Tax Court of Canada Judgments

                       

Docket: 2002-3718(IT)G

BETWEEN:

BARBARA QUINN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

The appeals of Barbara Quinn (2002-3718(IT)G), Susan Tolley (2002-3719(IT)G), and Caedmon Nash (2002-3720(IT)G) were heard together on July 5, 2004 at Toronto, Ontario

By: The Honourable Justice R.D. Bell
Appearances:
Counsel for the Appellant:	Clifford L. Rand and David C. Muha
Counsel for the Respondent:	Arnold Bornstein, Sointula Kirkpatrick and Michael Appavoo

____________________________________________________________________

JUDGMENT

The appeal from the reassessment made under the Income Tax Act for the 1997 taxation year is allowed, with costs, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that:

(1)      the fair market value of the signed and numbered limited edition Prints donated by the Appellant to Ferris State University on December 31, 1999 was $24,384;

(2)      the Prints were "personal-use property" as defined in section 54 of the Income Tax Act to which the provisions of subsection 46(1) of that Act applied with the result that no gain or loss was realized on disposition by donation by the Appellant; and

(3)      the Respondent conceded that the penalties be deleted.

Signed at Ottawa, Canada this 24th day of September, 2004.

"R.D. Bell"

Bell, J.

Citation: 2004TCC649

Date: 20040924

Docket: 2002-3718(IT)G

BETWEEN:

BARBARA QUINN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent,

REASONS FOR JUDGMENT

Bell, J.

ISSUES:

1.        In respect of her 1997 taxation year, what was the fair market value of the 48 signed and numbered limited edition Prints (each "Print" and, collectively, the "Prints") donated by the Appellant ("Donation") to In Kind Canada ("In Kind") on October 15, 1997, the date of Donation? That amount will determine the Appellant's Donation tax credit amount deductible under subsection 118.1(3) of the Income Tax Act ("Act") in respect of such Donation.

2.        If the amount on which the Appellant's Donation tax credit was calculated was higher than the Appellant's purchase price of the Prints, were the Prints "personal-use property" as defined in section 54 of the Act to which the provisions of subsection 46(1) of the Act applied? If they were "personal-use property", the Appellant's adjusted cost base of each of those Prints will be deemed to be $1,000 and no gain or loss will have been realized on disposition by the Donation.

FACTS:

[1]      The Appellant was advised by her financial planner of the potential of buying art works and donating them to a charitable institution for a tax receipt of market value, being higher than her purchase price. She said that she decided to participate both for the income tax reduction and to benefit charity. The Appellant, on August 10, 1997 acquired Prints, being 48 reproductions of art work by artist Barry Barnett, from CVIAM for a total purchase price of $8,648. On October 15, 1997 she donated the Prints to In Kind ("Donation"), a registered charity within the meaning of paragraph (a) of the definition of "total charitable gifts" in subsection 118.1(1) of the Act ("In Kind"). In Kind issued to the Appellant a donation receipt dated October 16, 1997 in the amount of $25,280, being in respect of 16 Prints at $225 each, 16 Prints for $410 each and 16 Prints for $945 each. The Appellant filed this receipt with her return of income for her 1997 taxation year and in computing her total charitable gifts and total gifts for that year, included $25,280 in respect of the Donation. The Minister of National Revenue ("Minister") reassessed the Appellant in respect of that year by reducing the amount of the fair market value of the 48 Prints at the time of Donation to her cost thereof, namely $8,648. The Minister also assessed penalties against the Appellant in the amount of $3,770 pursuant to subsection 163(2) of the Act and subsection 19(11) of the Income Tax Act of Ontario. At the hearing, counsel for the Respondent informed the Court that the penalties would be deleted.

EXPERT WITNESS ROLLAND FORD

[2]      Rolland Ford ("Ford") was qualified as an expert in the limited edition art print industry. His credentials are very impressive. A summary of his education and experience follows:

EXPERIENCE:

4/2002 - Present            Mill Pond Press              Venice, FL

VP/Sales & Marketing

Manage all sales and marketing efforts to national accounts and international distributors. Oversee all marketing decisions. Participate in decision making for; new artists, art published, edition sizes, pricing and distribution strategy. Responsible for continued development of new distribution channels. Responsible for maintaining Company's awareness level of all industry news including competitor product changes. Developed and conducted a Regional Sales Training program for entire dealer network via 14 Regional Seminars. Management of in-house sales department. Developed outside sales rep program. Spearheaded improved dealer communication via website and e-mail.

11/2000 - 3/2002       Light of the Future Galleries Naperville, IL

Director of Operations

Manage sales & marketing efforts for three art galleries. Responsible for inventory control, buying decisions and product evaluation. Hired and trained all sales staff. Developed and implemented training programs and sales strategies. Set schedules and goals to meet Company growth plans. Plan and manage all major events. Final decision making for all product pricing, including secondary market pieces.

2/1996 - 11/2000       Media Arts Group, Inc.          Naperville, IL

Regional Sales Manager

Developed territory from 1.3m to 5.1m in 3 years! Top RSM 3 of 4 years. Primary focus was developing franchise prospects into owners of multiple stores. Oversee all franchise steps from original business plan to grand opening and beyond. Focused on building trust and respect with top accounts. Worked diligently to improve established low volume accounts. Developed a regional training program that was later used by entire company. Meetings with business owners to review P & L's, identify opportunities, manage inventory and plan growth. Conducted on-site recruiting and training.

1/1992 - 1/1996         Home Cable Concepts          Cincinnati, OH

District Manager

Built a professional team of 25 salespeople, generating monthly revenue over $200k. Took over office ranked 46th of 47 in nation and developed it to #1. Hired for all departments, including service and administration. Developed and rolled out new sales program used nationally for new product line.

2/1985 - 1/1992         Entre Computer Centers       Stamford, CT

Sales Manager/Training Manager

Developed a new computer software training department. Spearheaded sales efforts to local companies, including fortune 500's. Managed all aspects of retail sales.

EDUCATION:            

NYU (CED)                  US-NY-New York

Vocational

- Computer Science certificate

Andover Inst. of Business     US-ME-Portland

Associate Degree

- Business Administration

[3]      Additional comments on Ford's experience are taken from the report prepared by him. He stated that he had been in the business of selling limited edition art work since 1996 and that he had been mainly employed by two different publishers of limited edition art and that he managed three Chicago area art galleries that sold limited edition art. In that role he purchased art from publishers and artists and sold it to retail consumers. He also collected, prior to 1996, more than a dozen limited edition prints. He stated that, currently being the vice president of sales and marketing at Mill Pond Press, a publisher of limited edition art prints, he was required to maintain a very high level of knowledge "of the limited edition print industry, the players, the product, and the wholesale and retail markets."

[4]      His report said that the subject matter of limited edition prints encompasses a varied group of genre including wild life, modern, inspirational, native, landscape, floral, nostalgia, figurative, sports, western, aviation, and a variety of others. Referring to an article in the July, 2002 edition of Art Business News magazine, he said that the most popular subject matter of limited edition prints is landscapes, the second most popular is flowers and the third most popular is wild life.

[5]      He stated that art print reproductions fall into two categories, open edition prints and limited edition prints. An open edition print is never numbered and may be produced in unlimited quantity. In the case of limited edition prints the artist and publisher have committed to produce only a certain number of prints called the "edition size". Because of the limited number of pieces personalized by the artist, limited editions, according to Ford, are, by their nature, desirable, collectible and exclusive. He stated that limited edition prints, when "sold out" in the primary market (retail outlets) will often trade in the secondary market and that open edition prints do not generally trade in the secondary market. His report said that limited edition prints are almost always numbered with a fraction that indicates the number of prints in the edition and the number of the particular print, being the numerator in the fraction.

[6]      Ford testified further that within an edition of limited edition prints there are often special prints designated as "proofs", the most common of those designations being the "artists proof". They are generally limited to a percentage of the total print run (generally less than 25 percent) and are labelled "AP" in the margin of the print. Traditionally these were the first prints that were produced through the printing process. He said that the artist would scrutinize them and would refine the printing medium by making colour adjustments, et cetera, being the prints that the artist would "proof" before the other prints were run through the printing press. They were generally considered more desirable and to have more value.

[7]      Ford then stated that an artist would, in some cases, add a small original work of art in the margin or on the back of a print or would embellish the print with hand-painted brush strokes. A print on which the artist has added an original drawing or painting is often referred to as a "remarque". He stated that these special prints would generally comprise a very small portion of the total edition of prints and would often sell, at both wholesale and retail market levels, for several times the value of the "standard" signed and numbered prints. He said that these remarques tend to increase in value, at a higher rate in a secondary market.

[8]      He further stated that limited editions are printed on top quality paper using expensive, long-lasting inks and are often run through a press multiple times using touch plates to print small corrections on each print, being, usually a minor colour correction. He explained that open edition prints use lower quality paper and inks that do not last.

[9]      He then explained offset lithography, being the most common printing method used in the reproduction of limited edition art. He explained the process stating that a modern offset printing press is a motor-driven machine with a computer brain that can cost several million dollars. That process is called "offset" lithography because the paper never actually touches the printing press. Ford stated that in the press, the image is transferred to a roller which then prints the image onto the paper and hence the image is "offset" before printing.

[10]     He also explained serigraphy using the silk-screen process. That involves placing a stencil that is made of tightly stretched silk or other fabric over the substrate (most often paper). The stencil blocks the areas where paint is not to be applied to the substrate. After describing the rest of the process, Ford said that due to the labour and skill necessary to create a serigraph, they typically sell for significantly more than offset lithographs. He attached a book entitled The Complete Guide to Limited Edition Art Prints by J. Brown that describes the offset lithography and serigraphy processes in detail.

[11]     He referred to other types of processes pursuant to which limited edition prints are produced, one of them being an "etching", where an image is etched onto a stone or other medium and the print is created by covering the medium with ink and impressing the medium onto the substrate. He said that offset lithographs are generally not considered to be "fine art".

[12]     Ford spoke of the edition sizes for limited edition art prints saying that they varied widely. He stated that offset lithographs range from 195 to 1950 in typical editions. He then said that some artists will release prints of an image on more than one substrate (e.g. on canvas and on paper) and in different sizes, each type of print forming its own edition. He gave different examples of how prices in different print editions could vary substantially in price.

[13]     He then said that on a regular basis he is directly involved in the process of pricing limited edition prints. He said that the retail pricing of a print is usually a product of the cost of producing it, the cost of bringing it to market and the market demand for it. He spoke of the factors determining cost, the selection of print size and the edition size and the establishment of wholesale price which must be sufficiently high so that the publisher can recoup its costs and make a profit. He said that other factors that influence the pricing decision include competitor pricing for similar prints, popularity of the artist, the subject matter and the success that the artist has had selling previous prints, et cetera. He said:

Generally, only small variances occur due to those factors. For example, a print of equal size and type by a very famous artist, say, Robert Bateman, would not be priced significantly higher than a print produced by a less-known regional artist. Generally, however, the more famous artists tend to release prints in larger edition sizes.

He said that the publisher generally sells prints directly to dealers at a wholesale price that is around 50 percent of the retail price, the dealers being the retail outlets where the prints are sold such as galleries and gift shops, et cetera. He said that a publisher would not, under any circumstances, sell at wholesale prices other than to "bricks and mortar" galleries at the prices set out in the price lists. He said that if a publisher learned that a retailer was selling prints at a significant discount to the retail sales price, the publisher very well might terminate its relationship with the retailer.

[14]     Ford stated that most limited edition lithographs retail for somewhere between $170 and $340 Canadian. He said that publishers of limited edition prints consider the North American market to be one market, it being very common for American print artists to retail their prints in Canada and vice versa. He opined that wholesale and retail prices are consistent for similar prints in Canada and the United States.

[15]     He testified that there are millions of buyers of limited edition prints in North America and more in the international market. He referred to an article in the August 2003 edition of Art Business News which reported that the total market for art and wall décor was estimated to be over 35 billion dollars U.S. for 2002 and that approximately 10 percent of that would be comprised of limited edition art prints. He stated that Mill Pond Press has a retail network of approximately 2000 retailers, about 200 of whom are located in Canada. He said that the limited edition print market was extremely strong in the early to mid 1990s, was moderately strong in the late 1990s "and has been soft in the early 2000s". He added that tourist galleries were hit extremely hard by the tragic events of "9/11" and its negative effects on the tourism industry.

[16]     Ford then said:

The limited edition print market has not, to my knowledge, been affected by large donations of prints made in either Canada or the United States. Before I was retained to testify in this case, I had never heard of a syndicated art donation program, and had never heard of a company called CVI Art Management Inc.

[17]     The concluding part of his report relates to the Prints donated by the three Appellants whose appeals were heard together. It is set out as follows:

E.          The Prints donated by Caedmon Nash, Barbara Quinn and Susan Tolley

On May 26 and May 27, 2004, I viewed a number of prints that I was advised were identical to those donated to charities by the individuals that are the subject of these cases in the Tax Court. In particular, I viewed a large number of prints from three collections entitled "A Distant Thunder", "The Barry Barnett Collection" and "Nature & Wildlife". I also reviewed an appraisal of the Barnett prints prepared by Cynthia Duval and appraisals of the other prints prepared by Robert Parks.

A Distant Thunder

The prints I viewed were by artists Carl Beam, Richard Bedwash, Russel Noganosh and Brian Marion. They were high quality serigraphs from an edition of 300 (345 including artist's proofs). The images were desirable and saleable. In my opinion, the values set out in the Robert Parks appraisal are lower than the prices paid for similar types of prints that were sold at the retail level in North America at the end of 1999.

Barry Barnett Collection

The prints I viewed were signed and numbered prints, artist's proofs and remarques by American artist Barry Barnett. Each of the remarques had a hand-drawn picture in the margin that related to the subject matter of the image. I also viewed a sample "Certificate of Authenticity" (I assumed a similar certificate accompanied each print). They are quality lithographs. The images were desirable and saleable. In my opinion, the values set out in the appraisal are equal to the prices that similar quality prints would have sold for in 1997 in retail galleries across North America.

Nature & Wildlife

The prints I viewed were stamped and numbered prints, each from an edition of 155, by artists Lynn Donoghue, Adriene Veninger and Pamela Stagg. They were quality lithographs. The images were desirable and saleable. In my opinion, the values set out in the appraisal were approximately equal to the prices paid for similar prints in 1998 in retail galleries across North America.

He signed his report after making the statement that he had prepared it and believed its contents to be accurate and complete to the best of his knowledge. This report was dated June 2, 2004.

[18]     Ford testified that the majority of limited edition prints would be priced somewhere between $125 U.S. and $250 U.S. He then stated that his company, Mill Pond Press does not publish many serigraphs and that they generally range from $300 U.S. to $1,500 U.S. He said that he had been in many galleries and had seen a lot of serigraphs produced by other print publishers or artists who are self-published and:

... that combined with the serigraphs that have been published by Mill Pond that is the price range.

[19]     Ford's experience, according to his oral testimony, was that he was part of the selection process at Mill Pond as to what original art works would become limited edition prints. He testified that he was a member of the selection committee because he is the person who "gets the most feedback from the dealers on what is selling". He testified that "almost anybody" is a customer for limited edition prints. Specifically, he said:

It's the masses. It's most. It's probably 75 percent of the buying public, the same folks that go to Lazy Boy to buy a recliner and the same folks that go to all the other stores and buy regular stuff.

He also said that there was a large market for the purchase of limited edition prints by offices, with or without the assistance of interior designers. He stated that Mill Pond Press publishes over one million prints each year at an average retail price of $200 U.S. per print and that there are hundreds of other publishers in the U.S.A., about 30 to 40 of which are "significant players". He also said that there are millions of limited edition prints sold each year in North America.

[20]     Appellant's counsel posed the following question to Ford:

Q. Then you wrote in the first full paragraph on page 11:

"The limited edition print market has not, to my knowledge, been affected by large donations of prints made in either Canada or the United States. "

You say:

"Before I was retained to testify in this case, I had never heard of a syndicated art donation program and had never heard of a company called "C.V.I. Art Management Inc.".

Why would the market, in your opinion, not have been affected by syndicated donation programs?

A.         Well, sheer numbers and marketing power probably. We have our art dealer network. We send hundreds of thousands of prints out every year and for the most part they are sold through and we are only one of many significant players in that business. We have the muscle of the advertising and the reputation and whatever number of prints you are talking about, whether it be 1,000 or 10,000 or whatever.

The best example I can think of is if you put 5,000 prints into a market like Ann Arbour, Michigan you could give one to every 200 people that just attended a football game and they would all be gone and I doubt if I would ever, in my role as Mill Pond's Vice-President, I doubt if I would ever get a call from any of my retailers in Michigan complaining that they had lost a sale because someone else had some edition prints there.

Q.         Haven't you just flooded the market in Ann Arbour by doing that, for example?

A.         One print for every 200 people? No.

Q.         Why is that? Doesn't that diminish the demand for prints in Ann Arbour?

A.         Not in my opinion.

Q.         Why is that?

A.         It's just that you are talking about again maybe a town of, I have no idea, maybe its 300,000 people. So if one out of five are going to buy a limited edition print some time in the next couple of years you are not going to significantly affect that market because one out of 200 people at a football game got one of those prints.

[21]     The following exchange then took place:

Q.         ... For A Distant Thunder the amounts indicated on the Robert Parks' appraisal was CDN $350. You say here in your report that in your opinion that amount set out in the Robert Parks' appraisal is lower than the prices paid for similar types of prints, that CDN $350 is lower for similar types of prints sold at the retail level in North America in 1999. Can you give us an idea of what those kinds of prints, similar kinds of prints, would have been sold at that that time?

A.         Definitely. Either at or a little bit higher I guess would be the way I would describe it for multiple reasons. One is they are serigraphs, which again is a very labour intensive process and very accepted in multiple markets, so whether it be the mass market, slightly higher end or even the fine art market. Before I even wrote this actually I did just a little bit of checking because I had not heard of Carl Dean and it appeared from what I could dig up on the internet he is a very saleable artist, has a certain amount of fame and notoriety, and that is important. So yes, I looked at him. There were pluses and minuses throughout the collection but when you added the pluses and minuses they came up to be pretty much consistent with the average serigraph type prices that I would bring similar pieces to the market at.

Q.         With respect to the Barry Barnett collection, Ms Duvall is the appraiser there and she had appraised them at U.S. $200 for the prints, U.S. $400 for the artists proofs and U.S. $900 for the remarques and these are in each of these cases. You say in your opinion that those values were equal to the prices that similar quality prints would have sold for in 1997 in retail galleries across North America. Is that correct?

A.         That is exactly correct.

Q.         For Susan Tolley's prints, the Nature & Wildlife Collection, they were appraised by Mr. Parks for their value in 1998. There were different artists there. These were the floral artists.

A.         Yes.

Q.         Some were at $280 Cdn, some were at $285 Cdn, some were at $290 Cdn. Are those approximately equal to the prices that would have been paid for similar prints in 1998 in retail galleries across North America?

A.        Yes, approximately, and certainly considering the small edition size again they would have to be brought to market and priced around that amount. They were quality lithographs in the sense they were printed on good stock. They appear to have used good inks. Again there were some pluses and minuses but I think when you added it all up it was darn close to that.

Q.         Did as a matter of fact the syndicated donation programs that you have now learned about have an impact on the market, on the industry, your industry, in 1997, 1998 or 1999?

A.         Not to my knowledge. I had never heard of it. I am involved in associations in the limited edition print industry, the National Association of Limited Edition Dealers is one. We get together, we talk on the phone and not only had I never heard of it but the subject had never come up in any of my conversations with anybody in our industry.

[22]     On cross-examination Ford said that none of the artists whose work is the subject matter of the donations had ever been in Mill Pond Press' inventory. He also said that one of the collections did not have a certificate of authenticity and that Mill Pond Press would probably not have published prints in that way. He said that there were no signatures on some prints, simply stamping the initial of the artist. He then said that Mill Pond Press would not have published prints without the signature. Ford also said that when a print was simply stamped as opposed to being signed by the artist one could not tell whether the artist had approved the print.

[23]     Respondent's counsel then asked Ford a number of questions to each of which he responded "no". Those questions dealt with whether he had checked the impact of CVIAM on the market for Barry Barnett's Prints, whether he had checked it in respect of A Distant Thunder Collection, whether he had done it for any of the artists in the Nature & Wildlife Collection, et cetera.

EXPERT REPORT OF SANDRA J. TROPPER, ASA

[24]     Sandra J. Tropper ("Tropper") was qualified as an expert appraiser of personal property including limited edition art prints. Tropper has what appear to be outstanding credentials in the area of her expert qualification. They read as follows:

APPRAISER'S CREDENTIALS

Sandra Tropper, owner of Artemis, Inc., has been an art dealer, consultant, and appraiser in the Washington, D.C. area for over twenty years. As a private dealer she assists in the purchase of original artwork including Limited edition prints, paintings, sculpture and contemporary crafts. Her clients include corporate entities (including major accounting firms, law firms, trade associations, etc.), private collectors and government agencies.

She received a B.A. in Art History and Political Economy from Sweet Briar College in Sweet Briar, Virginia in 1973. She received her Master of Arts in Art History from the George Washington University in 1986, Washington, D.C. She also has a Master of Arts in International Studies from The John Hopkins University Paul Nitze School of Advanced International Studies, Bologna, Italy and Washington, D.C., received in 1975.

In addition to her academic background as an art historian, Ms. Tropper has also taken practical classes in the fine arts at the Corcoran School of Art, the Smithsonian Institution, Pyramid Atlantic, and the Maryland College of Art and Design.

Ms. Tropper is an accredited senior appraiser (ASA) with the American Society of Appraisers, an international multi-disciplinary certifying and accrediting organization. the American Society of Appraisers has a mandatory recertification program for all its senior members and Ms. Tropper is in compliance with that program. She is currently an officer of the national Personal Property Committee of the ASA and a member of the Board of Examiners. Currently Ms. Tropper serves as an ASA representative to the Terminology, Applications and Concepts task force of the Centre for Advanced Property Economics for reinterpreting appraisal definitions in the Uniform Standards of Professional Appraisal Practice. She is an instructor for ASA Personal Property Valuation courses including Personal Property 203: Report Writing; and Personal Property 204: The Legal and Commercial Environment.

Ms. Tropper has completed courses in appraisal practice and theory including Principles of Valuation (Personal Property Appraising); Research and Analysis in Appraising Personal Property; Personal Property Appraisal Report Writing (Master Class); Personal Property Appraisers in Practice (Standards and Obligations); and the Uniform Standards of Professional Appraisers Practice (2001). In addition she has attended numerous courses and seminars including Personal Property Valuation (Appraising Fine and Decorative Arts); Asian Decorative Arts; Japanese Woodblock Prints; Victorian Painting; Appraising Photography; Williamstown Art Conservation Center's Summer Institute on the Conservation, Analysis and the Interpretation of Works of Art; Beyond Warp and Weft (Understanding Textile Connoisseurship, Conservation & Valuation); Cultural Property (Due Diligence and Provenance, Legal and Ethical Issues) and American Folk Art.

She is a member of both ArtTable, a national organization of women in the arts, and Charter 100, a national organization of professional women.

[25]     Tropper's letter of transmittal of her report to Mr. Cliff Rand, counsel for the Appellants reads as follows:

Dear Mr. Rand:

            In accordance with your request for the preparation of a valuation report for Fair Market Value for 233 prints by various artists (Barry Barnett, Lynn Donoghue, Pamela Stagg, Adriene Veninger, Carl Beam, Russel Noganosh, Richard Bedwash and Brian Marion), I inspected comparable properties at your offices on May 16, and 17, 2004 at my office in Bethesda, Maryland on May 24, and June 2, 2004 or at the Crowne Plaza Hotel in Arlington, Virginia on May 30, 2004. I understand that the prints that I inspected are from the same editions but are not the exact ones that are included in these donations. I have assumed that the prints included in these donations are comparable in all features, including condition.

            Based on my inspection of the property and subsequent research, including analysis of the artists' markets and the sale of comparable properties, I have reached the conclusion that, as of the dates of donation, the Fair Market Values for the properties are as follows:

Barry Barnett: Fair Market Value for 48 prints as of October 15, 1997: $24,384

Lynn Donoghue: Fair Market Value for 44 prints as of December 3, 1998: $10,560

Pamela Stagg: Fair Market Value for 35 prints as of December 3, 1998: $8,750

Adriene Veninger: Fair Market Value for 21 prints as of December 3, 1998: $4,620

(Total Fair Market Value for prints from Nature and Wildlife: $23,930)

Carl Beam: Fair Market Value for 25 prints as of December 31, 1999: $10,625

Russel Noganosh: Fair Market Value for 17 prints as of December 31, 1999: $5,525

Richard Bedwash: Fair Market Value for 25 prints as of December 31, 1999: $8,775

Brian Marion: Fair Market Value for 18 prints as of December 31, 1999: $5,332

(Total Fair Market Value for prints from A Distant Thunder: $30,257)

            Please note that the conclusions presented here are for the artwork's Fair Market Value for charitable donation. For all intents and purposes within this document, Fair Market refers to the definition from the judgment of Cattanach, J. in Henderson v. Minister of National Revenue, 1973 Carswell Nat 189, [1973] C.T.C. 636, 73 D.T.C. 5471. Per this judgment, Fair Market Value is defined as the highest price an asset might reasonably be expected to bring in 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.

            In the preparation of this report I have observed the Code of Ethics of the American Society of Appraisers and have conformed to the standards promulgated in the Uniform Standards of Professional Appraisal Practice of the Appraisal Foundation, an organization representing major appraisal organizations nationwide. In addition, I have no past, current or future interest in the properties contained within this report.

            Thank you for allowing me to be of service to you in this matter.

Yours truly,

Sandra Tropper, ASA

American Society of Appraisers

[26]     Tropper also included a page of definitions of appraisal terms as follows:

DEFINITIONS OF APPRAISAL TERMS

A Personal Property Appraisal

            An appraisal is an informed opinion as to the value, quality, condition and authenticity of an article of personal property. That opinion is backed by education, appraiser training, market experience, and research. A personal property appraisal must be used in its entirety including the Limiting Conditions as described on pages 104-5.

Purpose and Function of this Appraisal

            The purpose of this appraisal is to conclude the Fair Market Value of artwork. The function of this appraisal is to apply these values to substantiate a charitable donation to non-profit organizations.

Fair Market Value

            Fair Market Value is defined as the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the set 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. (Cattanach, J. in Henderson v. Minister of National Revenue, 1973 Carswell Nat 189, [1973] C.T.C. 636, 73 D.T.C. 5471)

Approach to Value

            Personal Property is valued using a Market Comparison Approach, a Cost Approach or the Income- or Revenue-Producing Approach. For the artwork included here, the Market Approach was used. The other approaches were deemed inappropriate after consideration.

Market Data Comparison Approach

            The Market Data Comparison Approach entails examination and comparison of transactions of like or comparable properties that have taken place in the appropriate marketplace in order to arrive at an apposite market value. As there are comparable properties in the marketplace, this approach was chosen for valuation of properties included here.

Cost Approach

            The Cost Approach provides a concluded cost of replacing the depreciated property with reproduction, or new, substitute property. It can also include the cost of repairs to return property to its original condition. As comparable properties exist in the marketplace, using this approach is not appropriate.

Income Approach

            The Income Approach to value is used when an object will be used to generate income at a future date. (Generally this is used when the subject property is being either leased or rented; depreciation must be accounted for as this may reduce the life span of the object due to handling and use over time.) Except for their sale, the properties being considered in this report are not able to generate income and this approach was not chosen.

Condition/Quality

            Condition and quality are ranked from top to bottom by the terms:

Excellent, Good, Average, Fair and Poor.

[27]     Tropper's report continues with a Narrative of 26 pages, followed by a very detailed Description of Artwork describing each of the 233 Prints involved in this appeal, identifying the type of print, the material used, the size, the number, the fact of signature, a very comprehensive description, and the fair market value of each such piece.

[28]     Obviously, a reproduction of all of this material is not practicable. A summary of the Narrative is that Tropper inspected the three groups of Prints including 48 by Barry Barnett, 100 Prints grouped under the title "Nature & Wildlife" and 85 Prints grouped under the title "A Distant Thunder". She arrived at her statement of the fair market value of each print for the appropriate Donation date being:

          Barry Barnett Prints - October 15, 1997

          Nature & Wildlife - December 3, 1998

          A Distant Thunder - December 31, 1999

She provided a description of the artists' background, a general description of the art work and a review of the artists' market. For the groups and the artists, she discussed the market in which these prints are regularly traded "in the ordinary course of business". For the groupings, she discussed each artist's background and market separately, noting similarities as well.

[29]     She stated that she sought the fair market value for calculating the amount of the charitable Donation on those dates according to the definition of "fair market value" from the judgment of Cattanach, J, in Henderson v. Minister of National Revenue, 73 D.T.C. 5471. Her narrative recites that:

...this judgment, Fair Market Value is defined as 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.

[30]     She set out the conversion rates for calculating the conversion of U.S. dollars into Canadian dollars on the appropriate date. She further stated that she approached each work as a separate property and that each work would command a price in the market place. She reviewed the open markets which were described as "not subject to undue" stresses and where no one has a compulsion to buy or sell for any reason other than to purchase art work as an investment, as decoration or as an addition to a collection.

[31]     Tropper said that the Appellants purchased the Prints at a reduced price based on an opportunity provided by CVIAM. She added that they were not purchased in the open market, a requirement for concluding the fair market value of the works. She added further that the Prints were not purchased by the donors in the market where property of that sort would normally be sold in the ordinary course of business. She stated that there are various market layers in the many levels of galleries and dealers in the art world. She then said that the market layer that determines fair market value for individual works of art:

...is the open common retail market, where an asset is reasonably expected to bring the highest price to a seller from a buyer and is the market in which such property is sold "in the normal method" in the "ordinary course of business."

[32]     Tropper described the three separate markets that were to be considered. The first is the offset lithograph market of wildlife imagery (for Barry Barnett). The second market is the offset lithograph market for general subject matter (for the Nature & Wildlife Prints). The third market is for native North American art work overlapping the print market where hand pulled art work is sold (for A Distant Thunder Prints). She then described the nature of those markets, concluding with the statement that prices vary a great deal in all such markets depending on many factors including size of the print, number of Prints in an edition, marketability of the image (which includes colour and the ability of the artist), reputation of the artist, quality of paper and quality of printing.

[33]     Tropper described the internet market and the effect it had upon prices, affecting, in part, prices in 1997, 1998 and 1999. She explained that those years did not have the benefit of exposure of the public to art work through the internet. She also reviewed the general market by contacting dealers, galleries, publishers, artists and websites to learn about the variations in prices due to the quantity of prints in a run and discussed that in some detail.

[34]     She then discussed "blockage discounts", concluding that there was not an adequate number of Prints in any one of the Donations to suggest the need to calculate a reduced value due to quantity. She said:

In fact, even the total number of prints in all the editions by these artists would not overload the huge North American market.

Tropper also discussed the variety of ways in which the recipient institutions were dealing with the works.

[35]     She said that each group of Prints would sell through a different area within the art market and therefore had its own rationale for concluding fair market value. She stated that all three markets were analyzed in relation to the above stated definition. Her report then went on to discuss Barry Barnett's work in substantial detail and sales records from Barnett's gallery, and described her research respecting the approaches to pricing the different productions of his works leading to her conclusion on value.

[36]     Tropper pursued the same process with respect to Nature & Wildlife respecting the art works of Lynn Donoghue, Pamela Stagg and Adriene Veninger.

[37]     Following this she discussed the silk screen Prints of the four Canadian Native artists making up the collection known as A Distant Thunder. Her research was extensive and her report detailed, leading to the valuation of works in that collection.

[38]     As indicated above, Tropper then devoted 67 pages to a description of the art works giving fine detail in respect of each of the 233 works examined and appraised by her.

[39]     A page devoted to certifications is reproduced as follows:

233 Prints: 48 by Barry Barnett; 44 by Lynn Donoghue; 35 by Pamela Stagg; 21 by Adriene Veninger; 25 by Carl Beam; 17 by Russel Noganosh; 25 by Richard Bedwash; 19 by Brian (Pashegesic) Marion

CERTIFICATIONS

Having carefully and personally examined the properties listed above on May 16 and 17 at the offices of Wildeboer Rand Thomson Apps & Dellelce, Toronto, at the offices of Artemis, Inc., Bethesda, Maryland, on March 24 and June 2, 2004, or on May 30, 2004 at the Crown Plaza Hotel, Arlington, Virginia. I present this valuation. I have made these certifications on the basis of my experience, expertise and analysis of markets where this property or comparable properties by these and comparable artists are traded.

I certify to the best of my knowledge and belief:

·         facts and data included in this report are true and correct.

·         the reported analyses, opinion and conclusions are limited only by the limiting conditions (pages 104-5) and are my personal, unbiased, professional analyses, opinions and conclusions.

·         I have no present or prospective interest in the property that is the subject of this report, and no personal interest or bias with respect to the parties involved.

·         my compensation is not contingent upon the reporting of a predetermined value or direction in value that favors my client, the amount of the value estimate, the attainment of a stipulated amount or the occurrence of a subsequent event resulting from the analyses, opinions or conclusions in this report or from its use.

·         my analyses, opinions and conclusions were developed and this report has been prepared in conformity with the Uniform Standards of Professional Appraisal Practice.

·         no one provided significant appraisal, appraisal review, or appraisal consulting assistance to me in the preparation of this report.

"Sandra J. Tropper"                                           "June 2, 2004"

Sandra J. Tropper, A.S.A.                                 June 2, 2004

American Society of Appraisers

The limiting conditions described on pages 104 and 105 of her report are reproduced as follows:

LIMITING CONDITIONS

In order to be valid, this appraisal must be used in its entirety of 106 pages with 104 pages of photographs, as delineated in the Table of Contents.

The valuations included in this report are effective as of the dates of donation as follows:

            October 15, 1997 (for Barry Barnett prints)

December 3, 1998 (for Nature & Wilderness artist prints)

December 31, 1999 (for A Distant Thunder prints)

The fee for this appraisal is based solely on an hourly rate and is not dependent on any conclusion of value.

The appraiser for this report, Ms. Sandra Tropper, has no past, present or future interest in the property and neither personal interest nor bias with respect to the parties involved.

This appraisal is limited to the purpose and intended use (as stated in the definitions), and nothing else. It is an estimate of value of the subject properties on the dates of donation. Any other use of this report renders it null and void. The appraiser assumes no responsibility for its unauthorized use.

This appraisal does not guarantee the title of the subject property.

This appraisal is neither a guarantee of proceeds from sale nor should it be relied on for purchase of a property.

This appraisal makes no warranty as to the authenticity of the property appraised. Absolute identity is frequently possible only through the use of scientific testing. Values are therefore based on the best information available. This appraisal is based upon visual examination on site; properties were not subjected to extensive testing by the appraiser.

The appraiser shall make no disclosure of the contents of the report without the approval of the client except as mandated by law and/or regulations of a professional organization.

This appraisal has been prepared to conform to USPAP, the Uniform Standards of Professional Appraisal Practice, a comprehensive set of procedural, competency and ethical standards developed by the Appraisal Foundation, and promulgated annually by the Appraisal Standards Board of the Appraisal Foundation, an organization of the major appraisal organizations in the United States.

This appraisal should be considered complete and not limited by any extraordinary assumptions. It is however a summary appraisal and all back-up information will be held in Artemis' work files. These files will be maintained for a minimum of five years, or two years following the conclusion of litigation, per USPAP requirements.

In this valuation, the appraiser has considered data from various sources (e.g. dealers, artists, authorities) and published documents (e.g. invoices, sales records) and considered that information to be reliable. Liability for the accuracy of those sources cannot be accepted.

Photographs included in this document are not considered to be professional in nature and are included solely to serve as an adjunct to the description included in this report.

[40]     The report further includes coloured photographs of each of the Prints.

[41]     In oral testimony Tropper said that she had looked for and tried to conclude a fair market value for calculating the amount of the charitable donation on the various dates of donation. She said that she used the definition of fair market value of Cattanach, J. in Henderson v. Minister of National Revenue. She stated that she used that definition because she understood that it was the appropriate definition to use and that she was provided with it by the law firm of Wildeboer Rand. She said that she tried to figure out how the artists fit into the various markets where their work seems to have been sold. She stated:

I tried to conclude values based on again the artists' backgrounds, the information that I had about past sales records, looking at the artwork itself trying to place it in a market context, a market where I believe it indeed would sell, and concluded values.

[42]     She said that the markets that she looked at were the open markets for these particular types of assets where one observes the asset and selling prices as knowledgeable dealers or sellers or buyers normally conduct their business. She said that they looked at free markets, open markets, in most cases being retail art galleries. She said that that could be expanded to include:

... things like frame shops, you can include things such as gift stores, art consultants and art dealers who work privately. I think all of those things compose the art market.

[43]     She emphasized that the open and free market, the market in which fair market value according to the definition would be found, would be that retail market. She said that that is the place that the highest price an asset might reasonably be expected to bring, would bring, if sold. She said that she had looked at the circumstances in which the Appellants had acquired their Prints and concluded that it was not the normal market. She said:

That is not the normal way artwork is sold. It was kind of an artificial market. It didn't exist over a period of time. Going to a financial planner to purchase artwork is not really the norm.

[44]     She said that, as written in her report, historical supply and demand for comparable works helps determine asking prices. She said:

When you look at the market what you are looking at is what have people been willing to pay in the past, what exists out there, what is similar, what is comparable. These pieces had not sold in the marketplace and so my assignment was, as far as I could see, to go back and to find indeed where similar kinds of things, comparable kinds of things had sold in the past.

[45]     She said that her understanding was that these works were produced specifically for a tax shelter promoter market and that they were not going to be going out into a retail market.

... at least not on the specific dates when this fair market appraisal - the various dates when the fair market value conclusions were to be drawn.

[46]     In giving evidence, Tropper described in detail the nature of the work of the artists in question. She took into account size of editions, paper quality, ink quality, the strength of colour values, et cetera. She also took into account the experience and reputation of the artist. She described the difficulty in obtaining invoices because:

Galleries and dealers don't want to provide you with invoices, especially invoices from six, seven, even five years ago. They have to dig in their records. They are going to pull things out. They are not receiving any compensation in most cases for this so it becomes very difficult. You have to establish some kind of relationship with the person that you are working with and hope that they will be forthcoming with information. There is also a privacy issue. To provide you with invoices is providing you with their clients and their clients' addresses. And while I speak with a lot of people on the phone they don't always know who I am and they don't always know if I'm looking to find myself a good mailing list to send out information about other artists ... or go directly.

[47]     With respect to obtaining discounts, Tropper said that the discount would normally be given on framing rather than on the art work stating that she believed that because there is no "up front" cost to the gallery on the framing that is an easier way of giving a discount. She stated that it also maintains the integrity of the price for the artist. She also said that there are artists who will not allow people to sell their work, galleries and dealers, if discounts are given. She said that designers and decorators generally add it on to the purchase price when buying for clients.

[48]     In cross-examination Tropper said that her assistant made some of the information seeking telephone calls. She stated that she had not heard about any of the artists in question before this assignment of valuations. Counsel also questioned her respecting information received from gallery owners. Tropper explained that they were not always forthcoming with information and were, on occasion, reluctant to speak to her or her assistant. He also asked her questions respecting the pricing of artists proofs and remarques and a number of questions about the artist Barnett and his view of the value of his works compared with the values assigned by Tropper. He asked about silkscreen works, lithographs, et cetera and about the various artists and the types of work they did. In addition he asked about several invoices and also the code of ethics of the American Society of Appraisers. Tropper was clear in her response to questions concerning her conclusions about the value of artists' Prints, namely that she was referring to comparable works in the market place. Tropper, in response to Respondent's counsel's questions, stated that she did not make enquiries of CVIAM of how many sales they had made and in fact made no enquiries whatever of CVIAM. She also said that she did not question anyone at Fresno Pacific University about how many donations of prints identical to Nature & Wildlife were donated to that university.

EVIDENCE FROM EXAMINATION FOR DISCOVERY READ IN:

[49]     Appellant's counsel read into evidence certain portions of the transcript of the examination for discovery of Mr. S. Tringali ("Tringali"), an official of the Customs & Revenue Agency ("CRA"). It dealt with the work of a Mr. Gary Roy ("Roy"), an auditor with the CRA who had provided assistance on the review of the art work herein. He was described as having had experience in buying and selling art work, devoting about ten hours per week to that activity for approximately ten years. Roy became an accredited appraiser [International Society of Appraisers ("ISA") accreditation] in 2003. Tringali said that Roy contacted the artists in writing and received letters or telephone calls in response. He also said that Roy used:

... not only his experience but, again, sales comparables, the condition of the art work, his knowledge of the art work, speaking with others in the field, so forth and so on.

[50]     Tringali was referred to a "Range Report to Appeals Officer from Gary Roy Re: Barry Barnett Collection with Supporting Material". That report assigned a value of $25,280 to the Barry Barnett Collection. Tringali said he believed that to be the value of the art that appeared on the donor's donation receipt. He then said that he did not believe that the document had been released to the appeals officer and that it was rejected by CRA. He said that CRA did not have a "position" but had an "indication" that the fair market value was what the donors paid. He then said that Roy had no comparables. Tringali said that report stated that all remarque prints in each of the three Barry Barnett series should be allowed at $945, that all artists proofs should be allowed at $410 and that all prints from the regular edition should be allowed at $225.

[51]     Tringali, referring to other range reports, said that the word "Draft" was not stamped on them and that they were dated. Respondent's counsel said he was not certain as to which other range reports were sent by Roy to CRA.

APPELLANTS' SUBMISSION

[52]     I have decided, based upon the thorough, yet succinct, notes of Appellants' argument, simply to reproduce them here as opposed, with potential compromising effect, to translating them into my own prose. A complete text of that submission, therefore, follows:

A.         Introduction and Material Facts

1.          The basic facts in these three appeals are quite simple. Each of the Appellants purchased a different group of limited edition art prints from CVI Art Management Inc. ("CVIAM") and donated the prints to a recipient included in the categories of qualified donees listed in the definition of "total charitable gifts" in subsection 118.1(1) of the Income Tax Act (Canada) (the "Act"). Each of the Appellants claimed charitable donation tax credits in respect of his or her gift of the prints to the donee. The Appellants participated in these transactions on the advice of their financial planners.

2.          CVIAM designed and facilitated these transactions. In addition to selling the prints to the Appellants, it arranged to have the prints appraised and provided copies of the appraisals to the Appellants, and it located qualified donees who were willing to accept donations of the prints.

3.          Each of the Appellant's purchased different prints:

·         Caedmon Nash purchased 85 serigraphs produced from original works by four Canadian First Nations' artists: 25 by Carl Beam, 25 by Richard Bedwash, 17 by Russell Noganosh and 18 by Brian Marion. Mr. Nash retained one of the Noganosh prints, and donated the other 84 prints to Ferris State University.

·         Susan Tolley purchased 100 limited edition prints produced from original works by three Canadian women artists: 44 by Lynn Donoghue, 35 by Adriene Veninger and 21 by Pamela Stagg. Ms. Tolley retained one of the Lynn Donoghue prints, and donated the other 99 prints to Fresno Pacific College.

·         Barbara Quinn purchased 48 limited edition prints created from original works by American wildlife artist Barry Barnett. The 48 prints were comprised of one limited edition print, one artist's proof and one remarque[1] of each of 16 different images. Ms. Quinn donated all 48 of the prints to In Kind Canada.

4.          Although the prints were all different, they had many things in common. Ms. Tropper, the expert appraiser, testified that all of the prints were good quality, professionally-produced, numbered limited edition prints. Mr. Ford's testimony was to the same effect. The prints were all decorative pieces of the sort that consumers throughout North America would purchase to decorate their homes and their places of business.

5.          Mr. Ford, an individual with a lot of experience in the production and marketing of limited edition prints, provided evidence as to the nature and scope of the market for limited edition prints. According to Mr. Ford's evidence millions of limited edition prints are produced for sale each year in the North American market. He testified that limited edition prints comprise a significant portion (i.e., U.S. $2.5 billion to U.S. $3 billion) of the over US. $35 billion annual market for art and wall décor. Mr. Ford testified that there are 10,000 to 20,000 retail outlets for limited edition prints in North America.

6.          The Appellants based their claims for donation tax credits in respect of the gift of their prints on the amount indicated on the receipt that was issued by the charity or institution that received their gift. The receipt amounts in turn were based on the appraised value of the donated prints.[2] The Minister of National Revenue reassessed the Appellants to reduce their donation tax credits on the basis that the amount of the donations they made was equal to the price they paid to purchase the prints.

7.          The Minister also assessed penalties against each of the Appellants. On June 18, 2004, the Minister advised the Appellants that he would reverse the assessment of penalties against them.

B.         Issues

8.          The issues before the Court in these appeals may be summarized as follows:

(a)         What donation tax credit amounts were the Appellants entitled to deduct under subsection 118.1(3) of the Income Tax Act (Canada) (the "Act") in respect of the donation of their prints?

(b)         If the amounts on which the Appellants' donation tax credits were calculated were higher than the Appellants' purchase price of the donated prints, were the prints "personal-use property" of the Appellants to which the provision of subsection 46(1) of the Act applied?

C.         Arguments

(a)         Fair Market Value

            (i)          Background

9.          Subsection 118.1(3) of the Act provides that, in computing tax payable for a taxation year, an individual may deduct a tax credit computed on the basis of his or her "total gifts" for the year. An individual's "total gifts" for a taxation year is defined in subsection 118.1(1) as the least of three amounts, the first of which is the individual's "total charitable gifts" for the year. Subsection 118.1(1), as it read at the relevant times, provided that an individual's "total charitable gifts" for a taxation year was "the total of all amounts each of which is the fair market value of a gift....made by the individual in the year or in any of the 5 immediately preceding taxation years". As a result, the issue before the Court is the fair market value of the prints at the time they were donated by each of the Appellants.

10.        The Respondent has assessed the Appellants on the basis that the amount of their total charitable gifts is equal to the amount the Appellants paid to acquire the prints from CVIAM. It follows that the Respondent has assumed in issuing its reassessments that the fair market value of the prints was equal to the Appellants' cost of the prints.

11.        The arrangements promoted by CVIAM under which the Appellants acquired and donated the prints have been referred to by the Department of Finance as "buy-low, donate-high" arrangements. It is understandable that the Minister of National Revenue and the Department of Finance do not like "buy-low, donate-high" arrangements. Permitting taxpayers to make a profit from the tax system through the mechanism of a charitable donation is clearly not in accordance with good tax policy. Nonetheless, as Mr. Justice MacDonald noted in Nova Corp. of Alberta v. R.,[3] if there is a [opportunity] in the Act, then a taxpayer who finds it and exploits it while it is available is entitled to any resulting advantage.

12.        The loophole exploited by the tax shelter promoters who designed charitable gifting arrangements resulted form the combination of two factors. First, the Courts had recognized that a taxpayer can make a "profitable" gift.[4] Second, in 1996 and 1997 the federal government introduced measures "to help all charities attract donations from modest income Canadians"[5] by significantly enhancing the charitable donation tax credit system. Specifically, the percentage of an individual's income that could be tax-effectively donated to charity was increased from 20% to 50% in [the] March 6, 1996 federal budget, and then to 75% in [the] February 18, 1997 budget. The door had been opened to permit the marketing of charitable gifting arrangements to ordinary lower- and middle-income Canadians, and the tax shelter promoters did not hesitate to walk right through it. Within a few months of the 1997 budget, CVIAM was busy promoting its charitable giving plan to Canadian taxpayers.

13.        Where a loophole exists, it may be closed in one of two ways: through the introduction of amending legislation (even, in some cases, amending legislation with retroactive effect[6]) or, where circumstances allow, by the Minister invoking the general anti-avoidance rule to deny the tax benefits arising from transactions intended to take advantage of the loophole. In the case of charitable gifting arrangements, the government chose the former route. By press release dated December 5, 2003, the Minister of Finance announced draft amendments to the Act intended to put an end to the "buy-low, donate-high" charitable donation transactions.[7] The press release accompanying the draft legislation said, in part:

The amendments proposed today respond to concerns that various promoters are marketing charitable gifting schemes to the public in which property acquired by a taxpayer is donated to a charity at a value represented to be in excess of the taxpayer's acquisition cost. These "buy-low, donate-high" arrangements provide taxpayers with a tax benefit greater than their actual cost of the donated property.[8]

14.        If these draft amendments to the Act are enacted[9] the assessing position taken by the Respondent in these appeals will clearly be correct in respect of taxpayers making similar donations of property on or after 6:00 p.m. on December 5, 2003. The draft amendments to the Act provide that, for the purposes of computing the taxpayer's donation tax credit in respect of a gift of property, the amount of the gift is limited to the taxpayer's cost of the donated property where:

·         the property was acquired by a taxpayer less than three years before the gift was made;

·         the property was acquired under a "gifting arrangement" (as defined in section 237.1 of the Act); or

·         the property was acquired in the expectation of making a gift.[10]

15.        In the Appellants' submission, the Respondent is effectively asking this Court to put into effect the December 5, 2003 draft amendments to the Act six years prior to their introduction by the Minister of Finance, and to do so by stretching or contorting the well-established Canadian Tax law concept of "fair market value". In doing so, the Respondent is asking the Court to make a decision on the basis of policy rather than law.

            (ii)         Canadian definition of "fair market value"

16.        "Fair market value" is (sic) not defined in the Act. It is, however, a fundamental concept in Canadian income tax law. The term appears well over a hundred times in the Act, in such diverse provisions as the inventory allowance rules, various corporate reorganization provisions, the debt forgiveness rules, and the rules prescribing the consequences of ceasing to be resident in Canada. One of the main uses in the Act of the concept of fair market value is to police non-arm's length transactions and ensure that accrued gains are taxed at the appropriate times and in the hands of the correct taxpayers. Primary examples are in subsection 69(1), which deals with inadequate consideration in non-arm's length transfers, and subsection 70(5), which provides for the taxation of accrued capital gains on the death of a taxpayer. In most of the circumstances in which the issue of the fair market value of property arises, the concern of the revenue authorities is to ensure that fair market value is not understated. There is a substantial body of Canadian jurisprudence dealing with the meaning of fair market value for the purposes of the Act. The essential elements of the definition given to this term in that jurisprudence is that it is the highest price available for the property in question in an open and unrestricted market. It is fair to say that the revenue authorities have advocated and largely benefited from the fact that the Canadian definition of fair market value looks for the highest price a property would bring. However, the same definition of fair market value applies to situations in which the Minister's preference would be to arrive at the lowest possible value, such as where the issue is the V-day value of property, or the value of property that has been donated.

17.        Two judicial expressions of the meaning of "fair market value" are frequently cited by Canadian courts. The first, which is quoted or relied on in numerous Canadian tax cases[11], is that provided by Mr. Justice Cattanach in Henderson v. M.N.R.:[12]

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.

The second, more succinct, definition of fair market value that is often used by Canadian courts dealing with income tax cases[13] is that adopted by McIntyre J. in Re Mann Estate[14]:

..."fair market value" is the highest price available estimated in terms of money which a willing seller may obtain for the property in an open and unrestricted market from a willing knowledgable purchaser acting at arm's length.

18.        The essential elements of the meaning of fair market value, being the search for the highest price available in an open and unrestricted market, are firmly entrenched in Canadian tax law.

            (iii)        Highest Price

19.        Canadian courts take extensive measures in order to give effect to the "highest price" component of the fair market value concept. For example, Canadian courts go so far as to determine the fair market value of a property on the basis of its highest and best use, regardless of its actual use at the valuation date,[15] and take into account the existence of special purchasers who might be willing to pay a premium for the property.[16]

            (iv)        Notional sales in the relevant market

20.        The "open and unrestricted market" in which fair and market value is to be determined assumes the existence of willing buyers and willing sellers, under no compulsion to buy or sell, and subject to no restrictions preventing purchase or sale.[17] In the Appellants' submission, the market in which the value of their donated prints must be determined is readily identified. It is the large and active retail market in which newly-published limited edition prints of like size, nature and quality as the donated prints are sold with great frequency, and in large volumes. It is the market described in the testimony of Mr. Ford, and the market to which Ms. Tropper looked for comparables in reaching her opinion on value. That retail market is the market in which these prints (which Mr. Ford described as having mass appeal) would be sold in the ordinary course of business and in the normal method applicable to newly-published limited edition prints of this sort. It is also the market in which these prints would be sold for the highest price. In the Appellants' submission, based on that evidence, Canadian jurisprudence on the meaning of fair market value requires that this Court look to that retail market in determining the fair market value of the prints.

21.        There is, of course, little or no evidence of actual sales in the retail market of prints from the same editions as the donated prints (except in the case of Barry Barnett prints). The reason for this is clear. The donated prints were newly-published prints and, on the valuation dates, had never been available for sale in the retail market. The evidence is that, with the exception of the Barry Barnett prints that were retained by Mr. Barnett, all of the prints from the same editions as the prints donated by the Appellants were donated to charities and educational institutions. They were not put into the retail supply chain. That does not, of course, mean that the donated prints do not have a value or could not be sold in the retail market; on the contrary, the expert evidence was that the prints are desirable and saleable in the retail market. It does mean that comparables must be relied upon to establish their value in this market. Reliance on comparables is a basic tool used in applying the price comparison or market data approach to valuation. Comparables are the evidence to which Canadian courts most commonly look in making fair market value determinations. Comparables are what Ms. Tropper largely relied upon in reaching her opinion as to the value of the prints. Mr. Ford's evidence as to the nature and scope of the limited edition print market provides support for the use of comparables in determining the retail value of the donated prints. Ms. Tropper and Mr. Ford testified that comparable prints are purchased and sold in the retail market on a regular basis, and that these transactions were a reliable guide on which to estimate the prices the donated prints would fetch in the retail market.

22.       The Respondent will argue that there is not need to look to comparables in these appeals because there is evidence of sales of the donated prints and prints from the same editions - i.e., the sales by CVIAM to the Appellants and other purchasers. That arguments ignores the essentials elements of the meaning of fair market value established in Canadian jurisprudence, which involves a determination of the highest price a property would bring if sold in the normal method applicable to that property in an open and unrestricted market. In our submission, the sales to the Appellants did not occur in the market in which the highest price would be obtained for the prints. In addition, there is nothing normal about selling or purchasing limited edition prints through a financial planner. The financial planner network through which CVIAM sold these prints was anomalous. It existed for only two and a half years, from mid-1997 to late 1999.[18] It is not the market in which limited edition prints are normally sold. The expert evidence was that a person wishing to buy a nice botanical print to decorate the powder room would not call a financial planner to make that purchase. Rather, the person would visit a local print shop, framing shop or gift shop to see what was available. The same would be true whether the purchaser wished to acquire a single print or a number of prints. Mr. Ford testified that, if a business wanted to buy, say, 80 prints to decorate the walls of its offices, the person charged with the task of purchasing the prints would likely go to a local print shop or acquire the prints from an interior designer or decorator. Again, that person would not call a financial planner. Accordingly, the market in which the Appellants purchased the prints is not the correct market in which to determine the fair market value of the prints under Canadian income tax law. It was for these reasons that Ms. Tropper determined that the promoter market was not the appropriate market in which to determine fair market value under the Canadian definition.

23.        The approach taken by Judge Mogan in Whent v. R.[19] is instructive on the issue of the relevant market in which to determine fair market value. That case involved the valuation of 215 original works of art by a Canadian First Nations' artist, Norval Morriseau. The art had been purchased by the taxpayers, three practicing lawyers, between March 1984 and February 1986, and donated to five different institutions between December 1984 and December 1986. During that period, Morriseau, formerly an important Canadian artist, had fallen on hard times for a number of reasons, not the least of which was a problem with alcohol. On the evidence before him, Judge Mogan concluded that there "was a very shaky, possibly non-existent, market in private galleries for new Morrisseau paintings" in the valuation years.[20] Due to a lack of gallery sales information during the relevant years, the Crown valuator had relied upon auction records as the primary tool in reaching his opinion on fair market value. Judge Mogan rejected this approach, on the basis that the auction market was not the one in which works of a contemporary artist like Morrisseau would bring the highest price.[21] Judge Mogan also noted that "the best first hand evidence of arm's length transactions" in new Morrisseau paintings in the valuation years was the purchases by the taxpayers.[22] Nonetheless, he concluded that the fair market value of the art was the amount that, based on the evidence and taking into account all relevant factors, it most likely would have fetched in retail art galleries at that time, had there been a gallery market for it. In other words, Judge Mogan approached the fair market value determination by first deciding in which market the Morrisseau paintings would have fetched the highest price, and then proceeding to determine what that price most likely would have been in that hypothetical market. In the Appellants' submission, Judge Mogan's approach was the approach mandated by the Canadian jurisprudence concerning the meaning of fair market value. The Federal Court of Appeal reviewed and upheld the approach taken, and the conclusions reached, by Judge Mogan.

(v)     Application of "well accepted valuation principles and methodology"

24.        The recent decision of the Federal Court of Appeal in Malette v. R.[23] endorses and supports the approach consistently taken by Canadian courts dealing with valuation issues (with, perhaps, the exception of one recent case, the Klotz case, which is discussed below). That approach is that determinations of value, in the context of charitable gifts as in other provisions of the Act, must be made by applying "well accepted valuation principles and methodology". Mr. Justice Noël noted in his judgment in Malette that "when Parliament wishes to depart from the accepted meaning of fair market value it does so in express terms (see for instance subsections 10(4), 69(6), 69(7), 70(5.3), 107.4(4), 160(3.1) and paragraphs 70(8)(a) and 110(1.5)(b) of the Act)".[24] If the December 5, 2003 draft legislation becomes law, subsection 248(35) will be another subsection that could be added to Mr. Justice Noël's list of Income Tax Act provisions that prescribe a departure from the accepted meaning of fair market value. For the years under appeal, however, the Federal Court of Appeal decision confirmed that it is the normal, accepted meaning of fair market value that applies for the purposes of determining the amount of a charitable gift.

25.        The approach taken by Canadian courts in dealing with the valuation of donated property is to carefully and critically examine the methodology employed by the experts presenting evidence to them, and to scrutinize their value conclusions. Then, based on all of the evidence presented to the court and the court's understanding of applicable valuation principles, the court determines what the value of the property would be in the relevant market. For example:

·         In Langloisv. R.,[25] Judge Garon was faced with the task of determining the fair market value of several original works of art donated by the taxpayer. He determined the value of each work of art by weighing the valuation of evidence presented to him, the evidence provided as to the retail market (i.e., auction versus gallery) in which each work in issue would most likely be sold, and evidence as to the selling prices of works that were comparable as to size, subject-matter and medium. The Federal Court of Appeal made note of the conscientious manner in which Judge Garon reached his value determination, and upheld his decision.[26]

·         In Whentv. R., as discussed above, Judge Mogan had to determine the fair market value of 215 original works of art by Norval Morrisseau. The taxpayers had paid an aggregate purchase price of $130,000 for the art, and donated it to a number of institutions for an appraised value of $990,000. The Minister had reassessed the taxpayers on the basis that the fair market value of the art was the amount the taxpayers had paid to acquire it. Judge Mogan carefully reviewed the three expert appraisals before him, which ranged from a low of $255,155 to a high of $1,104,795. For a variety of reasons that arose from the evidence before him, Judge Mogan was not wholly satisfied with the methodology used by any of the appraisers, nor with their conclusions. He considered the views of the experts as to the appropriate market in which to value the art, and concluded that the retail gallery market was the appropriate market since it was the market in which the highest prices could be realized for the Morrisseau paintings. Taking into consideration all of the evidence before him, and adopting different aspects of the methodologies employed by the various appraisers, Judge Mogan determined a value of $660,000 for the art.[27] The Federal Court of Appeal upheld Judge Mogan's approach, and his value determination.[28]

·         In Friedberg v. R.[29], Associate Chief Justice Jerome had to determine the fair market value of two collections of antique textiles donated by the taxpayer to the Royal Ontario Museum. ROM staff had located the collections and arranged for their purchase and immediate donation by Mr. Friedberg. One of the collections was purchased by Mr. Friedberg for $67,500 and donated at a value of $496,175. The other was purchased for $12,000 and donated at a value of $229,437. Each of the collections had been appraised by three appraisers. The Court reviewed the methodology used by the appraisers, who had concluded that, for the antique textiles in issue, auction house prices lists were the place to search for comparables, as were the prices paid by the ROM in the past for similar textiles.[30] Jerome ACJ concluded that the methods used by the appraisers were "more than adequate" to determine the fair market value of the textiles, and accepted the average of the appraised amounts as the fair market value of the collections.[31] The Federal Court of Appeal upheld Associate Chief Justice Jerome's conclusions on the fair market value of the collections.[32]

(vi)      "Blockage discount"

26.        The recent Federal Court of Appeal decision in Malette confirmed that one of the accepted valuation principles that may apply in determining fair market value in Canadian tax law is the application of a blockage discount, where appropriate. A blockage discount reflects the fact that there may be a depressive effect on the fair market value of property when supply exceeds demand. It is an accepted valuation principle that such a discount may apply where the assumption is that a large number of similar properties will come on the market at one time. Since the property that must be valued in these appeals consists of a numbers of prints - specifically, in the Caedmon Nash appeal 84 prints, in the Barbara Quinn appeal 48 prints, and in the Susan Tolley appeal 99 prints - the issue arises as to whether or not a volume or blockage discount should be applied in valuing the donated prints.

27.        Malette was not the first Canadian tax case to deal with blockage or volume discounts. In Untermeyer Estate v. A-G. British Columbia the Supreme Court of Canada concluded that it would not be proper to apply a volume discount in determining, for succession duty purposes, the fair market value of a block of 318,800 public company shares (i.e., approximately 6.4% of the entire float of the company). Mr. Justice Mignault's reasoning was as follows:

I would not deduct anything from the market value of theses shares on the assumption that the whole of them would be placed on the market at one at the same time, for I do not think that any prudent stockholder would pursue a like course. To make such a deduction in a case like the one at bar, would be to render the "sacrifice value" or "dumping value" of the shares the measure of valuation.[33]

                

Mr. Justice Cattanach adopted this reasoning in Dobieco Ltd. v. M.N.R..[34] Dobieco involved the determination of the fair market value of large blocks of speculative public company shares held by the taxpayer as inventory. Based on the evidence of trading volumes, Mr. Justice Cattanach concluded that it was reasonable to suppose that "the market was capable of absorbing the shares without undue disturbance"[35], and, citing the above-quoted passage from Untermeyer Estate, that it "would not be either normal or prudent" for the appellant in Dobieco to place all of its shares on the market at one time.[36] Accordingly, no discount from trading value was appropriate.

28.        In Whent, the Minister's expert appraiser had applied a 50% blockage discount in determining the fair market value of the 215 original works of art by Norval Morrisseau paintings. Judge Mogan rejected the application of a blockage discount in that case. He did so on the basis that "the hypothetical open market in which fair market value is determined contemplates purchasers and vendors acting without pressures to buy or sell".[37] He also accepted the opinion, expressed by one of the taxpayers' valuators, that the donated works could have been disposed of in the retail gallery market within a two year period if a sensible coast-to-coast marketing strategy had been employed.[38] Judge Mogan's reasons for rejecting the application of a blockage discount effectively mirror those of the Supreme Court in Untermeyer Estate: it must be assumed that a seller would adopt a rational, prudent course of action in disposing of the property in issue.

29.       The Appellants submit that, due to the size and scope of the market for limited edition prints, the circumstances in these appeals are akin to those in Untermeyer Estate, Dobieco and Whent. The limited edition print market is large enough to absorb the prints donated by the Appellants, if not immediately then over a relatively short period of time. Ms. Tropper's expert report reaches the same conclusion, stating that:

There were not an adequate number of prints included in any one of these donations to suggest the need to calculate a reduced value due to quantity. In fact, even the total number of prints in all the editions by these artists would not overload the huge North American market.[39]

30.        In the Appellants' submission, the decision of the Federal Court of Appeal in Malette does not derogate from the Untermeyer Estate principle that one must assume a seller would adopt a rational, prudent course of action in disposing of property. The Malette decision certainly does not stand for the proposition that a blockage discount will always apply where several properties are being valued, merely that it may apply where the circumstances warrant. In Malette, both parties had agreed that the 981 original works of art by artists Harold Feist that were at issue in that case could not be absorbed into the market over a short period of time.[40] In addition, the taxpayer had agreed that it was appropriate to apply a blockage discount on the facts in Malette, unless as a matter of law such a discount could not be applied.[41] The Court of Appeal's role, therefore, was limited to determining whether, in appropriate circumstances, a blockage discount could be applied in determining the fair market value of donated cultural property. The Court's determination that a blockage discount could apply was based on the fundamental principle that accepted valuation principles and methodology are to be followed in determining the fair market value of property, and that blockage discounts are an accepted principle or proper valuation methodology. In the appeals before this Court, the opinion of the Appellants' expert appraiser was that it would not be appropriate to apply a blockage discount. The Respondent has presented no expert evidence to the contrary.

(vii)            Cost is not determinative

31.       Canadian courts (again, with the exception of the Tax Court decision in Klotz) have made it clear that cost is not determinative of fair market value. Consider, for example, the following passage from the decision of Associate Chief Justice Jerome in Friedberg:

The above conclusions lead to the necessity of determining the fair market value of each of the collections for income tax deduction purposes. Counsel for the Minister argues that the purchase price can be taken as the fair market value, however such an approach is not supported by the jurisprudence. In Conn v. M.N.R., 86 D.T.C. 1669 (T.C.C.), after a lengthy review of the authorities the judge stated at page 1677:

          "Fair market value does not seem to pay any attention to cost of acquisition, only what might be obtained in the market at the time of disposition. Costs of acquisition can vary greatly, as has been illustrated, even for the same item, and such a cost or an adjusted cost base might affect income tax but in my opinion does not affect fair market value."[42]

In Friedberg, the Minister had reassessed the taxpayer on the basis that the fair market value of the donated textiles was equal to the amount the taxpayer had paid for them. On appeal, the Minister argued that the trial judge erred in law in accepting the appraisals, since the appraisers had not taken into account the price paid by Mr. Friedberg for the textiles. The Federal Court of Appeal rejected this argument, and refused to interfere with the value determination made by Mr. Justice Jerome, noting that in reaching that determination Jerome ACJ was well aware of Mr. Friedberg's purchase price. Mr. Justice Linden also made note of the fact that the Minister, "surprisingly and in retrospect unwisely", had called no expert evidence on value.[43] In these appeals, Ms. Tropper considered the market in which CVIAM sold prints to the Appellants and others. She rejected that market because it was not the open market for purchasing prints, nor the market in which prints would normally be sold in the ordinary course of business. Ms. Tropper testified that a person wishing to purchase art prints would not look to their financial planner to do so. For these reasons, Ms. Tropper concluded that the financial planner market through which CVIAM sold prints to the Appellants and others was not the relevant market in which to determine fair market value.   

32.       This is not to suggest that Canadian courts ignore the purchase price of property in making determinations of fair market value. In Whent, another case in which the Minister had originally reassessed the taxpayers on the basis that the fair market value of the donated artwork was equal to the amount they had paid to acquire it, Judge Mogan noted that, since there was little or no evidence of gallery sales of the Morrisseau's work during the valuation period, the purchase by the taxpayers of Morrisseau's work "[t]he best firsthand evidence of arm's length transactions" during that period.[44] On that basis, he concluded that the cost to the taxpayers of the art was "a relevant but not a determining fact in the question of fair market value".[45] The fact that cost was certainly not a determining fact is evident from Judge Mogan's conclusion that the fair market value of the artwork was more than five times the amounts the appellants had paid to acquire it.

33.       There may be circumstances in which the evidence establishes that there can be no market for the type of property in issue, or that the only market is the one in which the property was purchased. In those circumstances, the cost of property may be indicative of its fair market value. These were the circumstances before the Courts in Aikman[46] and in Global Communications.[47] In Aikman, Judge Bowman was faced with the task of determining the fair market value of the "Cyclo-Crane", a prototype of a lighter-than-air, heavy-lift vehicle. On the evidence, Judge Bowman found that the Cyclo-Crane was too large for museum display,[48] and that there was no commercial market for the product of which it was a prototype.[49] In those circumstances, the price negotiated by the purchaser for the Cyclo-Crane was indicative of its value. In Global Communications, an issue before the Federal Court of Appeal was the true value of seismic data purchased by the taxpayer. The Federal Court of Appeal rejected the appraisals of the property on the basis that they did not take into account the amount for which seismic traded on the only market in which it actually sold for cash.[50] In the Appellants' submission, the facts in the appeals before this Court are very different from those in Aikman and Global Communications. There is no Cyclo-Crane or seismic data for sale at the local shopping mall; however, there are thousands of print and framing shops at which limited edition prints comparable to the donated prints are sold on a regular basis.

(viii)      Klotzv. R.

34.       Some of the basic facts before the Court in the recent case of Klotz v. R.[51] are similar to those in these appeals, in the sense that Mr. Klotz had participated in a "buy-low, donate high" arrangement involving the purchase and donation of a number of limited edition prints. Associate Chief Justice Bowman concluded that the fair market value of the Klotz prints was equal to the purchase price paid by Mr. Klotz to acquire the prints from the promoter. His conclusion was based on several factors. One important factor that seems to have influenced the Court's decision in Klotz was the nature of the prints donated by Mr. Klotz. His expert appraiser had based her value conclusions on the assumption that the market in which Mr. Klotz's prints would bring the highest price was the New York retail art gallery market. Bowman ACJ was troubled by the fact that many of the limited edition prints donated by Mr. Klotz had been acquired by the promoter from those very retail galleries at huge discounts from their usual list prices. He was also troubled by the fact that that appraiser did not appear to take into account the age of the prints or "how long they had been lying around unsold"[52] in reaching her opinions on value. The fact that many of the Klotz prints were purchased at between 1/200^th and 1/20^th of their purported fair market value from the sort of galleries where that fair market value would in theory be obtained is an indication that these were "remaindered" prints, or unsaleable inventory, that had failed to sell in the retail market. The facts in the appeals before this Court are quite different in this respect. The prints purchased and donated by the three Appellants were newly published. The images that were reproduced in these prints were fresh and new to the market. Rather than scouring the market to pick up cheap unsold (and quite likely unsaleable) prints like the promoter did in Klotz, CVIAM effectively became a print publishing company, commissioning or purchasing the right to reproduce new works from established artists or their agents and arranging for their reproduction. Although it is not clear from his reasons for judgment, it may be that Associate Chief Justice Bowman concluded that, due to the nature of the prints donated by Mr. Klotz, there could be no retail market for them, and hence that it was appropriate to adopt the Aikman and Global Communications approach to valuing those prints. In contrast, the expert evidence provided in these appeals was that the newly-published prints donated by the Appellants had mass appeal and could readily be sold in the retail market.

35.       In Klotz, Associate Chief Justice Bowman was faced with valuation evidence that he rejected for a number of reasons. The only appraisal evidence before the Court was that of Ms. Laverty, the original appraiser of the Klotz prints, and a participant in the donation program for which she had provided appraisals. Her participation obviously brought into question her objectivity. The other expert witness called by Mr. Klotz, Mr. Alasko, merely commented on Ms. Laverty's methodology, and Bowman ACJ noted that Mr. Alasko had made it clear that he "was not endorsing the conclusions" in Ms. Laverty's report.[53] At paragraph 40, Bowman ACJ listed a number of other reasons for rejecting the appraisal, which may be summarized as follows:

           

1.          a lack of evidence of sales of identical or similar prints in retail art galleries;

2.          the fact that the retail art gallery asking price for an individual print was not indicative of the price that print would sell for if scores of them were dumped on the market at the same time;

3.          the fact that the value conclusion in respect of over 80% of the prints was $1,000, which coincidentally was also the maximum proceeds amount for which personal-use property could be disposed of without incurring a capital gain;

4.          the fact that the value conclusions did not differ on the basis of the identity of the artists, the medium, the size of the series, the age of the prints, or how long the prints had been "lying around unsold"; and

5.          the fact that some of the prints were acquired by the promoter from retail art galleries at 1/20^th of the appraised value, and some for as low as 1/200^th of the appraised value.

In the Appellants' submission, the appraisal evidence that was presented to this Court by Ms. Tropper, combined with the evidence of Mr. Ford as to the size and scope of the retail market for limited edition prints similar in nature to those donated by the Appellants, does not suffer from any of the weaknesses of the appraisal evidence presented to Associate Chief Justice Bowman in Klotz.

36.        Based on the weakness of the valuation evidence and the logical inconsistency of the fact that many of the Klotz prints were purchased by the promoter from retail galleries and dealers at huge discounts to the appraised values, a conclusion that there was no retail market for the Klotz prints was not surprising. On this analysis, Klotz can be reconciled with the body of Canadian jurisprudence on fair market value that preceded it. However, in reaching his conclusions, Bowman ACJ did consider and apparently rely upon a series of United States Tax Court decisions rendered in the mid-1980s. Given that the Respondent presented no valuation evidence in these appeals, the Respondent will ask this Court to take the same approach as that taken by Bowman ACJ.

(ix)      U.S. authorities

37.        In the Appellants' respectful submission, the U.S. authorities represent a significant departure from the large body of Canadian case law on the meaning of fair market value, and should not be followed. As Associate Chief Justice Bowman himself noted in Aikman, U.S. authorities should be approached with some caution, as the U.S. courts operate under a different statutory regime, and the U.S. Courts, faced with similar issues, "may have developed solutions that are not necessarily appropriate in Canada."[54]

38.       There are several differences between the definition of "fair market value" prescribed by regulation under U.S. tax law and the long-accepted meaning of the term in Canadian tax law. The U.S. treasury regulation being interpreted by the U.S. Tax Court in the series of cases referred to by Bowman ACJ provided a definition of the term fair market value. That definition provided that fair market value was "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts" (see Anselmo v. Commissioner, (1985) 757 F.2d 1208 (U.S.C.A., 11^th Circuit) at page 1212). This definition does not make reference to the highest price a property would fetch, a concept that is firmly embedded in the meaning assigned to fair market value by Canadian courts.

39.       In addition, in most of the U.S. Tax Court cases referred to by Bowman ACJ, the U.S. Tax Court had expressly stated that the U.S. estate tax treasury regulation was applicable in determining the fair market value of donated property. That regulation prescribed the relevant market in which to make a fair market value determination. It provided, in part, that the fair market value of an item of property is to be determined in the market in which that item is "most commonly sold to the public" (Anselmo v. Commissioner at page 1214). In its decisions, the U.S. Tax Court interpreted this estate tax regulation as requiring the court to engage in an examination of whether the taxpayers whose appeals were before it were "ultimate consumers" of the property donated in those cases.[55] The Court concluded that the taxpayers were the ultimate consumers of the property, since they did not purchase it for resale. The court then proceeded to look for the "most active" market where the property in question was sold to "ultimate consumers." Based on volume of sales, the court concluded that the market in which the taxpayers had purchased the property was the "most active" market and therefore, by operation of the estate tax regulation, it was the market to which the court had to refer in making the fair market value determination. For example, in Hunter v. Commissioner the U.S. Tax Court made the following statement:

In determining the fair market value of the prints, we must examine the market in which the prints are sold to the ultimate consumer... In Lio, we said "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 market place for the particular item involved."[56]

40.       Needless to say, the U.S. treasury and estate tax regulations prescribing the definition of fair market value and the relevant market do not apply in determining questions of Canadian law. On the contrary, the long-established Canadian definition of fair market value does not direct that the value determination be made in a market in which property is purchased by an "ultimate consumer", nor does it mandate a search for the most active market in which property is sold. What it does mandate is a determination of the highest price for which property could be sold in a market in which such highest price would be obtained, and in which the property is sold in the normal method applicable to it in the ordinary course of business. As a result, in the Appellants' submission, the reasoning and criteria used to reach a conclusion as to the fair market value of property in these U.S. Tax Court cases should not be applied to the determination of fair market value in these appeals.

41.       It may be illustrative of this point to compare the approach Judge Mogan took in Whent to that which it can be assumed the U.S. Tax Court would have taken if presented with the facts in that case. The U.S. Tax Court would have sought to identify the most active market in which Morrisseau paintings were purchased by "ultimate consumers", and then determined the price the paintings would sell for in that market. There is little doubt that the U.S. Tax Court would have concluded that the three appellants in Whent were "ultimate consumers", and that the streets and corner shops of Thunder Bay and Vancouver was the most active market for Morrisseau's work in the relevant period. As a result, the U.S. Tax Court almost certainly would have concluded that, under the treasury and estate tax regulation and its own jurisprudence, the fair market value of the Morrisseau paintings was the amount the appellants in Whent had paid to acquire them. As previously discussed, Judge Mogan's approach was quite different. Judge Mogan (1) identified the retail gallery market as the market in which the Morrisseau paintings would bring the highest price; and (2) determined on the evidence what the likely selling price would be in that market, had it existed. The Federal Court of Appeal found no fault with that approach. In our submission, Judge Mogan's approach and result are correct under Canadian law. The approach that the U.S. Tax Court would take to deal with the same facts, and the result that it would reach, are not.

(x)      Onus of Proof

42.       If the Respondent based its assessments of the Appellants in these appeals on the assumption that the tax promoter market was of such a size and level of activity as to render it the proper market in which to determine fair market value (which, in our submission, would in any event be incorrect under Canadian law), then we submit that the evidentiary burden of establishing the facts concerning this market must fall on the Respondent. In particular, in the face of the Appellants' expert evidence that, as a matter of accepted valuation principles and methodology, this market is not the proper market in which to determine fair market value, the Respondent ought to have provided expert evidence that it is. Information concerning the size of and activity in this market is not information within the knowledge of the Appellants, who were merely individual participants in the donation arrangement promoted by CVIAM. Your Honour's detailed discussion in the recent decision of Redash Trading Incorporated v. R.[57] of the issue of onus of proof leads to the conclusion that, in such circumstances, the onus shifts to the Respondent.

(xi)      Summary of expert evidence

43.       The Respondent presented no expert appraisal evidence to the Court, and no expert evidence concerning the market for limited edition prints. If the Court accepts the Appellants' evidence and argument as to the correct market in which to value the donated prints, the only expert evidence on value before the Court was that provided by Ms. Tropper. In addition, Mr. Ford testified that, based on his knowledge of the retail market for limited edition prints, the values originally assigned to the donated prints (by the Parks or Duval appraisals) and relied on by the donees in issuing the donation receipts were approximately equal to the prices that would have been paid for those prints in the retail market, in the years under appeal. Ms. Tropper's value conclusions, and the amounts shown on the donation receipts are as follows:

                        Tropper Value[58]          Donation receipt amount

Nash prints                  $29,932                                    $29,400

Tolleyprints                $23,690                                    $28,130

Quinn prints                 $24,384                                    $25,280[59]

44.        Even Gary Roy, the Canada Revenue Agency's own valuator, apparently concluded that the prints donated by Ms. Quinn had a fair market value equal to the amount reflected on the donation receipt issued to her. There is no evidence as to whether Mr. Roy did any valuation work on the prints donated by Ms. Tolley or Mr. Nash.

(b) Personal-Use Property

(i)      Generally

45.       The second issue in these appeals is whether or not the donated prints were "personal-use property" for the purposes of the Act. This determination is relevant in the event that the Court concludes that the fair market value of the donated prints was higher than the amount the Appellants paid to acquire them.

46.       Pursuant to subparagraph 69(1)(b)(ii) of the Act, the Appellants' donation of the prints was a disposition with deemed proceeds equal to the fair market value of the prints. Pursuant to subsection 40(1) of the Act,[60] upon donation of the prints each of the Appellants would have realized a capital gain to the extent that his or her proceeds of disposition exceeded his or her adjusted cost base of the prints.

47.       In the Appellants' submission, each of the donated prints is a personal-use property. Accordingly, subsection 46(1) of the Act, as it read in the years under appeal, deemed the Appellants' adjusted cost base and proceeds of disposition of each of the prints to be $1,000. As a result, no gain or loss would have been realized on the disposition of the prints.

48.              In effect, this special rule that applies to personal-use property provides that gains that would otherwise be realized on a disposition of personal-use property are not taxed if the value of the property does not exceed $1,000. It must be noted, however, that there is another way in which the tax rules that apply to personal-use property differ from those applicable to other non-personal use capital property. Pursuant to subparagraph 40(2)(g)(iii) of the Act, any loss realized on the disposition of personal-use property (other than property which falls within the special subset of "listed personal property") is deemed to be nil. As a result, one might assume that the Minister would encourage a broad interpretation of the meaning of personal-use property.

(ii)      Inclusive definition in section 54

49.        Personal-use property is defined inclusively in section 54 of the Act. This inclusive and non-exhaustive definition provides, in part, that personal-use property includes "property owned by the taxpayer that is used primarily for the personal use or enjoyment of the taxpayer". The fact that the definition provided in the Act is merely inclusive means that the term retains its ordinary meaning. This is discussed in Sullivan and Driedger on the Construction of Statutes as follows:

         

Non-exhaustive definitions presuppose rather than displace the meaning a defined term would bear in ordinary (or technical) usage. A non-exhaustive definition is normally introduced by the verb "includes" and is used for one of the following purposes:

         

·     to expand the ordinary meaning of a word or expression

·     to deal with borderline applications

· to illustrate the application of a word or expression by setting out examples.[61]

                                   

In the Appellants' submission, the non-exhaustive definition of personal-use property provided in section 54 performs the first two of these tasks. It expands the meaning of personal-use property to include receivables arising as a consequence of the disposition of personal-use property and options to acquire personal-use property. It also deals with borderline applications of the term, providing that personal-use property includes property used primarily for the personal use or enjoyment of persons related to the owner or, in the case of property held by a trust or partnership, by the trust beneficiaries and partnership members. However, apart from the expansions and clarifications provided by the definition in section 54, personal-use property as used in the Act has its ordinary meaning. The task, then, is to determine what that meaning is.

                       (iii)      Personal use versus commercial use

50.       In the Act, the term "personal" is used to describe property, interests and expenses that relate to individuals in some manner, and, most significantly, that are not connected to businesses or other income-earning activities. For example, the definition of "personal or living expenses" in subsection 248(1) of the Act is based on the distinction between (a) the expenses of "properties maintained by any person for the use or benefit of the taxpayer", and (b) the expenses of properties "maintained in connection with a business carried on for profit or with a reasonable expectation of profit".

51.       The policy rationale underlying the personal-use property regime is based on the distinction between that which is personal and that which is related to a business or commercial activity. The Summary of 1971 Tax Reform Legislation (June 1971) noted that permitting the deduction of losses realized on personal-use property "would amount to government subsidization of personal expenses". Accordingly, the personal-use property provisions are constructed so as to ensure there is no mingling of losses from personal-use property with gains realized in the commercial context. Subsection 46(3) of the Act goes so far as to deny any loss realized on a share of a corporation or interest in a trust or partnership that can reasonably be attributed to a decline in the value of personal-use property held by the corporation, trust or partnership. Section 41 of the Act provides a set of special rules that apply to "listed personal property" (which is defined in section 54 as a subset of personal-use property). These rules provide for the recognition of losses on the disposition of listed personal property; however, those losses may only be applied against gains from the dispositions of listed personal property, and are not available to offset gains from the disposition of commercial or business properties.

52.       The definition of "listed personal property itself should be noted. Listed personal property of a taxpayer is defined as "the taxpayer's personal-use property that is all or any portion of, or any interest in or right to, any

(a) print, etching, drawing, painting, sculpture, of other similar work or art,

(b) jewellery,

(c) rare folio, rare manuscript or rare book,

(d) stamp, or

(e) coin".

                        The fact that art prints comprise a part of this subset of personal-use property suggests that prints are a type of property that is generally considered to be personal-use property.    

      

53.       In the Appellants' submission, the scheme of the Act is based upon a division of property into two broad categories: property that is connected to a business, or used for a business, commercial or income-earning purpose, and property that is not so connected or used. Everything that falls into the latter category is personal-use property. In other words, the meaning of personal-use property is most easily expressed in the negative: personal-use property is all property other than that which is connected to a business or used for a business, commercial or income-earning purpose.

54.       After considering the matter in some detail, this is the interpretation given to the term personal-use property by Associate Chief Justice Bowman in Klotz.[62] It is also the approach followed by courts in the few reported cases that deal with the issue of whether or not a particular property (generally, real property) is properly characterized as personal-use property. Consider for example, the following passage from Boudreau v. R.:

The evidence adduced at trial points to the conclusion that the Property is personal-use property. The Property was not acquired for the purpose of gaining income from property. Not once did the Appellant rent the Property at fair market value.[63]

To a similar effect is the Court's expression of the issue before it in Jason v. R.:

[T]he primary issue is whether the amount of $188,164 is a business loss from an adventure in the nature of trade or a loss on the disposition of personal-use property.[64]

55.       The Minister's own publications adopt the same approach. See, for example,

·       Interpretation Bulletin IT-373R2 entitled "Woodlots" at paragraph 11:

Where a woodlot is a non-commercial woodlot, and money or other valuable consideration is received for the sale of timber or the right to cut timber, the sale proceeds are subject to tax on capital account, generally as a disposition of "personal-use property".

                      

·         Interpretation Bulletin IT-218R entitled "Profit, Capital Gain and Losses from Real Estate" at paragraph 10:

Real estate that is held by its owner as capital property may be used by its owner as personal-use property (see definition in paragraph 54(f) or it may be used for the purpose of gaining or producing income from business or property.

56.       In the Appellants' submission, their donated prints fall into the category of personal-use property because they were not acquired or used for any commercial, business or income-producing purpose, or in connection with any business or adventure in the nature of trade.

(iv)     Donation is a personal use of property

57.       The Appellants further submit that, in any event, the donation of property amounts to a personal use of that property, bringing property acquired for the purpose of donation and used to make a gift into the personal-use property category. This was the conclusion of Associate Chief Justice Bowman in Klotz:

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.[65]

58.       That the Appellants' donation of the prints was a personal use by them of this property is far more clear on the facts in these appeal than it was in the case of Mr. Klotz, who did not see the prints he purchased, never had possession of them, and had no role in choosing them. His only motivation in purchasing and donating prints was an anticipated tax benefit.[66] The Appellants, on the other hand, appreciated the fact that their donations would benefit charities and universities. Mr. Nash and Ms. Tolley testified that they participated in the donation program largely to assist charities. Ms. Tolley chose to purchase the prints by the three Canadian women artists because the idea of supporting them appealed to her, and she selected and kept one of the prints. Similarly, Mr. Nash selected the prints by the First Nations' artist because he likes aboriginal art. He also selected and kept a print. The Appellants owned and had the prints in their homes for a period of time before donating them.

59.        An examination of certain amendments made to section 46 of the Act with effect from February 27, 2000 provide [sic] additional support for the proposition that property acquired for the purposes of donation is personal-use property.

60.       Although subsection 45(2) of the Interpretation Act provides that an amendment to a statute is not "deemed to be or to involve a declaration that the law" was different prior to the amendment, this does not prohibit use of statutory amendments as an aid in interpreting legislation. See, for example, the following statement by Mr. Justice Sexton in Silicon Graphics Ltd. v. R.:

   

...the Interpretation Act does not preclude the Court from drawing an inference that amendments to legislation are intended to change the legislation where the internal and external evidence warrants such a conclusion. It has been suggested that there is a presumption that changes to the wording of legislation are purposeful and that the provisions of the Interpretation Act referred to above [i.e., subsection 45(2)] do not preclude the Court from acknowledging that, in principle at least, the foremost purpose of amendments is to bring about a substantive change in the law.[67]

In that case, the Federal Court of Appeal relied in part on amendments made to the definition of "Canadian-controlled private corporation" in the Act in interpreting the meaning of the definition prior to its amendment. Similarly, in HSC Research Development Corp. v. R.,[68] Judge O'Connor performed a detailed analysis of the manner in which subsection 256(5.1) was added to the Act as an aid to determining that, prior to the introduction of that new provision, the phrase "controlled, directly or indirectly in any manner whatever" when used in the Act meant de jure, not de facto, control. Finally in Nova Corp. of Alberta v. R., Mr. Justice MacDonald relied in part upon the introduction of the "acquisition of control" stop-loss rules to conclude that, prior to their introduction, loss-trading transactions of the sort entered into by Nova Corp. were permitted by the Act.[69]

61.        The amendments to section 46 enacted changes announced in the February 28, 2000 federal Budget. The background documents released with the Budget made the purpose of these amendments quite clear:

     

Certain charitable donation arrangements have been designed to exploit the $1,000 deemed adjusted cost base for personal-use property and to create a scheme under which taxpayers attempt to achieve an after-tax profit from such gifts. For example, arrangements have been designed under which a promoter acquires a number of objects for less than $50 each, invites taxpayers to purchase the objects for $250 each, and arranges for their appraisal at $1,000 each and their donation to a charity.

   Based on the $1,000 appraised value, there would be a $750 capital gain per item to the donor but for the $1,000 deemed adjusted cost base for the gift. [70]

               ...

The budget proposes to amend the Income Tax Act so that the $1,000 deemed adjusted cost base and deemed proceeds of disposition for personal-use property will not apply if the property is acquired after February 27, 2000, as part of an arrangement in which property is donated as a charitable gift.

62.        The means by which this objective was achieved was the addition of subsection 46(5), which provides a definition of "excluded property", and amendments to the preamble portion of subsection 46(1), to except "excluded property" from the special rules providing for a deemed $1,000 adjusted cost base and proceeds of disposition. "Excluded property" is defined, essentially, as property acquired as part of an arrangement under which the property will be the subject of a charitable gift. The definition of personal-use property was not amended.

63.       In the Appellants' submission, it is clear both from the fact that these amendments were made and from the manner in which they were made that personal-use property, both before and after the amendments were enacted, encompasses property acquired for the purpose of making a gift of donation. If that were not the case, there would be no property that would fall within the new category of "excluded property".

D.              Order Sought

64.       Each of the Appellants therefore respectfully requests that his or her appeal before this Honourable Court be allowed with costs and that this Honourable Court refer these matters back to the Minister of National Revenue for reassessment on the basis that the reassessments appealed from be vacated, or varied to reflect the fact that the fair market value of the donated prints on the date of donation was, in the case of Mr. Nash $29,932; in the case of Ms. Tolley $23,690, and in the case of Ms. Quinn $24,384, and that the prints were personal-use property of the Appellants.

                       

RESPONDENT'S SUBMISSIONS:

[53]     Respondent's counsel's position is that the fair market values of the grouping of Prints donated by the Appellants are the prices paid by the Appellants for those groupings. The written submission says:

They bought their prints from CVI Art Management Inc. ("CVIAM"). In the years under appeal, CVIAM was certainly the normal, if not exclusive vendor of the groupings of prints in question. For those groupings, CVIAM charged its customers, other than the Appellants, prices that were the same as, or similar to, those it charged the Appellants. In making sales of those groupings of prints, CVIAM established the highest, reasonably attainable prices that those groupings could fetch at the times the Appellants donated their prints.

The written brief continues by saying that if this Court finds that the fair market value exceeded the cost to the Appellants then the Appellants have realized capital gains on the donation of their Prints and that those Prints were not personal-use properties of the Appellants.

[54]     Respondent's Counsel referred to the finding of Associate Chief Justice Bowman in Klotz v. R., 2004 TCC 147. He said that Bowman, A.C.J. stated that there was a sale of 250 Prints for $75,000 between two arms-length parties with a gift to charity virtually contemporaneous with the purchase. Counsel then said that the learned justice questioned what better valuation evidence there would be than the purchase price. Counsel stated that the Court said that claiming a fair market value in excess of the Appellant's purchase price two days after purchase "is devoid of common sense and out of touch with ordinary commercial reality".

[55]     Counsel posed a number of questions:

1.        Do the prices paid by the Appellants satisfy the classic definition of fair market value in the Henderson case?

2.        Is it an acceptable approach to valuation to rely on the prices charged by CVIAM?

3.        Are those prices reduced prices for the Prints in question?

4.        Should the Court value the Prints, as Tropper did, on a print by print basis?

5.        Does the evidence of Ford and Tropper about the prices for Prints similar to those in question support fair market value of the Prints set out on the Appellants' charitable donation receipts?

6.        Should the Court accept the opinion of Tropper?

7.        For Quinn's donation, should the Court be bound by the Range Report prepared by Gary Roy?

[56]     He then deals with these questions.

1.        Do the prices paid by the Appellants satisfy the classic definition of fair market value in the Henderson case?

Counsel set out the meaning of fair market value as presented by Cattanach, J. in Henderson and stated that the Appellants entered into transactions with CVIAM containing all the main elements of that definition. He referred to 931 Holdings Ltd. v. M.N.R., [1985] 2 C.T.C. 2094 in which Rip, J. said that an open market is one:

from which no purchaser is excluded even if the property is so situate that to one or more persons it presents greater attractions than to anyone else.

Counsel then said that Tropper did not support her assertion with an independent inquiry into CVIAM's business and that Tropper felt that the market was not an open market solely because CVIAM sold its prints to financial planners. He said that they received commissions for selling prints, that there was no evidence that no customers were turned away and that there would be an incentive to sell prints to as many customers as possible. He then referred to Gilvesy Enterprises Inc. v. R., [1997] 1 C.T.C. 2410 in which Bowie, J. of this Court, regarding the operation of a "shot-gun" clause respecting the sale of shares said:

There was no room for negotiation because of the terms of the buy-sell agreement and in particular its shot-gun clause. I do not believe, however, that these restrictions diminish the probative value of the sale for the present purposes.

Counsel's point was that even if a market created by CVIAM was restricted it could still provide the best evidence of fair market value.

He then said that although Tropper testified that limited edition prints are normally sold by art galleries, gift shops, frame shops, art dealers and art consultants, CVIAM was a source of many prints in 1997 to 1999 and offered many groupings of prints for sale in those years. He then said that it was simply another kind of retail vendor of prints and was able to offer 35 groupings identical to the groupings that Quinn bought.[1]

Counsel then concluded his submission on this first point by stating that since CVIAM was the main, if not the only source of collections purchased by the Appellants, the prices paid to it by them "are the highest prices reasonably attainable for those Prints".

[57]     He then moved to his second question, namely:

2.        Is it an acceptable approach to valuation to rely on the prices paid by the Appellants to CVIAM?

Counsel referred to the American authorities, commented upon by Bowman, A.C.J. in the Klotz case. He stated that Justice Bowman, found the reasoning in such cases instructive and persuasive. He said that fair market value in those cases is defined as:

The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.

He said that for charitable contributions the Internal Revenue Code and Regulations do not specify which market courts must look to but that for American estate tax and gift tax purposes the courts are instructed to look to the market in which the asset in question is most commonly sold. That market is a sale to the ultimate consumer.

[58]     Counsel then turned to his third question, namely:

3.        Are the prices paid by the Appellants reduced prices for the Prints in question?

Counsel stated that Tropper, in her report, suggested that the prices paid by the Appellant were reduced prices. He said that there was no evidence that that was so. He therefore submitted that the price actually paid was the fair market value of the Prints.

[59]     Counsel then dealt with his fourth question, namely:

4.        Should the Court value the prints, as Ms Tropper did, on a print by print basis?

Counsel said that Tropper wrote that each of the Prints in question,

had an individual title, an individual image and was a numbered, individual work of art and would therefore sell individually. For this reason I approached each work as a separate property.

He submitted that there was no evidence that CVIAM sold any Print in question on an individual basis around the time of the Donations. He submitted that Tropper was in error, her approach being contrary to the reasoning of Bowman, A.C.J. in Klotz who stated:

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 it what they in fact sold for - $75,000.

Counsel then submitted that the Appellants were obliged to buy the Prints in groups. He said that little weight should be given to Tropper's conclusions because Tropper is a member of the American Society of Appraisers ("A.S.A.") and is therefore bound to adhere to the Uniform Standards of Professional Appraisal Practice ("U.S.P.A.P."). He then said that she did not adhere to those standards but for almost every artist relied on current sales data to reach a value conclusion. He submitted that her questioning the accuracy of Barnett's oral statements did not have a clear basis. He added that, most importantly, Tropper ignored CVIAM, the vendor of the Prints, making no enquiries into its operations or into the number of sales it had made.

[60]     The fifth question dealt with by counsel was:

5.        Does the evidence of Ford and Tropper about the prices for Prints similar to those in question support fair market value of the Prints set out on the Appellants' charitable donation receipts?

Counsel submitted that the Court should not rely on Ford's opinion that limited edition prints similar to those in question "fetched prices close to the appraised values of the prints in question". He said that Ford's testimony about current and past prices for limited edition prints by artists other than those in question, such as Robert Bateman, a household name, were not "comparables". He submitted that Ford's substantial reliance on pricing at Mill Pond Press was not applicable to the artists in question, Mill Pond never having published any of those artists. He said that Mill Pond claimed that all its limited edition prints are accompanied by certificates of authenticity and are signed and numbered and that many of the prints in this case would not meet those standards, there being no evidence that any of the Prints except the Barnett Prints were accompanied by certificates of authenticity and that the Nature & Wildlife Prints were not signed and numbered. Counsel further submitted that the existence of a market is a question of fact, not of opinion, and that the Court should not rely upon Tropper's opinion that there were markets for the Prints in question in the years under appeal she not, for two of the artists, finding a market for any limited edition Prints in 1997 to 1999. He also said that Tropper did not testify as to any sales of specific prints donated by the Appellants close to and before the times of the Donations. Counsel also said that Tropper acknowledged Barnett's unreliability but gave an opinion depending upon information he provided. He submitted that Tropper offered no evidence of a market for any prints by most of the artists in 1998 or 1999 et cetera.

[61]     The sixth question was:

6.        Should the Court accept Ms Tropper's opinion?

Counsel submitted that little weight should be given to Tropper's conclusions for the reasons above set forth.

[62]     The seventh question was:

7.        For Ms. Quinn's donation, should the Court be bound by the Range Report prepared by Gary Roy?

Counsel stated that In Kind issued Quinn a charitable donation receipt showing a fair market value of $25,280 for Barnett Prints. He said that Gary Roy, then an auditor with Revenue, prepared a "Range Report" in which he agreed to that fair market value. He submitted that at the time he prepared his report Roy was not an accredited appraiser and had had experience only in buying and selling books and art work on a part-time basis. He submitted that Roy's conclusion is unreliable because of its dependence on Barnett's oral statements that sales of comparable Prints had been made. Counsel said that Roy took, at face value, what Barnett had told him. He submitted further that the report could be considered a draft report even though it was not stamped as such, the report being addressed to an appeals officer but never sent.

PERSONAL USE PROPERTY

[63]     Respondent's second counsel made submissions respecting whether the Prints were "personal-use property" as that term is used in the Act. Counsel submitted that the Appellants bought and owned the Prints for two reasons, namely to save tax and to donate them. She then submitted that donating them was not the way the Appellants used the Prints but was only an intended use. When counsel finally, at my urging, referred to the definition of "personal use property" she submitted that it was inclusive and gives aid in interpreting the meaning of personal-use property in borderline situations. She said that in order for the Court to determine how the Appellants used the Prints it should look at why the Appellants bought them and what they did with them. She said that Nash donated because it made sense financially and that he intended to donate all or most of the Prints. She then said that Tolley thought that she would get the money back that she put into it.

[64]     She referred to the case of Woods Estate v. R., [2000] 3 C.T.C. 2179. Counsel said the property in question, a house, was found not to be personal-use property. It was a house belonging to the estate and, not being rented, never produced income. It was not used by the taxpayer or anyone related to the taxpayer. Her point was that this was a type of property other than business and commercial property but was not personal-use property, referring to Appellants' counsel's suggestion that there were only two types of property. She said that purchasing the prints and donating them to save tax was not a personal use but "more like an investment use". She said that receiving the Prints, looking at them and deciding which ones to keep and which ones to donate might be considered a use,

but in our submission they do not constitute a personal use because they are part of the process of buying and holding and donating the prints to save tax, or to obtain a credit.

As indicated above, she submitted that the Donation was not "an actual use" but was "an intended use" while the Appellants held the prints. She then referred to Mid-west Feed Ltd. et al v. Minister of National Revenue, [1987] 2 C.T.C. 2101 (T.C.C.) and submitted that it stands for the proposition that it is the actual use of the property that must be looked at, not an intended use or a future use.

[65]     Counsel then referred to Glaxo Wellcome Inc. v. Her Majesty the Queen, [1996] 1 C.T.C. 2904 (T.C.C.) where the Court said:

Unless some principle of interpretation compels me to ascribe a broader meaning to the word, "use" connotes actual utilization for some purpose, not holding for future use.

Counsel submitted that the asset was property purchased by the taxpayer for future expansion. The property was sold when the owner realized that it was not large enough to be useful in the expansion of the business. The question, according to counsel, was whether the property was a "former business property". At my urging she referred to the definition of that term as being,

"former business property" of a taxpayer means a capital property that was used by him primarily for the purpose of gaining or producing income from a business ...

She then said:

It is our submission that the prints that the Appellants acquired and held and donated in this case, that by donating them they did not use them in any meaningful sense of the term as the Court interpreted the term "use" and "used" in Glaxo Wellcome. The Appellants did not use their prints by donating them. They gave them away so that someone could use them. This is not, in the Respondent's submission, a personal use contemplated by section 46 or by the definition of personal use property in section 54. The Respondent submits that the ordinary use to which one would put prints would be to hang them on their wall, enjoy looking at them in their office and home over some period of time. Even if they didn't use them in that way, the Appellants could have used the prints themselves personally. They could have used them for a multitude of things. They could have used them for wrapping paper, packing material, or they could have lined cupboards with them. Those are uses that the taxpayer or the Appellants in this case ...

[66]     Counsel completed her submission by saying that the donation of the Prints was simply the fulfilment of the investment like purpose in buying the Prints, that is to save tax. She said that it was not a personal use nor was it a primary use of the Prints.

[67]     I asked what her view would be if someone had a violin for 30 years, never played it and finally donated it to The Canada Council instrument bank. She responded that if it sat unused it would not be personal-use property. Counsel then submitted that Bowman, A.C.J., in Klotz, in respect of personal-use property, seems to have based his conclusion on the fact that donating can be a use and that the Respondent disagreed with that conclusion.

[68]     Respondent's first counsel then made reference to Appellants' counsel's concession that Tropper's opinion of the fair market value of Tolley's Prints was less than originally claimed. The same applied to Quinn's Prints. He said that with respect to Nash, the Tropper opinion was higher, by some $500, than the amount of the fair market value claimed by Nash. He referred to subsection 118.1(2) of the Act stating it reads as follows:

(2) A gift shall not be included in the total charitable gifts, total Crown gifts, total cultural gifts or total ecological gifts of an individual unless the making of the gift is proven by filing with the Minister a receipt therefor that contains prescribed information.

He said that the receipt was for a lesser value than the valuation. He then referred to section 3501(1.1) of the Income Tax Regulations reading as follows:

(1.1)     Every official receipt issued by another recipient of a gift shall contain a statement that it is an official receipt for income tax purposes and shall show clearly in such a manner that it cannot readily be altered,

He also referred to paragraph (h) reading:

(h)         the amount

            ...

(ii)         where the donation is a gift of property other than cash, the amount that is the fair market value of the property at the time that the gift was given;

APPELLANTS' COUNSEL'S RESPONSE:

[69]     Counsel dealt firstly with the last point raised by Respondent's counsel. He said that section 118.1(2) simply provides that a taxpayer must prove the fact that he has made a gift by filing a receipt, and that the Regulations then say what should be on that receipt. He stated that once the fair market value of the Donation is challenged it is an open issue for the Court to determine.

[70]     He submitted that the facts in this case are very different from those in Klotz, specifying that the present Appellants were dealing with new Prints. He submitted that Bowman, A.C.J. had said in his Reasons for Judgment in Klotz that the expert witness, Laverty, had embarrassed herself in the context of Mr. Alasco, the Appellant's second expert witness, not wanting to embarrass her further. He submitted that Ford and Tropper did not embarrass themselves and that this was a key distinction. He submitted further that the embarrassed witness was not credible and that a case such as Klotz would be "going ... downhill from there because then you have no credible expert witness on either side in Klotz".

[71]     Counsel referred to the Gilvesy case which had to do with a "shotgun" clause. He submitted that it wasn't a case in which the Court was asked to determine the fair market value of the shares. He said it was an allowable business investment loss ("ABIL") case and that the judge did not conclude that the shotgun sale price was equal to fair market value but "just that it was not more than fair market value". The issue was the cost base used in the ABIL claim. He submitted that the only point in Gilvesy is the proposition, with which he agreed, that a sale in a restricted market would not give a price that is more than fair market value.

[72]     He then referred to Respondent's counsel's submission that CVIAM "was just another retailer". He submitted that it was the last thing from being another retailer but was there to implement a program that involved the donation of Prints. He said:

It was about finding a financial planning network, getting legal opinions and accounting opinions in place, finding donees, doing all that stuff that retailers of prints don't do.

[73]     He pointed out that the Barry Barnett Prints were sold only to 35 individuals because there were only 35 artist's proofs and 35 remarques. He said that it is not entirely clear from the evidence what happened to all of the prints but many of them went to Mr. Barnett and he sold many of them and that this provided the basis for Tropper's evaluation of same. He said that Respondent's counsel's description of sales by CVIAM to other individuals or customers was "this is the normal market for those Prints, the only market for those Prints". He continued by saying that:

the Respondent's position was that applying Henderson, being the only market for those prints, that's where one must go to determine the fair market value.

He then said that the Appellants' submission was that that was not the Henderson test. He continued by saying that:

The Henderson test is the highest price an asset would bring when sold in the normal method applicable to the asset in question in the ordinary course of business.

[74]     He stated that purchasing through a financial planner is not the normal method for buying limited edition Prints. He posed the following example to explain his position, namely:

Let's say there is a furniture manufacturer that makes 100 chairs and let's say the chairs have a new design and that they have never been sold before and it is good quality wood, very nice design and they are saleable chairs. To someone walking in those are saleable chairs. Some expert will walk in like Mr. Ford, not in prints, but a chair expert will walk in and say those are saleable chairs. But they have never sold before in retail. Let's say the manufacturer sold those 100 chairs, just sold them to the Brick Warehouse, a retailer, sold them wholesale for $50 each. Now Brick's going to sell them for $100 each. ... But those chairs have never been sold retail. So my friend would argue, presumably, that you have got to look at the only market in which those chairs sold. They only sold for $50 each when they got sold to the Brick. They are still in the factory. They haven't been delivered to the Brick yet. Or even if they have been delivered to the Brick, they haven't been sold yet retail. In their submission that is the only market so far for those chairs. In our submission those chairs still have a fair market value. It's what an expert in the value of those chairs at retail would say that they are worth - $100 is what the Brick is going to sell them for because it is a hypothetical sale in the appropriate market, that is what the case law says. That is what Friedberg and Whent says. And the hypothetical sale in the appropriate market, when you are dealing with mass appeal prints, is a sale in the retail market. It is not a sale through your financial planner. It is not a sale from CVI. ... you go to Henderson. You say well, what is the highest price those chairs would bring when sold in a normal method applicable to the asset in question in the ordinary course of business. And the highest price is obtained at the Brick Warehouse when they finally sell those chairs. The fact that the person is donating those chairs, having bought them from the manufacturer, doesn't mean they are suddenly worth as a fair market value $50 a chair because that is what he was able to pay for them.

[75]     Counsel continued by saying that the Court did not know much about CVIAM, whether they were in some deal with a financial planner or the financial planning community, et cetera. He stated that we do not know the circumstances "because the Respondent has not told us and it is beyond the ken of the Appellants to know all about that". He challenged the assumption in the reassessment that the highest price was the price at which CVIAM sold the Prints and posed the query as to the basis for such assumptions. He then said that the Appellants have done everything that they could reasonably be expected to do, calling appraisers, hunting down whatever facts they could, bringing in a market expert, introducing evidence overall about the saleability of the Prints and the prices at which they could be sold. Counsel then said that if the Appellant had made a prima facie case by Tropper's evidence, by Ford's evidence, by the Appellants' evidence and by the evidence even of Roy, that the fair market value in one case was roughly what was claimed on the donation receipts, the burden shifts to the Respondent. He suggested about Respondent's counsel finding fault with Tropper's approach missed the point because Tropper said that print by print is the way sales occur in the appropriate market, the Prints being all different and, in effect, saleable one by one, not as a group. He said that Respondent's counsel:

... has certainly picked away at the Tropper report and in fairness to him he has not had his own expert evidence to rely on and I understand that. But by saying she made a mistake, she should have valued the prints not on a print by print basis but as a group, that contradicts not only proper appraisal methodology, it contradicts what the Respondents have done in the past when they have adduced expert appraisal evidence in similar circumstances.

[76]     He then referred to the Mallette case in the matter of blockage discount. He pointed out that the Respondent's own expert applied a discount to "each work" thereby taking the same approach as that now advanced by the Appellant.

[77]     Counsel referred to Tropper hunting invoices from galleries, not knowing who was telling the truth, and weighing information received against comparables in the market. He submitted that Respondent's counsel, on cross-examination, did "a little picking away at this and a little picking away at that". He said that Tropper was not a witness who embarrassed herself. He stated that her mission was to find the highest price attainable using the normal method in the ordinary course of business - the Henderson test. He said:

Tropper didn't need to focus on the price paid by the Appellants because she knew there was a market having examined the prints, and having looked at them. With her background and knowledge, she knew there was a market for those kinds of prints in retail galleries, print shops and framing shops all across North America.

[78]     He then submitted that the Court could draw an inference from the failure of the Respondent to produce expert evidence. He suggested that the Respondent could not find anyone to take an oath after having filed a report and after having done the appropriate work and tell the Court that the Prints did not have a fair market value beyond the price paid by the Appellants.

[79]     Counsel then reminded the Court that Tropper had said that even if all the Prints sold by CVIAM, the Prints in issue, had been on the retail market, such sale would not have had any depressive effect on the market. He added that Tropper said, in her written report:

There were not an adequate number of prints included in any one of these donations to suggest the need to calculate a reduced value due to quantity. ... In fact, even the total number of prints in all the editions by these artists would not overload the huge North American market.

[80]     He also referred to Tropper's evidence as an expert, including hearsay evidence, and said that the Courts had endorsed the theory that such evidence could be used by an expert. He referred to the Woods case in which a trust owned a house which was found by this Court not to be personal property. He stated that that does not stand for any proposition other than that a trust cannot have personal use property unless it fits within section 54(a)(iii) of the Act.

[81]     Counsel then referred to the release with the Federal Budget of February 28, 2000 referring specifically to certain charitable donation arrangements such as in the present case, describing same as external evidence, adding that the Act as it existed after the legislation constituted the internal evidence. He referred also to Silicon Graphics v. Her Majesty the Queen, [2002] 3 C.T.C. 527 (F.C.A.) and HSC Research v. Her Majesty the Queen, [1995] 1 C.T.C. 2283 (T.C.C.) as an authority for the proposition that the Court is not restricted by subsection 45(2) of the Interpretation Act in interpreting a change in legislation where all the external and internal evidence suggested that the change was purposive, there being a purpose for the change. Counsel summarized his point by saying that by simply reading the provision one can infer that Parliament must have intended a change and that, therefore, prior to that change, these properties were personal-use properties. With respect to Respondent's counsel's argument on this point Appellant's counsel said:

We say ... that as soon as you buy it and as soon as you own it you are owning it with the purpose of making some use of it which could be a charitable purpose. It is really splitting hairs to say that it is only at the very moment that you donated it because there is some hand-over time when you are donating it, but you still own it.

ANALYSIS AND CONCLUSION:

[82]     I agree with all of the submissions contained in Appellant's counsel's notes of argument reproduced herein and with those advanced in his response.

[83]     Tropper is extremely well qualified and was extremely knowledgeable in the area of her expertise, having been qualified as "an expert appraiser of personal property including limited edition prints". I found her to be totally credible and I was highly impressed with the professional manner in which she testified, both in direct examination and cross-examination. Her report was exceptionally well prepared and was very well presented. Respondent's counsel's questions to her respecting USPAP and the markets for the work of the artists who prepared the images from which the Prints were made, et cetera, appeared to be an attempt to compromise the accuracy and efficacy of her valuation. I was impressed with Tropper's forthright replies as to both what she had done and had not done in her examinations. In my view her evidence was not compromised on cross-examination.

[84]     The Respondent produced no expert evidence and, indeed, no other evidence. The evidence of the Appellant's witnesses, including Ford, an art marketing expert, and Tropper, as above stated, created not only a prima facie case but an impressively strong case. The Minster made assumptions of fact in each Appellant's Reply to the Notice of Appeal respecting the fair market value of the Prints. Specifically the Minister made these assumptions respecting Nash:

m)        The purchase price of the donated Prints was $8,571.00

n)         The fair market value of the eighty-four Prints at the time of donation was no more than $8,571.00

The Minister made these assumptions respecting Tolley:

m)         The purchase price of the donated Prints was $8,377.00

n)         The fair market value of the ninety-nine Prints at the time of donation was no more than $8,377.00

The Minister made these assumptions respecting Quinn:

n)         The purchase price of the donated Prints was $8,648.00

o)          The fair market value of the forty-eight Prints at the time of donation was no more than $8,648.00

[85]     In Redash Trading Incorporated (supra) I discussed at length the effect of no evidence being adduced by the Respondent in a situation where the onus had clearly shifted to the Respondent. I refer to that entire discussion and conclusion on this matter. Specifically, I set out here statements from Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 where the Supreme Court of Canada stated:

As I have noted, the appellant adduced clear, uncontradicted evidence, while the respondent did not adduce any evidence whatsoever. In my view, the law on that point is well settled, and the respondent failed to discharge the burden of proof ...

The law is settled that unchallenged and uncontradicted evidence "demolishes" the Minister's assumptions: ... As stated above, all of the Appellant's evidence in the case at bar remained unchallenged and uncontradicted ...

Where the Minister's assumptions have been "demolished" by the appellant, the onus ... shifts to the Minister to rebut the prima facie case made out by the appellant and to prove the assumptions.

and

Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed.

The Respondent has simply not responded to the shifted onus in this case.

[86]     On the evidence, set out in detail and upon my agreement with Appellants' counsel's submissions, I have concluded that the Appellants will succeed. I want to underline particularly the thesis advanced by Tropper in using the definition of fair market value made in Henderson (supra) by Cattanach, J. The meat of that definition 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.

[87]     I also want to underline my agreement with Appellant's counsel respecting the Klotz case. It is my opinion that the evidence in that case as described by Bowman, A.C.J. was so inferior to that presented in the case at bar that I would find it extremely difficult to disagree with his decision.

[88]     I can add little to Appellant's counsel's comments and the comments of Bowman, A.C.J. in Klotz respecting personal-use property. I agree entirely with both. Respondent's counsels' thesis is that intended use can't be use. The extension of that thesis, as she submitted, concluding that a violin, owned for 30 years and never played, would not be personal-use property is so wanting as to deserve no further comment.

[89]     I conclude that the valuation made by Tropper is the fair market value that should be used for the purpose of answering the question in the first issue. I conclude further that the Prints were "personal-use property" within the meaning of that term as set out in the Act for the purpose of answering the question in the second issue. Based on the concession by Respondent's counsel the penalties will be deleted.

[90]     Accordingly, the appeal will be allowed with costs.

Signed at Ottawa, Canada this 24th day of September, 2004.

"R.D. Bell"

Bell, J.

CITATION:

2004TCC649

COURT FILE NO.:

2002-3718(IT)G

STYLE OF CAUSE:

Barbara Quinn v. The Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

July 5, 2004

REASONS FOR JUDGMENT BY:

The Honourable Justice R.D. Bell

DATE OF JUDGMENT:

September 24, 2004

APPEARANCES:

Counsel for the Appellant:

Clifford L. Rand and

                                                          David C. Muha

Counsel for the Respondent:

Arnold Bornstein, Sointula Kirkpatrick and Michael Appavoo

COUNSEL OF RECORD:

For the Appellant:

Name:

Clifford L. Rand

Firm:

Wildeboer Rand Thompson Apps & Dellelce Toronto, Ontario

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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