisors, accountants, and occasionally lawyers. At no point was the Artistic Program marketed to the public at large. Because of this selective marketing channel, the participants were largely individuals who paid income tax at the highest marginal tax rates. Indeed the Artistic Program appeared to be so selective that Sackman in his own daily discourse coined the phrase “qualified investors”, that is, individuals who reached a certain income level could invest or participate in the Artistic Program.
Origin of the Artistic Program – Sloan and Pearlman
[16] The lithographic prints used in the Artistic Program were supplied by Sloan, a resident of California. Sloan testified to his involvement in the Artistic Program in the GST Proceeding as well as this trial.
[17] Sloan first became acquainted with Pearlman in the mid-90s as they together promoted a software tax shelter called Protosource to Canadians. Sloan testified that he was not aware that Protosource was a tax shelter, a statement clearly contradictory to Pearlman’s evidence in this trial and in the GST proceeding, in which Pearlman gave evidence that Protosource was apparently conceived by Sloan as well. Protosource was also not Sloan’s first tax shelter venture. Prior to Protosource, he had apparently been involved in promoting several tax shelters in the U.S.
[18] For the Artistic Program, Pearlman testified that Sloan, after the Protosource venture, first approached Pearlman and Alan Grossman, the other principal of the Artistic Program, about potentially setting up a tax shelter using art he had left over from an art gallery he once owned. Sloan denied that it was his idea and stated that he merely agreed to supply the art for donation purposes.
[19] Pearlman initially had some concerns about the Artistic Program. One concern was the capital gains tax on the donations and the other was the fair market value of the art to be used in the Artistic Program. Pearlman thought the first concern was cleared up by Graham Turner, a tax lawyer who provided a legal opinion in connection with the Artistic Program and the second concern was resolved by obtaining appraisals from two independent appraisers.
[20] Subsequently, the Artistic Program kicked off on a verbal agreement or mutual understanding between Sloan and Artistic’s principals that Artistic would act as Sloan’s agents in promoting the Artistic Program to Canadian investors and would earn a commission on any art sold. The profits would be shared basically on a 50-50 basis.
Source of the Art
[21] Sloan incorporated two companies for the purposes of supplying art to the Artistic Program - Coleman Fine Arts (“Coleman”) and Silver Fine Arts (“Silver”). Coleman supplied the art in 1998, 1999, and 2000, while Silver supplied the art in 2000, 2001, and 2002.
[22] Prior to his involvement in the Artistic Program, Sloan carried out a very successful career as an art dealer. In the 1980s, he worked as a sales manager for Jackie Fine Arts, which had acquired the rights to some of the works of the renowned Spanish Artist, Pablo Picasso. Later he became a partner in Dyanson, a retail art gallery chain that went public and, at one point in time, operated 12 galleries in the U.S.A. Some of the Dyanson inventory was sourced from Jackie Fine Arts, including works of Picasso. When Dyanson was later sold in 1995 to London Fine Arts, an art gallery based in Detroit, Michigan, Sloan retained more than 100,000 pieces of art from Dyanson and stored them in a warehouse in California (“Dyanson Inventory”).
[23] Initially, most of the art used in the Artistic Program came from the Dyanson Inventory. Later, prints were sourced from various artists and art galleries directly. Some of the artists were: Charles Lynn Bragg, Charles Bragg, Jim Jonson, and Wayne Ensrud. Coleman and Silver paid approximately $20 to $40 U.S. for a print from these artists. Coleman and Silver also acquired art from galleries such as the Ro Gallery and the Museum Master International Ltd.
The Appraisal and Donation Process
[24] As part of the purchase price, participants received streamlined services from Artistic and Sloan, which included but were not limited to:
1. arranging for charities;
2. appraisal;
3. shipping;
4. quality inspection; and
5. the eventual donation.
In addition to supplying the art, Sloan was responsible for the shipping and delivery of print samples to the appraisers to appraise. Initially, there were two appraisers involved, Lesley Fink and Yeomans. Generally, prints that Yeomans appraised had values of $1,000 Cdn or more, which were included in the groups offered for sale. Yeomans would provide verbal assurances based on her research, followed by formal written appraisals in the early months of the following year. Later, Rosoff, who was recommended by Yeomans to Artistic, replaced Fink as the second appraiser as Pearlman felt that Fink’s appraisal was wildly unreliable. Any prints that met Yeomans’ valuation would then be sent to Rosoff for a second opinion.
[25] Under the Artistic Program, the participants would sign three documents: (i) a Purchase Agreement; (ii) an Agency Agreement; and (iii) a Deed of Gift.
[26] The participants would enter into an agency agreement with Artistic pursuant to which Artistic would act as the agent responsible for finding charities willing to issue donation receipts for $1,000 per print in the pre-February 28, 2000 period, and later for the appraised fair market value in the post-February 28, 2000 period.
[27] The participants would also enter into a purchase agreement with Coleman or Silver, whereby they would select the group to purchase based on the title of the one print within that group which they would intend to keep and which image was made available for their viewing. Participants would also select from a pre‑arranged list of charities the ones to which they would like to donate.
[28] Under the Deed of Gift, the participants would then indicate the charities they wished to benefit and would authorize Artistic to arrange for the donation.
[29] Once Artistic received payment from a purchaser, it would then contact Sloan to ensure that there was sufficient inventory to fill the order. After the year-end, Sloan would ship the art to Artistic’s office in Toronto. There, the art would be inspected, sorted, repackaged as discussed above, and shipped to the selected charities along with the Deeds of Gift and a letter stating the value of the prints and requesting that they issue the charitable receipts as previously agreed. Artistic would then hold onto the charitable receipts until the final written appraisals were received, a copy of which were then forwarded to the charities. (The Respondent called into question the extent of the charities’ knowledge about the value of the prints prior to issuing the receipts.)
[30] Finally, Artistic would also send a copy of the final appraisals and the charitable receipts to the respective participants who would then use them in the filing of their tax returns.
Jeffrey Sackman
[31] Sackman, one of the original Appellants, testified to his participation in and understanding of the Artistic Program. He struck me as an intelligent businessman with an extensive background in the film industry.
[32] Sackman learned of the Artistic Program through his accountant, Elliot Richmond. He had relied on his accountant and the professional tax opinion rendered by Fraser Milner. In 1998 and 1999 he purchased 10 and 40 groups of art through the Artistic Program, respectively for $35,000 and $140,000, respectively which he donated to charities in exchange for donation receipts totaling $510,000.
[33] Sackman testified that the idea of the Artistic Program was to purchase art in bulk at a wholesale price and to donate the art to charities based on their fair market value, which was the highest price that each print can garner in the retail market.
[34] Sackman recalled vaguely the name of Sloan and possibly a warehouse in California, but otherwise had no knowledge of where the prints he purchased were sourced.
Edith Yeomans
[35] Pursuant to the Order of this Court reported in Kaul v R, 2017 TCC 55, Yeomans testified to her involvement in the program as a “participant expert”. Yeomans’ testimony was limited to the facts and opinions she formed during her involvement with Artistic as an appraiser. I have reproduced the relevant paragraphs of that decision:
5 Ms. Yeomans and Mr. Rosoff are two of the appraisers engaged by Artistic to value the lithographic prints that were transacted in the Artistic Program.
6 Ms. Yeomans was based in Toronto and was the primary appraiser who had set the Program in motion. From 1998 to 2003, she conducted appraisals of every single title purchased and donated by participants in the Artistic Program.
7 Ms. Yeomans was a licenced appraiser accredited by the American Society of Appraisers. Her qualifications as an appraiser in fine arts were not in dispute during a voir dire held in November 2016 for the purpose of qualifying her as an expert witness before this Court.
8 During the voir dire, Ms. Yeomans testified that prior to her involvement with Artistic, she had been approached several times by other art donation programs. She turned them down because they required her to certify or "rubber stamp" certain values to their art that were not determined by her independent judgment and expertise, but were instead dictated by them.
9 She testified that she took the job with Artistic because it did not impose on her this requirement as a condition of her retainer. She knew that the Program was basically a buy-low-donate-high concept. She also knew that the threshold required of her appraisals was approximately $1,000 CAD per piece. Nevertheless, she was the person responsible for determining, in her capacity as the appraiser, the fair market value of a particular title in USD and consequently, whether that title met the threshold. Those that she determined met or exceeded the threshold were included in the Program for selection by the participants; and those that she determined were below the threshold were discarded. She was retained by Artistic at an hourly rate, irrespective of the valuation opinions that she would reach in any particular case.
10 Her appraisal process normally involved the direct inspection of art at the offices of Artistic and conducting research on the art, including the artist, the type of art, and etc. She then came to an initial value conclusion based on a market-comparison approach whereby she would compare the sales data of, for example, the same or similar art from the same artist in the U.S. market. She accessed this information through direct communication with art dealers, commercial galleries and etc. She inspected samples of every single title that was purchased and donated by participants in the Program, but not every single reproduction of every title. She would communicate her preliminary value conclusions to Artistic either verbally or by fax.
11 There was no evidence of any communications between Ms. Yeomans and the Appellants or any of the participant donors.
12 Following her initial value conclusions, she would provide two Appraisal Reports to Artistic: (i) a long-form report that included the appraisals of all titles that she had appraised for the Program; and (ii) a short-form report that only included titles that were chosen for the Program, i.e., those that met the threshold. The purpose of the Appraisal Reports was, largely, to put into writing the preliminary verbal value conclusions that had already been reached by Ms. Yeomans. Other than the length as a result of the number of titles that were included, the content of the two Appraisal Reports were otherwise no different. Only the short-form reports were later provided to the participant donors and to the charities.
13 The Appraisal Reports have been disclosed to the Respondent since the very beginning. However, the Appellants refused to produce Ms. Yeomans' working papers and any supporting documents on the basis that litigation privilege attached to those documents.
[36] At the beginning of Yeomans’ testimony, the Appellant sought to introduce into evidence the working papers created by Yeomans during her appraisal. The Respondent objected on the grounds that initially litigation privilege was asserted over these documents and pursuant to rule 96 of the Tax Court Rules, leave of the Court was required before these documents could be introduced as evidence at trial. The Appellant did not seek leave at any time prior to the hearing. Finding that the Respondent would suffer prejudice if the working papers were introduced into evidence without an adjournment to allow time for review, and that any further delay was not in the interests of justice, I did not allow the working papers to be admitted into evidence.
[37] Yeomans provided valuation reports for Artistic in 1998-2003. Her reports state that the appraisals were completed in accordance with the standards set by the American Society of Appraisers and the International Society of Appraisers. Her reports state that they comply with the Uniform Standards of Professional Appraisers Practice (“USPAP”).
[38] Yeomans reports state the definition of fair market value, which she applied when appraising the artwork. In her examination-in-chief, Yeomans confirmed that this definition was the definition of fair market value contained in CRA publications and the definition was in agreement with the definition stated in Henderson v Minister of National Revenue, [1973] CTC 636, [1973] FCJ No. 800. The report provided an appraised value for each piece, as well as a “total FMV” determined as the aggregate value of the works appraised.
[39] Yeomans testified the definition of fair market value required her to reach value conclusions based only on what a piece of artwork would fetch when sold in an open and unrestricted market to an ultimate end user consumer unaffected by external factors. Yeomans used the market data approach in her appraisal reports. Her reports do not provide any discussion on why the market data approach was selected over alternative approaches.
[40] The retail market was selected by Yeomans as the appropriate comparator market. Depending on where the individual artist most commonly exhibited their works, either the commercial gallery market in the United States or Japan was considered. In her examination-in-chief, Yeomans described the three common markets that she considered before deciding on the retail market. These markets were: the commercial gallery retail market; auction retail and wholesale sales; and private treaty sales. No evidence was provided on why the retail market was selected over other markets. The geographical location of the retail market selected was the location where the artist most commonly exhibited.
[41] The reports listed the sources considered by Yeomans when appraising the works. Yeomans’ testimony on which sources she considered was consistent with the sources listed in her reports. Yeomans stated that only after considering all the listed sources did she determine which market was the appropriate comparator market for a given artist.
[42] Yeomans testified that she contacted commercial galleries, one of which was Ro Gallery. The Respondent questioned the reliability of the valuation conclusions based on the information provided by Ro Gallery on the basis that Ro Gallery provided artwork to Coleman and Silver, and these sales were not mentioned in Yeomans’ report. USPAP standards require that an appraiser consider previous sales that occurred within a reasonable time period.
[43] Where a gallery had a website, Yeomans also relied on the information on the website, including the list prices of the artwork. In cross-examination, the Respondent put it to Yeomans that relying on list prices was contrary to the USPAP, as list prices are not an accurate indicator of actual sales prices. Yeomans agreed with the Respondent that list prices are generally not representative of actual sales. Yeomans did, however, state that in the case of online sales, the listed price could be relied on, as online sales do not provide any opportunity for price negotiation.
[44] Yeomans also relied on two publications. The first was ArtNet Online, a predominantly North American, but worldwide database of auction sales. The second was InformArt, a publication which provided information on sales of reproduction pieces.
[45] The final source of information was the artists themselves. Yeoman testified that where ever possible she would contact the artist, who would provide information on sales of the same or similar works. During cross-examination, the Respondent questioned the reliability of sales figures self-reported by the artist, and put it to Yeomans that artists have self-interest in their work being appraised at a high value. Yeomans rejected this generalization, and characterized artists as forthcoming with previous sales, and rarely instead providing statements as to what they think a piece is worth. Yeomans stated that the main motivation of an artist is to be appreciated and have their work purchased at a fair price. This statement is suspect as it is both contrary to common sense, and inconsistent with the evidence before me as given by Sloan.
[46] The Appellants and the Respondent both agree that Yeomans’ report was deficient in that it did not fully comply with the USPAP standards. The Appellants take the view however that the non-conformity of the valuation report only speaks to the form of the report. The Respondent’s view is that the non‑conformity with the USPAP standards brings into question the valuation conclusions contained in the report.
Charles Rosoff
[47] The Appellant had previously attempted to call Rosoff as a litigation expert. Rosoff’s expert report did not comply with the Tax Court Rules and therefore Rosoff was not accepted by this Court as a litigation expert. Pursuant to the Kaul order, the Appellant also introduced Rosoff as a “participant expert”. His testimony was limited by the same constraints as the testimony of Yeomans.
[48] Overall, I found Rosoff to be reluctant to answer questions, sometimes to the point of being evasive. Rosoff’s was often deliberate in his answers, seemingly out of a desire to protect his reputation as a respected independent appraiser, while also attempting to avoid an answer that would be damaging to the Appellants’ case.
[49] The Respondent’s position is that Rosoff’s report is deficient for largely the same reasons as Yeomans’ report. Furthermore the Respondent questions the reliability of Rosoff’s conclusions on the basis that he was not independent of Yeomans, and relied on her research and sources. Rosoff did not list any of his sources in his report. This may bring into question the credibility of Rosoff’s opinion on the FMV of the donated art.
April Cornell
[50] Cornell, the former executive director of OVIC, a charity which received donations from the Artistic Program in 2000, testified as a witness for the Respondent. Cornell testified to the charity’s participation and understanding of the program. Cornell’s duties as executive director of OVIC included the management and administration of OVIC’s programs and services, including the financial administration of OVIC. She struck me as a straightforward, honest and forthcoming individual.
[51] OVIC was a registered charity that existed until 2012. In 2012 OVIC merged with Surrey Place Centre, an existing charitable organization which provides similar programming within Toronto. Shortly thereafter, OVIC was dissolved.
[52] Cornell testified that in 2000, 85–87% of OVIC’s funding came from grants from the Ontario Ministry of Community and Social Services and the Municipalities where it provided services and programming. The remainder of the funding needed to cover OVIC’s operating budget was raised through OVIC’s fundraising activities. Cornell stated that OVIC needed to continuously raise funds on a year-to-year basis to ensure that the charity could cover its operating budget. It was due to this need to cover operating costs that OVIC became involved with Artistic.
[53] OVIC became involved with Artistic through correspondence between Alan Grossman of Artistic and William Findlay, President of OVIC Board of Directors. Cornell testified that she had no direct communication with Artistic, except for one telephone conversation at the end of 2000, when Artistic contacted her to solicit OVIC’s participation in the program for 2001.
[54] According to the testimony of Cornell, OVIC would issue receipts without having received a copy of an appraisal report. OVIC relied on the Deeds of Gift and correspondence from Artistic to issue the receipts. In 2000, the sole year which OVIC accepted donations from the Artistic Program, an appraisal report was not received until the following year. Cornell expressed concern about issuing receipts without the appraisal reports, but these receipts were issued anyway. Only Yeomans’ report was received by OVIC, a second independent appraisal report prepared by Rosoff was never sent to OVIC. The appraisal report received by OVIC did not contain any information on the prints actually donated to OVIC, however, other appraisal reports prepared by Yeomans did value the donated prints. The value of the donated prints as per Yeomans’ report was consistent with the value provided to OVIC by Artistic.
[55] Cornell testified that the donated prints were never sold by OVIC. In 2010 based on the research of the board, the prints had a value of $100 each. In 2010 the prints were delivered to Waddingtons, an auction house in Toronto, to be sold. The prints were returned unsold in 2013. In cross-examination, Cornell admitted that no professional valuation of the prints was done and further clarified that Waddingtons was not an auction house specializing in print or reproduction artwork.
[56] Cornell testified that OVIC received $11,000 from Artistic.
[57] With respect to the $11,000 given by Artistic to OVIC, this was apparently to offset storage and insurance for the intended art. That OVIC did not pay for insurance or storage with this money is not determinative. The Respondent did not suggest that the characterization of this payment was a sham or window dressing. I need not make any such determination. Had the Respondent done so, the evidence before me falls short of establishing such a characterization.
[58] While I found Cornell a credible witness, I need not rely on her evidence to reach my decision. This is for two reasons. First, while Cornell’s testimony suggests that OVIC did not directly rely on the appraiser’s reports when issuing donation receipts, Artistic did rely on these reports when providing OVIC with the information relied on. Second, accepting that the fair market value of the donated artwork was $100 per print in 2010, does not say anything about what the fair market value may have been almost a decade earlier when the prints were donated.
III. Issues
[59] The principal issue before the Court is the fair market value of the donated artwork. In determining the question there are three questions to be considered:
1. What is the relevant market?
2. What is the identity of the assets in question? and
3. What is the fair market value based upon the evidence before the Court?
IV. Applicable Law
[60] The Appellants had sought a donation tax credit for the donation of artwork in excess of the price they paid to acquire that artwork. Reference must be made to the definition of “total charitable gifts” as set out in subsection 118.1(1) of the Income Tax Act (the “Act”):
total charitable gifts, of an individual for a particular taxation year, means the total of all amounts each of which is the eligible amount — to the extent it is not otherwise included in determining an amount that is deducted under this section in computing any individual’s tax payable under this Part for any taxation year — of a gift (other than a gift any part of the eligible amount of which is included in the total cultural gifts or the total ecological gifts of any individual for any taxation year) that is made
(a) to a qualified donee,
(b) in a taxation year that is not a year for which an amount is deducted under subsection 110(2) in computing the individual’s taxable income, and
(c) if the individual is
(i) not a trust,
(A) by the individual, or the individual’s spouse or common-law partner, in the particular year or any of the five preceding taxation years,
(B) by the individual in the year in which the individual dies if the particular year is the taxation year that precedes the taxation year in which the individual dies, or
(C) by the individual’s estate if subsection (5.1) applies to the gift and the particular year is the taxation year in which the individual dies or the preceding taxation year, or
(ii) a trust
(A) by the trust in the particular year or any of the five preceding taxation years,
(B) by the trust if
(I) the trust is an individual’s estate,
(II) subsection (5.1) applies to the gift, and
(III) the particular year is a taxation year
1. in which the estate is the individual’s graduated rate estate, and
2. that precedes the taxation year in which the gift is made, or
(C) by the trust if
(I) the end of the particular year is determined by paragraph 104(13.4)(a) because of an individual’s death,
(II) the gift is made after the particular year and on or before the trust’s filing-due date for the particular year, and
(III) the subject of the gift is property that is held by the trust at the time of the individual’s death or is property that was substituted for that property; (total des dons de bienfaisance)
[61] This provision provides that an individual’s total charitable gifts in a year are the total of all amounts each of which is the fair market value of the gifts made by the individual in the year or in any five immediately preceding years. The “total charitable gifts” amount arrived at then becomes part of the calculation for the deduction by the individual for gifts as set out under subsection 118.1(3) of the Act.
[62] The key to the applying of subsection 118.1(1) of the Act is the application of the definition of fair market value. In Canada (Attorney General) v Nash, 2005 FCA 386, 2005 DTC 5696, the Federal Court of Appeal stated the following in relation to the applicable fair market value test when it quoted the Henderson Estate appeal:
8. The well-accepted definition of fair market value is found in the decision of Cattanach J. in Henderson Estate and Bank of New York v. M.N.R. 73 D.T.C. 5471 at 5476:
The statute does not define the expression "fair market value", but the expression has been defined in many different ways depending generally on the subject matter which the person seeking to define it had in mind. I do not think it necessary to attempt an exact definition of the expression as used in the statute other than to say that the words must be construed in accordance with the common understanding of them. That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and under no compulsion to buy or sell. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand.
Although Cattanach J. expressed the caution that his words did not constitute an "exact" definition, the extent to which his words have been adopted in the jurisprudence without change over some thirty years suggests that his approach, although not necessarily exhaustive, is now considered to be the working definition.
[63] The Federal Court of Appeal went on to state at paragraph 12, in part, as follows:
…
The meat of that definition (Henderson) is 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. That describes precisely the mode of valuation made by Tropper.
…
[64] The above-noted definition has been the definition which was applied by the Federal Court of Appeal in the above-noted case, as well in Klotz v The Queen, 2005 FCA 158, 2005 DTC 5279.
[65] The analysis conducted below applies the Henderson test, as it relates to the fair market value of the donated art in question on the date on which the art was donated.
V. Analysis
[66] The evidence in this trial focused on the fair market value of the donated art and the applicable market utilized by the appraisers in arriving at the fair market value of the donated art. Both Yeomans and Rosoff were “participant experts”, not litigation experts as contemplated by the General Procedure Rules. They were found not to be independent and objective and their reports were not accepted by the Court but they were allowed to give evidence as participant experts.
[67] I have concluded that the fair market value in this case is the price paid by the Appellants for the art which they subsequently donated and not the appraised value as presented by the Appellants through the evidence of Yeomans and Rosoff. I quote Associate Chief Justice Bowman (as he then was) in Klotz v The Queen, 2004 TCC 147, 2004 DTC 2236, at paragraph 46: