Docket: 2003-308(IT)G

BETWEEN:

FRANK KLOTZ,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard on January 26 to 29, 2004 and on February 3, 2004

at Toronto, Ontario.

Before: The Honourable D.G.H. Bowman, Associate Chief Justice
Appearances:
Counsel for the Appellant:	Douglas H. Mathew Thomas Boddez L. Michele Anderson
Counsel for the Respondent:	David E. Spiro Arnold H. Bornstein Sointula Kirkpatrick

____________________________________________________________________

JUDGMENT

          The appeal from the assessment made under the Income Tax Act for the 1999 taxation year is .......

Signed at Ottawa, Canada this      day of March, 2004.

"D.G.H. Bowman"

Bowman, A.C.J.

Citation: 2004TCC147

Date: 20040213

Docket: 2003-308(IT)G

BETWEEN:

FRANK KLOTZ,

Appellant,

And

HER MAJESTY THE QUEEN,

Respondent.

AMENDED REASONS FOR JUDGMENT

Bowman, A.C.J.

[1]      This appeal is from an assessment made under the Income Tax Act for the appellant's 1999 taxation year.

[2]      In filing his return of income for that year the appellant included in his "total gifts" as defined in subsection 118.1(1) of the Act under subparagraph (a)(i) of that subsection the sum of $258,400. He alleged that this amount was the fair market value ("fmv") of 250 original prints which he donated to Florida State University ("FSU") on December 30, 1999 and was to be included in the computation of his "total charitable gifts" as defined in subsection 118.1(1) of the Act. He therefore claimed a deduction in computing his tax payable using $258,400 as one of the components of B in the formula in subsection 118.1(3).

[3]      The Minister of National Revenue disallowed the claim on the basis that the fmv of the prints was at most $300 per print, or $75,000 in total, the amount paid by the appellant. The Minister also took the position that the prints were not personal use property. The Minister also assessed penalties under subsection 163(2) of the Act. As a separate allegation of fact the respondent says that the fmv of the prints was only $50. This position was not pressed in argument.

[4]      The result of these various positions is as follows:

(a)     If the prints were personal use property of the appellant with a fmv of $1,000 each, subsection 46(1) deems the adjusted cost base ("ACB") to be the greater of $1,000 and the ACB otherwise determined, and the proceeds of disposition otherwise determined. In the result the appellant realized no capital gain or deemed capital gain because his ACB and his proceeds of disposition are both $1,000 per print. He would nonetheless get a charitable donation tax credit based on a fmv of $1,000 per print.

(b)    If the prints are not personal-use property but nonetheless had, at the date of donation, a fmv of $1,000 each he would still get his charitable donation tax credit based on $1,000 per print, but he would also realize a capital gain based on proceeds of disposition of $1,000 (subparagraph 69(1)(b)(ii)) and an ACB of $300.

(c)    If the prints are personal-use property with a fmv at the time of donation of $300 per print he would realize no deemed capital gain because of subsection 46(1) but his charitable donation tax credit would be based on $300 per print and not $1,000. Subsection 46(1) obviously has no effect on the operation of section 118.1.

(d)    If the respondent's alternative position that the prints had a fmv of $50 were sustained the charitable donation tax credit would be reduced even more and there would obviously be no capital gain regardless of whether the prints were personal-use property. If they were personal-use property the capital loss would be nil (subparagraph 40(2)(g)(iii)). If they were listed personal-use property the loss could be carried forward against any gains from the disposition of listed personal property.

[5]      The parties entered into a statement of agreed facts and in addition four witnesses were called by the appellant: the appellant himself, Mr. Klotz, Joan Krawczyk, a New York art dealer, and two experts in the appraisal of art, Ms. Kathleen Laverty and Richard-Raymond Alasko.

[6]      The respondent called no witnesses.

[7]      I shall not reproduce in full the lengthy statement of agreed facts. It forms part of the record if the matter is appealed. It consists of 16 pages plus an appendix and it incorporates 54 books of exhibits.

[8]      In summary, the facts are these: Mr. Klotz is one of about 660 individual Canadian taxpayers who participated in a program called Art for Education or AFE.[1]

[9]      Under the AFE program the Canadian taxpayers acquired limited edition prints which they donated to colleges and universities that were prescribed for the purposes of paragraph 118.1(1)(f) of the Act. They bought the prints from the promoters of the program for about $300 per print and immediately donated them to the universities or colleges and received a receipt for $258,400 or approximately $1,000 per print, which they used to support a claim for a charitable gift tax credit under subsection 118.1(3).

[10]     The promoters of the program were Galleries Consultants Ltd., an Ontario corporation, which changed its name to AFE Consultants Ltd. ("AFEC"), Empyrean Galleries Inc. ("Empyrean"), an Alberta corporation, and Curated Prints Ltd. ("Curated"), a Delaware corporation which acted as bare trustee for Empyrean. AFEC and Curated were associated corporations.

[11]     The way it worked in the case of Mr. Klotz was that Curated, through a person Hazel Hett, who retained Ms. Krawczyk, acquired prints from artists or dealers. Ms. Krawczyk's instructions were pay no more than US$50 and this was the price typically paid. Novak Graphics Ltd., a Canadian source, was paid CDN$50, $55, $70 or $75 per print. Ms. Krawczyk testified that she was sometimes able to acquire prints for less than US$50 - in some cases as little as US$5, in others $20. Prints were acquired in large quantities. In 1997, 1998 and 1999 when the program was in effect, over 63,000 prints were acquired.

[12]     In light of the prices for which Ms. Krawczyk, on behalf of Curated, was able to obtain the prints the other instruction to Ms. Hett may seem a little strange. It was that the prints she acquired should have a value of CDN$1,000 or more. I say strange because the man on the Clapham omnibus might find it anomalous that a person could be instructed to acquire prints having a value of at least CDN$1,000 for a price not exceeding US$50. But then, the man on the Clapham omnibus would probably not be familiar with the art scene in New York in the 1990s or the methods devised to make mass charitable gifts of art a profitable endeavour.

[13]     It may be useful to look at just what Hazel Hett's contract provides. It reads as follows:

PERSONAL SERVICES CONTRACT

HAZEL HETT of 1457 Churchill Drive, WA 98281 agrees to perform the following services to the benefit of Empyrean Galleries Inc., a company duly incorporated under the laws of Albeta. All services are to be performed in New York and Washington State.

·         Locate suitable premises in New York City for the storage and distribution of art.

·         Arrange for the purchase of fine art prints each having a value of $1,000 Cdn or more. Such prints shall be delivered to the New York warehouse.

·         Arrange for photography in New York of all art works delivered to the warehouse.

·         Design and implement an inventory control system for the art inventory.

·         Design and implement a shipping program for the art.

·         Locate and hire the following:

2 qualified appraisers.

Packing and shipping staff as necessary

·          Arrange for the donation of art to qualified charities.

·          Assist in the design of the marketing brochures.

·          Assist in the designing of materials to educate the marketing team.

EMPYREAN GALLERIES INC. in consideration for receiving the services detailed above undertakes and covenants to perform the following

·         Reimburse Hazel Hett for all expenses incurred related to the management of the business within ten (10) days of the invoice being submitted.

·         Pay Hazel Hett $300,000 CDN annually. Payments to start January 1, 1999.

·         Parties may extend such term annually, provided the parties have mutually agreed to same prior to each anniversary date.

_______________________               ______________________

Hazel Hett                                             Date

_______________________               ______________________

Empyrean Galleries Inc.                         Date

[14]     In addition to the US$50 paid for the prints by Curated to the artists or dealers, it had other expenses:

(a)             A commission of $5 per print to the person who acquired the prints for it;

(b)            The cost of storage, insurance and shipping of the prints;

(c)             A management fee of $125 or $135 per print to its associated corporation AFEC. Since over 63,000 prints were donated under the program the management fees would have amounted to over $8,000,000; and

(d)            the cost of retaining the valuators Kathleen Laverty and Roger Woltjen.

[15]     Curated sold the prints to the 660 Canadian taxpayers for prices that generally ranged from $290 to $320 per print. The price varied depending on the number of prints purchased. The Statement of Agreed Facts sets out two examples of the purchase invoices. Several versions were used in 1999. One version used in 1999 read in part:

1 - 9 Works:                 Current Market Value (retail price at Galleries)

10 - 49 Works $500.00 CDN a piece

50 -99 Works               $350.00 CDN a piece

100 - 249 Works          $320.00 CDN a piece

250 + Works                $300.00 CDN a piece

Each work will be from Curated Prints Ltd.'s inventory and will have a minimum fair market value of $625.00 US as determined by an independent appraisal to be provided on closing.

Another version read:

1 - 9 Works                  Current Market Value

10 - 24 Works $500.00 CDN a piece

25 - 49 Works $360.00 CDN a piece

50 - 99 Works $345.00 CDN a piece

100 - 249 Works          $320.00 CDN a piece

250 + Works                $300.00 CDN a piece

Just what 'Current Market Value' meant is uncertain.

[16]     Some individuals associated with the AFE program including the appraiser Ms. Laverty acquired prints under the program and received discounts.

[17]     Volume 5 of the 54 books of documents is a document prepared by Kroll Lindquist Avey. It is referred to as the Kroll Material. It consists of schedules summarizing information about the prints donated by the Canadians and about the prints donated by many other donors in the AFE program in 1997, 1998 and in 1999. This document summarizes material in 11 of the 54 books of documents relating to a substantial number if not all of the works purchased in the program.

[18]     In summary there were 24 donation recipients 23 of which are United States educational institutions and one of which was an institution in Israel. There were 63,074 prints donated in the program. There were numerous artists and print names. It appears that most of the donors bought enough to entitle them to the lower prices charged by Curated.

[19]     Mr. Klotz's donation to FSU comprised 250 prints created by 30 artists. They were bought for $75,000 on December 28, 1999 and donated on December 30, 1999 for which he received a charitable donation receipt of $258,400. He never saw the prints, never had possession of them and had no role in choosing them. They were shipped directly to FSU. He participated in the AFE program in 1998 as well to the extent of 333 prints, which he gave to Providence College of Providence, Rhode Island and claimed a charitable deduction based on a fmv of $381,350. That year is not before the court.

[20]     Mr. Klotz is senior vice president of capital markets at a company Prebon Yamane. In 1997, 1998 and 1999 he earned a substantial income and is sophisticated in financial matters. He brokers interest-rate derivative products to financial institutions.

[21]     He became involved in the AFE program on the advice of his financial advisor, Mr. David Brill, who had brought him similar programs in the past. He stated that he trusted Mr. Brill. It is not entirely clear that Mr. Klotz was aware that out of the $125 or $135 per print management fee paid by Curated to AFEC, AFEC paid financial planners who recommended the AFE program to the taxpayer 10 to 15 per cent of the price paid.

[22]     One thing is clear, albeit probably irrelevant to what has to be decided here, and it is that Mr. Klotz's motivation in participating in this program was purely the anticipated tax benefit. The broadening of the cultural or intellectual horizons of the students at FSU was not a factor. He never asked what FSU was going to do with the prints. In 1999, FSU received 1,450 prints from various donors and presumably issued receipts for at least $1,450,000.

[23]     He received substantial promotional materials from the AFE program. They contain a page or two of idealistic and somewhat hifalutin verbiage about the social benefit of giving art to educational institutions but the bulk of the material has to do with the tax advantages. Two opinions from well-known law firms were received. The opinions are carefully drafted but like most legal opinions that I have seen in respect of transactions in which the reduction of tax is a significant factor, they are more in the nature of a dissertation on the various provisions of the Act in the government's arsenal that might be used to attack the intended tax result. Such opinions are stated to be subject to so many qualifications, provisos and assumptions that it is difficult to see how a client could derive much comfort from them.

[24]     Mr. Klotz did not receive Ms. Laverty's appraisal until after he had donated the art works.

[25]     It is unnecessary for me to deal at any greater length with the donor. Mr. Klotz made a mass donation of limited edition prints to FSU. He did not see them or have them in his possession. He was indifferent as to what they were or who they went to or what the donor did with them. His sole concern was that he receive a charitable receipt. None of this is relevant to the issue. A charitable frame of mind is not a prerequisite to getting a charitable gift tax credit. People make charitable gifts for many reasons: tax, business, vanity, religion, social pressure. No motive vitiates the tax consequences of a charitable gift.

[26]     The principal question here is: what was the fmv of these prints at the date they were donated? It is not suggested that they increased over 300 per cent in value between December 28, 1999 and December 30, 1999. The argument is that in December 1999 they were worth $1,000 and it is irrelevant that Ms. Krawczyk or other purchasing agents managed to persuade hundreds of artists or art dealers to part with thousands of limited edition prints for US$50 (or less, sometimes as little as US$5) or that Curated was able to sell over 63,000 prints to about 660 Canadians for about $300 per print.

[27]     The basis upon which the $1,000 per print value is advanced is the valuation made by Ms. Laverty. A valuation was made as well by Mr. Roger Woltjen. Although it was put in evidence it was not tendered as an expert witness report and Mr. Woltjen was not called as a witness. The other expert, Mr. Alasko, was called to comment on the metholodogy of Ms. Laverty's and Mr. Woltjen's reports. I excluded the portion of his report dealing with Mr. Woltjen's report and I shall say nothing more about Mr. Woltjen.

[28]     Ms. Laverty is an art dealer and appraiser. The report that she prepared on the value of the prints donated by Mr. Klotz to FSU had an effective date of December 28, 1999 and expressed a conclusion of value of $265,900. This is higher than the amount in the receipt issued by FSU, which followed the practice of issuing receipts in amounts that were the lower of those expressed by Mr. Woltjen and Ms. Laverty.

[29]     Her report consisted of a one-page letter to which were attached schedules detailing the prints being valued containing the name of the artist, the value assigned, the number in the series if there is a series and the method of production (silkscreen, lithograph, linoblock, aquatint or woodblock). I have picked at random one artist, Stephen Davis, as an example and have reproduced below the data relating to him set out in the schedule. I do not know what the seven digit number on the left or the four digit number preceded by the letter E are. Presumably they are some type of identification.

Davis, Stephen

Untitled (Monoprints) - E7054

- Height x Width = [19.00 x 27.00 inches] or [48.26 x 68.58 cms]

Silkscreen

3,034,099	1 of 200	$1,000
3,034,100	2 of 200	$1,000
3,034,107	9 of 200	$1,000
3,034,119	21 of 200	$1,000
3,034,125	27 of 200	$1,000

Untitled black & white squares with drawing - E6987

- Height x Width = [19.00 x 27.00 inches] or [46.26 x 68.58 cms]

Silkscreen, mixed media

3,033,764	Unique	$1,000
3,033,773	Unique	$1,000
3,033,776	Unique	$1,000
3,033,786	Unique	$1,000
3,033,792	Unique	$1,000

[30]     Of the 250 prints valued in the Klotz donation, 201 are valued at exactly $1,000 each, 13 at $1,100, 16 at $1,200, 11 at $1,400, five at $1,500, three at $1,800 and one at $2,000. One is struck by how many come in at exactly $1,000 each. Ms. Laverty's reports that are given to the donors appear to be identical in every case except for numbers.

[31]     Since this is a test case it is appropriate that I reproduce in full the appraisal that was given to Mr. Klotz.

HORIZON ART GALLERIES (1994) LTD.

Denman Place P.Stn. POBox 47055

VANCOUVER, BC V6G 3E] (604) 602-0440

DONOR: Frank Klotz

60 Chancery Lane Oakville, ON L6J 5P6

RECIPIENT: Florida State University

Inspection:

Dates: 21/11/97, 8/12/97, 20/1/98, 19/6/98, 9/11/98,                                          Location: Vancouver, BC; New York, NY;

2317199,29/10199,5/11/99,4112/99                                                                                                    Toronto, ON

Report date: 25/01/00                                                                                 Condition: Good, unless otherwise stated

Item: 250 Original prints

Value Conclusion: $264,900.00 Cdn                                                                 Effective Date: 28112199 Purpose: Current Fair Market Value (CFMV) for Donation

CFMV Definition: the highest price available in an open and unrestricted market between a willing buyer and a willing seller, who are both knowledgeable, informed and prudent, acting independently of each other. Other definitions: AP (artist's proof) HC (hors commerce) PP (printer's proof) WP(working proof) BAT(bon a tirer)SP(state proof), TP(trial proof)

Method: Market data approach with the relevant market being retail gallery sales. The price assigned is the mode for the highest and best use, arrived at through the analysis of retail sales of like or similar properties, use of current published price indexes, and market parallels comparing artist's reputation and sales history, complexity and artistic exploration of medium, costs of production, and size of the edition. Value does not include any fees or taxes, nor does it take into consideration any future events.

TERMS AND CONDTl7ONS

This appraisal is given subject lo the terms and conditions hereinafter set forth, all of which are a part thereof unless expressly set aside in writing on the pages of this Appraisal and signed by all parties concerned.

The values expressed are based on the appraiser's best judgment and opinion and are not a representation or warranty that the items will realize that value if offered for sale al auction or otherwise. The values expressed are based upon current information on the dale made and no opinion is expressed as to any future values nor, unless otherwise stated, as lo any past values.

Stated values are given item by item unless stated as being per grouping. The total of the individual item values shall not be construed as an appraised value for the whole collection, but merely as the addition of single items. Where values are given by a grouping, the value for the group is for the whole and no opinion is given as lo individual or proportionate values within the group. Unless otherwise stated values expressed are based on the general expertise and qualifications of the appraiser as lo the purpose (value sought) and function (assigned use) involved as well as lo the most appropriate market for the items listed. Where particular detailed valuation information is relied upon, it will be so stated in writing.

Where an appraisal is made on a sample of the whole, it AU be so stated, and it will be based on the critical assumption that the sample is representative and fair. While this appraiser undertakes lo make even' reasonable effort lo ensure the samples taken are representative and fair, no warranty is given or implied that this is, in fact, the case.

Where the appraisal is based not only on the item(s), but also on factual data or documentation supplied therewith, the appraisal report shall so state by malting reference thereto and, where appropriate, attaching copies of such data and documentation to the appraisal. Should, in conjunction with this appraisal, additional services of the appraiser by requested by the client his agent or attorney, or the court (such as for added lime researching other value purposes, pretrial conferences, court appearances, depositions, court preparations, etching.) compensation for same shall be al the customary hourly rate charged by the appraiser at the time and shall be due and payable by the client immediately upon receipt of a statement for said work.

Unless otherwise noted. estimates of value are based only on visual inspection with no tests of any kind having been conducted. Unless otherwise noted, all prints are signed and numbered. Measurements and details of medium, title and editions were determined under "field conditions" and are, therefore, approximate. All written data supplied by Curaled Prints is assumed lo be correct and the appraiser has taken all reasonable action to confirm the data's accuracy.

I certify that to the best of my knowledge and belief that the facts contained in this report are true and correct. based on full and fair consideration of all the facts available; that I have personally examined the appraised property, or in the case of print editions, I have examined one print from the edition, that I have no past, present or future interest in the properly appraised; that unless otherwise noted estimates of value are based only on visual inspection with no test of any kind having been conducted, that my fee for appraisal is not contingent upon the value found; that. unless otherwise noted, no one provided significant professional assistance to the person signing this report: that this appraisal has been prepared in conformity with and is subject lo the International Society of Appraisers' Appraisal Report Writing Standard and to the ISA Code of Ethics and to the Uniform Standard of Professional Appraisal Practice (USPAP). Any departure from these standards, the reasons for such departure. and its impact on the appraiser's value conclusions were discussed with the client in advance.

Unless otherwise noted, the appraised values are based on the whole ownership and possessory interest undiminished by any liens, fractional interest or and• other form of encumbrance or alienation. This report is confidential and no change in the report shall be

made by anyone other than the appraiser. The appraiser shall have no responsibility for any such unauthorized changes. No portion of this report, including the cover page, may be reproduced copied or used in any manner by anyone other than the client, his agent or stipulated third parties, without the appraiser's consent.

The undersigned is an independent appraiser of contemporary an

(Accredited Member, International Society of Appraisers)

[32]     The expert report filed in court was somewhat more extensive. It explained her methodology. Her definition of fmv is the traditional one.

[33]     Because I am not prepared to accept her conclusion of value I believe that in fairness I should set out portions of her expert report and then give my reasons for agreeing with the Crown's position, even though the Crown called no witnesses. To call no expert witnesses in a valuation case can be a risky manoeuvre. Nonetheless, the court is not bound to accept any expert's opinion and ultimately the court must make its own determination of value based on all of the evidence.

[34]     Before I come to her report, however, there is one point that was emphasized by counsel for the respondent and it is Ms. Laverty's purchase in 1998 of 25 prints for $200 each and, in 1999, 10 prints for $200. She donated them to an educational institution and claimed a charitable donation tax credit, which was disallowed and penalties were imposed. She has objected to the assessment.

[35]     Counsel for the respondent suggests that her evidence should be rejected because she is not objective and has an interest in the outcome. Mr. Alasko - a highly qualified expert - took a somewhat more benign view of Ms. Laverty's lapse in judgement in becoming involved in the AFE program. He considered that what she did was naïve but that it did not in his view compromise the conclusion. He noted certain respects in which her report did not conform to the standards set by the Uniform Standards of Professional Appraisal Practice. He did not however endorse the conclusions but said they were "reliable in substance". He noted a number of inadequacies but said "it's not the greatest report in the world". He said "substantially I think that the report stands up. It's thin but it stands up." The expression "damning with faint praise" comes to mind.

[36]     My impression of Mr. Alasko in the witness stand and upon reading the transcript is that he was a kind man who was not anxious to cause Ms. Laverty any more embarrassment than she had already been caused. The most that he could do was to give the report a very lukewarm endorsement. He made it clear that he was not endorsing the conclusions.

[37]     I am not prepared to reject Ms. Laverty's report simply because of her rather minor participation in the AFE program. My concerns with the appraisal go beyond that. Counsel attacked her objectivity, independence and credibility. I prefer to examine the report objectively. It is, after all, the appraisal not the appraiser that is on trial here.

[38]     Her report reads in part as follows:

Curated Prints ("CP") retained my professional services in November, 1997 to examine and appraise original prints. CP was considering acquiring original prints for resale and subsequent donation to institutions qualified to receive charitable gifts. Services were limited to estimating a fair market value based on my experience (see Appendix B: Professional Profile. Professional standards were observed. The standards established by the International Society of Appraisers were applied. The engagement was not contingent upon values assigned, and I had no interest in the prints purchased by CP, including those prints later purchased from CP by Mr. Klotz (the "Klotz Prints").

Under the terms of the retainer, many hundreds of prints were personally examined and documented. The examinations and related documentation and appraisal work was conducted over a series of two and a half years. The examinations took place in New York in November and December 1997, January, September and November 1998, November and December 1999, and February 2000; in Toronto in 1999, and in Vancouver in December 1999. The examinations were in the presence of people contracted by CP to source prints.

The works examined were usually from limited editions, and were usually samples. Most of the prints were created by American artists whose primary market is in the United States. It was assumed, based on assurances from CP, that the condition of any other prints from the same edition purchased by CP would be excellent. Not all prints examined were assigned a value. For those that were, the values estimated were expressed in US currency, then converted from US$ to Cdn$ at the prevailing conversion rates between 1US$ to 1.4 Cdn$ and 1US$ to 1.5 Cdn$.

The appraised values were conservative, in order to account for the possibility of discounts offered by retail dealers. The appraised values ranged from $250 Cdn to $1800 Cdn. The value estimates were updated periodically throughout the term of the retainer to account for changing market conditions. The value conclusions for each individual print were submitted to AFE Consultants Ltd. ("AFE"), a company understood to be assisting individuals who purchased prints from CP with the donation of those prints to educational institutions.

The assigned use of the appraisal was for donation purposes. The definition of fair market value used was as follows:

"The highest price available in an open and unrestricted market between a willing buyer and a willing seller, who are both knowledgeable, informed and prudent, acting independently of each other."

The sales comparison approach was used with the relevant market being retail sales. The cost approach or the replacement cost (comparable) was also taken into consideration. The estimate of value was the mode (the most common value) for the highest and best use of like or similar properties, using current price indexes, dealers' suggested retail prices, and market parallels comparing the artist's reputation and sales history, the complexity and artistic exploration of medium, costs of production, and the size of the edition. The fair market value did not include fees or taxes, nor did it take into consideration any future events.

B. Value Conclusions

The values assigned to each of the individual Klotz Prints are shown in Appendix A. The values ranged from $1000 CDN to $1800 CDN. For the 250 Klotz Prints:

Fair market value: $264,900 CDN as of December 28, 1999

C. Scope of Review

The process used to examine, document and research values for the Klotz Prints began with the examination of prints as outlined in the Introduction. At each of the viewing locations other than Vancouver, the person who purchased prints on behalf of CP was present. As a starting point for analysis, CP in most cases provided a list of works with descriptions, photographs of each work, and biographical material.

Each work (or a sample from the same print edition) was examined and the following details and qualities were noted:

artist, title, date of production, size of paper, size of image, quality of paper, print technique (see appendix C), edition size, condition and quality of the image.

The complexity of the print was noted. The artist's biography, price history, and price lists (current and past) were studied. During the two and a half years that the examinations were conducted, extensive time was spent visiting galleries, attending auctions and art fairs, checking the resale market, reading trade publications and conducting general research. Appendix D is a chart summarizing by artist/print all of my research used to determine market values for the Klotz Prints.

Numerous sources were used to conduct the research required in order to estimate the fair market value of the Klotz Prints:

1)      Representative galleries and dealers: Retail inventory lists were reviewed and verbal confirmation of recent sales of works by the artists from the Klotz Prints was obtained.

2) Published price lists: Reliable sources to determine artists' retail prices are from the publisher's/distributor's suggested retail price lists. The price lists are readily available to the individual consumer at many art fairs across the United States, on the Internet, and at the galleries with exclusive representation of an artist. In researching values for the Klotz prints, published price lists were consulted.

3) Comparables: When qualities of one item are compared to similar items by the same artists and/or to similar items by other artists the values for the comparables are helpful in estimating value. Comparables were sought for all of the Klotz Prints.

4) Biographies: The artist's credentials were reviewed to note the level of relevant education and gallery representation. The dates and venues of exhibitions, lists of public and corporate collections, and bibliographical sources were reviewed to help associate an artist with his peer group. These associations help establish a reasonable price range for an artist's works.

5) Art Fairs: International Art Fairs were attended on a regular basis to maintain and develop knowledge of the print market, which was used in appraising the Klotz Prints.

6) Trade magazines: Some publications such as Art in Print, Art Business News, and gallery catalogues are sources of prices for the most current work by artists. Other trade magazines such Art in America confirm the importance of an artist through reviews and articles. These publications, issued and reviewed monthly contributed to the knowledge applied in evaluating the Klotz prints.

Appendix E is a list of the sources used in the Klotz appraisal.

[39]     Ms. Laverty considered three approaches to value: income, cost and market data. She rejected the income and cost approach and chose the market data or sales comparison approach. In using this approach she explained why she turned to what she described as the "retail" market rather than the "wholesale" market.

The research for the market data or sales comparisons began by examining both the wholesale and the retail markets. There is a wholesale print market but, as with other commodities, transactions take place in the wholesale market only where special conditions are met, one of which is the volume of prints purchased. Wholesale transactions involving multiple prints are made to the art trade, at prices not available to members of the general public seeking to acquire a single print. Print publishers, artists, and dealers who are continuing to promote the artists' works have a vested interest in making sure that the wholesale buyer would not be harming the current market for works by the same artists. Any wholesale transaction would be predicated on the protection of the market value that the publisher/artist/ dealer had worked hard to build and maintain.

The Klotz Prints were to be donated to an educational institution for the benefit of its users. The review of the larger publishing and distribution print businesses clearly indicated that there are hundreds of thousands of prints being created and available in the American retail market every year. When compared to the total number of prints sold at retail outlets between December 1997 and December 1999, the number of prints CP sold at wholesale was a small percentage of the market, and would not be large enough to have any impact on the retail market. Although Klotz and others may have purchased their prints at a wholesale cost, there exists a far larger market for the prints at the retail level.

Cost and value are two different concepts. Cost is the price paid, which, depending on the circumstances surrounding the purchase can differ significantly from fair market value. The latter is the highest price available in an open and unrestricted market between a willing buyer and a willing seller, who are both knowledgeable, informed and prudent, acting independently of each other. The most common market where fair market value is determined is the retail, not the wholesale market. The highest and best use for each of the individual Klotz Prints is in the retail.

The market data or sales comparison approach, which is the analysis of similar sold properties, was the approach to value considered to be the most useful in estimating values for the Klotz Prints. The value assigned to each print was the mode (the most common value) for the highest and best use of like or similar properties, using current price indexes and market parallels comparing the artist's reputation and sales history, comparing the complexity and artistic exploration of medium, the costs of production, and the size of the edition. The state of the retail print market from December 1997 to December 1999 was stable.

3. Relevant Markets Considered in Applying the Sales Comparison Approach

The retail markets researched were both those of retail sales and secondary market sales of international auctions and of secondary market dealers. The auctions research did not provide sufficient information about the value of the Klotz Prints. Price lists from dealers were useful for sales comparison purposes. The research established that artists whose works are readily available at retail outlets created most of the Klotz Prints.

The American-retail print marketplace is very large, and is characterized by many different business structures. The most relevant of these for most of the Klotz Prints, which are all original prints, is the printer to publisher to distributor business structure. This structure has the ability to build and sustain the print market so that through an orderly distribution over a few years the maximum prices can be realized.

The artists who created the Klotz Prints fall primarily into two basic groups, with some overlap. The following artists have or had their works printed, published and marketed by others: Asmar, Bratt, Diamond, Hall, Hardy, Jian, Jones, Kidder, King, Izquerdo, Morris, Nesic, Slonem, Sonfist, Saito, Tobey, Walker, and Zox. Companies who print and distribute and sell their artists' works through a network of galleries and art auctions, a system otherwise known as orderly distribution, control the market for these artists. There is also a reasonable expectation that a high percentage of a print run will sell within a few years. Unforeseen market conditions, and unusual business circumstances are some of the reasons to cause those expectations not to materialize. These publisher/distributors use a suggested retail price list, which is readily available to the consumer. Artists in this group will produce upwards of six images a year, generally in large print runs to accommodate the demand of a chain of galleries that will range from two or three and up to fifty or sixty. The life span of a print within this system may only be five to six years before any remainders are shelved while newer works are promoted in the galleries. The qualities of these prints remain the same as when they were sold at their last listed retail prices therefore their value does not diminish. Their price is supported through the ongoing sales of similar works by the same artists, through the facilities of the dealer or publisher.

The second group of artists do their own printing but their distribution/marketing is primarily left to dealer/distributors. These artists are Consagra, Davis, Hewitt, Kent, Marca-Relli, Mock, Poloukhine, Porter, and Storey. Their prices are also supported by the dealer/distributor but, on a smaller scale. These dealers will sell at retail or at discounts to other dealers, using a sliding scale tied to volume buying. These artists generally produce smaller print runs primarily because their perceived front end demand is not as high as those being promoted through large companies.

The information from the market research for sales of Labrie, Szkola and Walker prints was minimal. Because direct sales information was not found, the next closest comparisons were sought for works with similar physical properties, complexity of the technique, and the quality of the image.

For those artists with an established publisher/distributor price history, published price lists, gallery price lists and artist's price lists were examined. To establish the value conclusion for each of the Klotz Prints the most weight was given to values found for the same print, and then to values found for similar works by the artist (size, medium, print method, image). Where no values were found for a print then the values were sought for comparable items and a reasonable value was assigned. Some artists also produce and sell works in other media such as drawings, paintings and sculpture. Information regarding current prices of works in other media was used to assist in determining current value for a print by the same artist.

Sales comparisons (prints with similar qualities by the same artist or by other artists) were also sought by examining evidence of current prices at the artist's representative galleries, or price lists supplied by galleries, artists, printers, publishers or in commonly used price guides. Appendix E lists these sources. Confirmation of retail sales prices from galleries, artists and international art fairs was collected and noted. Some industry standards confirmed from art fair research were that works by the same artist are available at the same price through all dealers at the primary retail market level, and that higher prices are place on larger works by the same artist when medium and complexity are similar. An exception to this is when an artist is in control of his own prices and is selling through a small number of dealers. An example of this is Mock's prints in Klotz's Prints.

When available the artists' biographical material was studied for levels of professionalism. Works by artists with higher quality professional education, and credible exhibition and collection histories are more likely to retain or increase their value than work by lesser artists. Most Klotz Prints were by artists with a lengthy exhibition history and commercial dealer representation.

4. Results of Analysis

All the Klotz Prints were assigned individual values, as analysis confirmed that if distributed in an orderly fashion, the highest and best use for the Klotz Prints was in the American retail market where prints are most often sold individually. The retail market value is the most relevant value because that is the market available to the highest number of consumers, making the retail price the most common price.

Klotz purchased these prints from CP at reduced prices based on the size of his purchase. Wholesale opportunities are only available to consumers who are buying large amounts, and are not available to the average consumer. A seller wishing to attain the highest price would choose a retail market.

It was on these principles that the conclusion was reached that the most common market for the Klotz Prints was the retail market, where the prints could be sold in an orderly manner for their highest price, over a reasonable period of a few years.

[40]     I have reproduced large portions of Ms. Laverty's report because in fairness to her it is important that I give my reasons for not accepting it. On paper her report has a certain plausible ring to it. However, I reject it for several reasons:

(a)      Even if we accept that the proper market to which one should look is the "retail" market, that is to say the retail art galleries, principally those in New York, the evidence does not support the conclusion that recourse to that market justifies the fmv determined in the report.

(i)                 The evidence of actual sales of identical or similar prints is virtually non-existent.

(ii)               Price lists of dealers are not a reliable guide to the price that a willing purchaser and a willing vendor would agree upon.

(iii)             I do not think that what a New York art dealer might be asking for a similar print by one of the artists whose works are in the program proves anything about what scores of the same work would fetch if they were all dumped on the market at the same time.

(iv)             The conclusion that over 80 per cent of the prints involved in the Klotz donation (and probably in everyone else's) were valued at precisely CDN$1,000 (which by an extraordinary coincidence is the amount mentioned in subsection 46(1)) is suspect, to say the least. I find it hard to believe that there is no difference between the multiplicity of prints valued.

(v)               No differentiation was made with respect to the identity of the artist, the medium used, the number of prints in a series, the age of the prints, how long they had been lying around unsold.

(vi)             Her evidence that the prints of some artists would fetch the prices she determined if exposed for sale over a period of years proves nothing about the fmv on December 30, 1999. It is moreover conjecture unsupported by the evidence. I am prepared to assume, without any real evidence, that, had we but world enough and time, the odd print of a particular artist might eventually sell for $1,000. I am not however prepared to leap from that speculative assumption to the conclusion that on December 30, 1999, 100 of that artist's prints would sell for $100,000 in the open market.

(vii)           Some of the prints that were obtained by Curated through Ms. Krawczyk were obtained from dealers such as Szoke Gallery, Novak Graphics and Alex Rosenberg Fine Arts at the favourable prices authorized by her mandate. It is strange that dealers would sell the prints to Curated or Ms. Krawczyk for US$50 or less if there were a retail market out there ready to buy the prints for $1,000 each. Although the evidence of actual sales of identical or comparative prints is thin, if it exists at all, I am prepared to assume that one of a particular artist's prints may be offered for sale in a New York gallery for $1,000 and perhaps somebody might even pay that for it. However, one swallow does not make a summer and I have certainly not seen a flock.

b) A possibly more fundamental problem with Ms. Laverty's report is that in my view she picked the wrong market. A great deal of time was spent in the evidence and in argument on identifying and articulating the market to which an appraiser should look in determining the value of these works of art. Let us stop for a moment and ask ourselves just what we are trying to do here. We are not valuing an individual print. We are valuing 250 prints given en masse to a university. What is to be valued is the totality of that gift and one must look to what those 250 prints would fetch on the open market. The best evidence of what 250 prints would sell for is what they in fact sold for - $75,000. Now it will be objected that this is contrary to the decision of Beaubier J. in Malette v. The Queen, 2003 DTC 1078. The case is under appeal to the Federal Court of Appeal and perhaps I should say nothing about it but since counsel placed considerable reliance on it I shall mention it briefly. It involved a gift of 981 paintings by a painter to a public art gallery. The taxpayer valued the gift at $879,714 and the Canadian Cultural Property Export Review Board valued it at $293,246. The valuator for the Board valued each painting individually then gave a bulk discount of 90 per cent on the premise that the disposition occurred in the "tax shelter market" in which the value consisted of 8 to 15 per cent of the objects' fmv. Where she got this notion is not clear from the record. The basis upon which the appellant and the painter determined the price is equally mystifying. The price agreed to was apparently 25 per cent of whatever the Board's certificate would be.

[41]     Beaubier J. rejected the block discount, on the basis of the decision of Mogan J. in Pustina, Whent and Zelinski v. The Queen, 96 DTC 1594 in which he rejected the application of a block discount. His judgment was affirmed by the Federal Court of Appeal.

[42]     In Pustina, one of the issues was whether the acquisition and sale of the Morrisseau paintings was an adventure in the nature of trade. That position was rejected and is not advanced here. The paintings were assembled over two years for a total of $129,350, not en masse, and were valued by the taxpayer's appraisers at $992,900 and the respondent assessed on the basis of a value of $255,155. Mogan J. valued them at $660,000. His finding of fact was upheld by the Federal Court of Appeal. Mogan J. was faced, however, with the respondent's own expert witness valuing the paintings at $510,000. He chose not to ignore it (96 DTC 1609-1610) but considered all of the appraisals and arrived at a figure that differed from all of them.

[43]     Neither case is of much assistance here. I am not applying a block discount to a retail value. Indeed I would not know what figure I should apply a block discount to. I do not regard the value of $1,000 per print or more arrived at by the appellant as sufficiently reliable to use as the starting point at which to apply a block discount even if I were inclined to do so.

[44]     I am simply looking at the best evidence available to determine what the fmv of the gift of 250 prints is. The most contemporaneous and most comparable figure is what Mr. Klotz paid Curated for them. One might question whether even this figure is too high considering that the reason Mr. Klotz paid even as much as he did was that he believed that an expenditure of $300 would yield him a tax credit based on $1,000. It is an interesting question that I need not consider here whether the price paid for something is truly indicative of fmv where the predominant component in the price paid is the tax advantage that the purchaser expects to receive from acquiring the object. I need not pursue this question because the Crown did not suggest a lower figure. The US$50 figure (Ms. Krawczyk's maximum price) that was mentioned in the reply was not pressed in argument.

[45]     The Crown's principal argument was that the magnitude of the mass art donation program (63,000 prints in 1997-1999 sold by Curated alone) created its own market.

[46]     The respondent's approach is in my view more realistic. Mr. Alasko described the sale to the appellant by Curated as a wholesale or bulk transaction. No doubt the respondent would have preferred to have him say it was a retail sale but in the final analysis it does not really matter what one calls it. It is what it is. It was a sale of 250 prints for $75,000 between two arm's length parties. The gift was a virtually contemporaneous disposition of the same 250 prints. What better evidence is there of what the 250 prints were worth at that time? Why chase the will o' the wisp of an elusive and largely hypothetical fmv through the trendy up scale art galleries of New York and ignore the best evidence that is right there before your very nose? The problem with the claim here, whereby property is acquired for $5 to $50, sold to the appellant for $300 and claimed to have a fmv two days later of $1,000, is that it is devoid of common sense and out of touch with ordinary commercial reality.

[47]     Considerable argument was devoted to a number of United States Tax Court decisions. That court has had to deal with very similar arrangements. As I observed in Aikman v. R., [2000] 2 CTC 2211, affirmed [2002] DTC 6874, one must treat foreign authorities with caution, but they are entitled to respect and they can be instructive where they deal with essentially the same problem.

[48]     A case that is very close to this one is Lio v. Commissioner, 85 T.C. 56. Counsel for the respondent quoted extensively from it and I find the reasoning persuasive.

. . . we must first identify the market where the lithographs at issue in this case are commonly purchased by the ultimate consumers and ascertain the price paid for them in such market. . . . The petitioners argue that lithographs are most commonly sold to the public by art galleries and dealers at retail prices and that, therefore, the prices charged by such galleries and dealers for individual Nelson and Nierman lithographs are determinative of fair market value. They maintain that since art galleries sold an unspecified number of unframed Nierman lithographs from the same editions as those at issue for $300 each in 1979, and since some similar Nelson lithographs were sold by a mail order dealer unframed at $150 each from 1975 through 1980 and by a gallery framed for $260 to $325 each between December 1979 and February 28, 1980, they are entitled to charitable contribution deductions of $300 for each of the donated Nierman lithographs and of $150 for each of the donated Nelson lithographs. We do not agree with the petitioners' definition of the appropriate market.

Lithographs may be purchased by individuals from galleries or from those dealers that sell each lithograph separately, but such are not the only sources for purchasing lithographs. Indeed, the facts of this case demonstrate that most of the lithographs of the types at issue were not purchased from such sources. During 1976, 1977, and 1978, AAA was the sole distributor of the Nelson lithographs, and in 1977 (the Lios' taxable year in issue), it sold 12,225 of them. Ninety-eight percent of such sales were made to individuals in lots of 50 to 400 each. Likewise, in 1978 and 1979, Lublin, which was the sole American distributor of the Nierman lithographs, sold 63 percent (1,473) of such lithographs in those years to Greenwich, and Greenwich sold all of such lithographs in large quantities to individuals. Thus, the sales of these lithographs by galleries and small dealers constituted a miniscule part of the market; most of the sales were made by AAA and Greenwich. Moreover, most of the sales by the galleries and small dealers were of one or only a few lithographs at a time; whereas, Dr. Lio purchased 150, and Dr. Orth purchased 100, of the lithographs. Although the petitioners made bulk purchases of the lithographs in issue, there is no evidence that individual lithographs could not have been purchased for the same price from AAA and Greenwich. Hence, the sales by AAA and Greenwich must be taken into consideration when we seek to find the prices most commonly paid by the individuals who purchase these lithographs for their own use or for gifts to museums.

Clearly, on the facts before us, AAA and Greenwich acted as art dealers, and the petitioners purchased the lithographs as individual customers. The sales of the lithographs to the petitioners were as much sales to "ultimate consumers" as the sales by art galleries and dealers to other individuals upon which the petitioners rely. It is common knowledge that a consumer can pay a wide range of retail prices for the same item depending on where he chooses to shop and how much investigating he does of the various sources of a particular item. . . . We do not construe the term retail as used in this context to mean that where a consumer has a choice of several sources for an item, only the most expensive source is a retail sale and all other sources are wholesale. Rather, the sale to the ultimate consumer is any sale to those persons who do not hold the item for subsequent resale . . . and the most appropriate market for valuation purposes is the most active marketplace for the particular item involved. In the present case, the most active marketplace for Nelson and Nierman lithographs was the marketplace in which the petitioners purchased them.

[49]     It should be noted that in the United States there is a specific regulation referring to the market in which the item is "most commonly sold to the public". Such a criterion is not statutorily imposed in Canada. In determining fmv we are not directed to any particular market.

[50]     Another instructive authority in the United States Tax Court is Samuel E. Hunter v. Commissioner, 51 TCM (CCH) 1533 at 1537:

Petitioners' explanation of the differential between the amount they paid for the prints and the prints' claimed fair market value is that Mr. Ackerman's close relationship with Marlborough enabled him to purchase the prints at a substantial discount from the retail price which he, in turn, passed on to petitioners. According to petitioners, Sovereign, through Mr. Ackerman, purchased the prints from Marlborough at approximately one-sixth of the retail price. Sovereign transferred the prints to Rocquencourt, who then sold the prints to petitioners at approximately one-third of the published retail value.

Sovereign, through Mr. Ackerman, was able to acquire the prints at a substantial discount from Marlborough's published retail price due to the fact that prints were old and constituted excess inventory in the hands of Marlborough. It is clear to us that the transaction between Rocquencourt and petitioners was at arm's length, involving as it did a 100 percent markup by Rocquencourt. The record is devoid of any explanation of why Rocquencourt would sell the prints to petitioners for less than fair market value. Neither Sovereign nor Rocquencourt purported to be a nonprofit organization. If Rocquencourt sold the prints for approximately one-third of what it might otherwise have obtained, as petitioners claim, then such from an economic point of view, makes no sense. As we found in Chiu v. Commissioner, supra, we also find here no credible explanation as to why petitioners would be able to acquire the prints at substantial discounts from value. Thus, we believe that the fair market value of the prints in October, 1978 (as well as in December, 1979) was the price paid for them by petitioners.

[51]     Counsel also referred to Goldstein v. Commissioner, 89 T.C. 38, and to Chiu for the propositions that neither price lists nor a few isolated gallery sales establish fmv. These propositions seem to me to be rather self-evident and require no further authority.

[52]     The United States and Canadian authorities are both clear that the best evidence of value is the actual sale of the very property.

[53]     In Chiu v. Commissioner, at 2960 the Court stated:

In this case, however, we have what has been described as the most reliable evidence of value, to wit, sales of the same property within a short period of time prior to the valuation date. In another context, the Court of Appeals for the Sixth Circuit, the court to which our decision in this case is appealable, has recently stated that "[i]n determining the fair market value of property, little evidence could be more probative than the direct sale of the property in question."

In Hunter, the U.S. Tax Court stated at p.1537:

Petitioners presented a plethora of evidence, including written appraisals of each artist's work and the testimony of three expert witnesses. Neither the appraisals nor the expert witnesses were persuasive. All experts failed to consider the price paid for the prints by petitioners.

The most probative evidence of the fair market value of the prints is the amount petitioners paid for them, especially as their acquisition occurred only one year prior to the time of contribution.

[54]     The Federal Court of Appeal in Global Communications Limited, 99 DTC 5377 at 5385-6 said:

. . . Moreover, the sale from Petroseis to Karon [for $2 million cash] must be deemed to be a sale at fair market value, since the parties were clearly at arm's length. How, then, did the so-called experts arrive at a fair market value for the data of $15 to $19 million? Obviously, Global's appraisers were not prepared to look at the price paid for seismic data on the open market. According to the Minister's uncontradicted evidence, seismic data trades at about 10% of the value at which it is appraised.

In my opinion, appraisals which ignore cash transactions are simply self-serving opinions designed to inflate the value of seismic data and, therefore, must be rejected for tax purposes....

* * *

Global responds by asserting that only its four appraisers (three were retained prior to the purchase, another at trial) had practical valuation experience, and that the Minister's expert witness lacked this practical perspective. In my opinion, the appraisal evidence submitted by Global is fatally flawed. The fact that Global's appraisers adopted the view that the price at which Petroseis sold the data to Karon had no effect on the value which they placed on the data defies both commercial and common sense.

[55]     In Aikman, supra, I stated:

The intent or expectation of obtaining a tax advantage does not vitiate the charitable gift. Nonetheless an appellant in such circumstances runs a risk that the Board or the court may conclude that the best evidence of fair market value is the price at which the object was bought.

[56]     I continue to be of that view. It is one thing serendipitously to pick up for $10 a long lost masterpiece at a garage sale and give it to an art gallery and receive a receipt for its true value. It is another for Curated to buy thousands of prints for $50, create a market at $300 and then hold out the prospect of a tax write-off on the basis of a $1,000 valuation. Mr. Mathew presented the appellant's case with consummate skill and persuasiveness but ultimately his case foundered on the shoals of common sense.

[57]     I turn now to the question whether the prints were personal-use property. The significance of this is that if I had agreed with the appellant's valuation of $1,000 per print but held that the prints were not personal-use property the appellant would have lost the benefit of paragraph 46(1)(a) and would have realized a capital gain of the difference between his actual cost of $75,000 and his deemed proceeds of $258,400. The reason this question was not relevant on assessing was that since the Minister's assumed value of the prints ($75,000) was equal to the appellant's cost, no capital gain or loss would have arisen on the Minister's theory. I raise parenthetically the rather interesting question what the court could do if it had agreed with the appellant's value (thereby supporting the tax credit claimed under subsection 118.1(3)), but held that the prints were not personal-use property, so that a capital gain of $183,400 arose. I have not calculated the comparative benefit of the tax credit and the detriment of the loss of the protection afforded by subsection 46(1). It is of course trite law that the court cannot increase the tax assessed. In light of the conclusion I have reached, it is not necessary for me to deal with the question.

[58]     Personal-use property is not comprehensively defined. Section 54 of the Act however provides, in English and in French:

"personal-use property" of a taxpayer includes (a) property owned by the taxpayer that is used primarily for the personal use or enjoyment of the taxpayer or for the personal use or enjoyment of one or more individuals each of whom is        (i) the taxpayer,        (ii) a person related to the taxpayer, or (iii) where the taxpayer is a trust, a beneficiary under the trust or any person related to the beneficiary, (b) any debt owing to the taxpayer in respect of the disposition of property that was the taxpayer's personal-use property, and (c) any property of the taxpayer that is an option to acquire property that would, if the taxpayer acquired it, be personal-use property of the taxpayer, and "personal-use property" of a partnership includes any partnership property that is used primarily for the personal use or enjoyment of any member of the partnership or for the personal use or enjoyment of one or more individuals each of whom is a member of the partnership or a person related to such a member;

« biens à usage personnel » Sont compris parmi les biens à usage personnel : a) les biens qui appartiennent au contribuable et qui sont affectés principalement à l'usage ou à l'agrément personnels du contribuable ou à l'usage ou à l'agrément personnels d'une ou plusieurs personnes qui sont : (i) le contribuable,       (ii) une personne liée au contribuable,       (iii) lorsque le contribuable est une fiducie,    un bénéficiaire de cette fiducie ou        toute personne liée au bénéficiaire; b) toute créance du contribuable relative à la disposition de biens qui étaient réservés à son usage personnel; c) tout bien du contribuable qui consiste en une option relative à l'acquisition de biens qui seraient, si le contribuable les acquérait, des biens réservés à son usage personnel. Dans le cas d'une société de personnes, le terme vise également les biens de la société de personnes qui sont affectés principalement à l'usage ou à l'agrément personnels d'un ou plusieurs associés de la société de personnes ou d'une personne liée à cet associé.

"Listed personal property" is defined in section 54 as follows:

"listed personal property" of a taxpayer means the taxpayer's personal-use property(1) that is all or any portion of, or any interest in or right to, any

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

(b)        jewellery,

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

(d)        stamp, or

(e)         coin;

[59]     An initial question is what purpose is served by the words following "including" since as a bare minimum personal-use property would include property that is used for the personal use or enjoyment of the taxpayer.

[60]     The function is to expand the ambit of the ordinary meaning of personal-use property, (which would certainly include property used by a taxpayer for his own personal use and enjoyment) to cover

(a)               property used for some other purpose, such as business, but used primarily for personal use and enjoyment.

(b)              Property used by related persons or beneficiaries of a trust.

(c)               Debts arising from the disposition of personal-use property.

(d)              Options to acquire personal-use property

(e)               Property owned by a partnership but used primarily for the personal use or enjoyment of partners or related persons.

The legislative draftsperson was apparently concerned that personal-use property by itself would not cover a number of the enumerated items.

[61]     This leaves the question whether personal-use property, by itself and apart from the extended meaning in section 54, is confined to property owned by a taxpayer and used for the taxpayer's personal use or enjoyment.

[62]     I think there are two possible approaches. The first involves asking the question "What is clearly not included in the expression 'personal-use property'"? Obviously it would exclude inventory, land or depreciable property or eligible capital property used in a business or to earn income - indeed any property used or held for an income-earning purpose, whether the income be from property, business, employment or any of the specifically enumerated sources in the Act. I shall refer to this broad category of property as "income property".

[63]     On the first approach we would have "income properties" and everything else. Everything else would be personal-use property.

[64]     The second approach, which the Crown espouses, involves a more restrictive definition that is to say the property must actually be used or enjoyed by the taxpayer. "How", the respondent asks rhetorically "can these prints be used for Mr. Klotz's personal use or enjoyment when he never saw them, and never had physical use and possession of them?" Essentially, therefore, the respondent's approach envisages three categories of capital property - income property, property actually physically possessed and used or enjoyed personally by the taxpayer and everything else. The respondent contends that the prints fall into the "everything else" category.

[65]     This is a somewhat difficult question of statutory interpretation involving, among other things, the question whether the words "personal-use property" in addition to being broadened by the words following "includes" can also be restricted by those words so that the property must be used or enjoyed personally by the taxpayer. I do not think that as a matter of construction it is appropriate to ascribe such a function to an "including" provision. This has not traditionally been the purpose of such provisions. Maxwell on The Interpretation of Statutes, Twelfth Edition, at page 270 discusses such provisions:

   It is common for a statute to contain a provision that certain words and phrases shall, when used in the statute, bear particular meanings.

   Sometimes, it is provided that a word shall "mean" what the definition section says it shall mean: in this case, the word is restricted to the scope indicated in the definition section. Sometimes, however, the word "include" is used "in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include." In other words, the word in respect of which "includes" is used bears both its extended statutory meaning and "its ordinary, popular, and natural sense whenever that would be property applicable."

   Thus, by section 10(1) of the Income Tax Ordinance of Trinidad and Tobago: "For the purpose of ascertaining the chargeable income of any person, there shall be deducted all outgoings and expenses wholly and exclusively incurred during the year preceding the year of assessment by such person in the production of the income, including- . . . (f) annuities or other annual payments whether payable within or out of the colony." The Judicial Committee held that an annual payment might be deducted under paragraph (f) notwithstanding that it was not an expense incurred in the production of income, the effect of "including" being to comprehend in "outgoings and expenses incurred in the production of income" payments which would not fall within the natural meaning of those words.

   By section 74(1) of the Shops Act 1950: "'retail trade or business' includes the business of a barber or hairdresser, the sale of refreshments or intoxicating liquors, the business of lending books or periodicals when carried on for purposes of gain, and retail sales by auction, but does not include the sale of programmes and catalogues and other similar sales at theatres and places of amusement." "I think it is plain," said Somervell L.J., "that the words which follow 'includes' describe activities about which, at any rate, there might have been disputes whether they came within the words 'retail trade or business.'" The words therefore comprehended both what they naturally meant (primarily, because of the word "retail," the supply of goods rather than services) and those activities specially mentioned in the definition section.

[66]     I prefer the appellant's interpretation which would include the prints in personal-use property. My reasons are:

(a) The respondent's approach uses the words after "including" in a manner that I do not think is appropriate in that it seeks to restrict the words that the provision seeks to expand. If Parliament wanted to restrict the meaning of personal-use property and also expand its meaning it is capable of using language to express that intent. One may assume that not having done so it did not intend to restrict the meaning. After all the expression "personal-use property" is not an expression with a readily ascertainable meaning that is common in everyday parlance.

(b)The appellant's interpretation is more consistent with the scheme of the Act (Highway Sawmills Ltd. v. M.N.R., [1966] S.C.R. 384 at 393; Glaxo Wellcome Inc. v. R., [1996] 1 C.T.C. 2904 affirmed [1999] 4 C.T.C. 371. Personal-use property is not confined to subsection 46(1). One important function in the Act is to provide that capital losses on the disposition of personal-use property are not allowed as deductions. Why the Crown would want to put a restrictive definition on it is hard to understand.

(c) The Crown's restrictive definition would lead to an anomaly. It would mean that a piece of jewellery inherited by a taxpayer and put in a safety deposit box or an inherited painting that the taxpayer stored in the attic or gave away would not be personal-use property but if the taxpayer wore the jewel or hung the painting on the wall it would be. It would involve a requirement that one examine in every case just what a taxpayer did with such a property. Whatever may be the conceptual merits of the Crown's position, it has certain practical problems.

(d) The definition of listed personal property includes the very items with which we are concerned here. It is true that such items must still be personal-use property and it would be contrary to rules of logic and statutory interpretation to reason backwards from the definition of listed personal property to the conclusion that prints are personal-use property. All I take from the definition of listed personal property is an indication that prints are capable of being personal-use property.

[67]     I have concluded that the prints are personal-use property. Even if I had accepted the narrower interpretation advanced by the Crown I would still have held that the prints were personal-use property. One way of using an object is to give it away, whether the motive be altruistic, charitable or fiscal.

[68]     Finally, I come to the question of penalties. The penalties were based upon the premise that the appellant's claim was made in circumstances amounting to gross negligence. I have already held that the value of the gift to FSU was overstated by a significant amount. Does this amount to a misrepresentation that is attributable to gross negligence? Counsel argued that the appellant did not make the sort of enquiries that he should have and that he knew or ought to have known that the prints were over valued. It is important to emphasize that failure to exercise due diligence is not the same as gross negligence. Gross negligence connotes a much greater degree of negligence amounting to reprehensible recklessness.

[69]     In a recent case Urpesz v. The Queen, 2001 C.T.C. 2256 the following was said at pages 2259 to 2261

As it happens, the authorities on this branch of the law are legion. One might start with the numerous pages under subsection 163(2) of the Act in the CCH Canadian Tax Reporter or the DeBoo Canada Tax Service. A recent case is Farm Business Consultants Inc. v. The Queen, 96 DTC 6085, in which the Federal Court of Appeal upheld a decision of this court (95 DTC 200). At pages 205-6 this court said:

I am cognizant of the fact that subparagraph 152(4)(a)(i) has as its purpose the opening up of returns for statute-barred years where items of income, for a wide variety of reasons, are omitted or misstated, whereas subsection 163(2) is a penal provision and that in applying it if there is doubt as to the type of conduct to which the misrepresentation is attributable the benefit of that doubt should be given to the taxpayer. In Udell v. M.N.R., 70 DTC 6019 Cattanach, J. said at page 6025:

   There is no doubt that section 56(2) is a penal section. In construing a penal section there is the unimpeachable authority of Lord Esher in Tuck & Sons v. Priester, (1887) 19 Q.B.D. 629, to the effect that if the words of a penal section are capable of an interpretation that would, and one that would not, inflict the penalty, the latter must prevail. He said at page 638:

We must be very careful in construing that section because it imposes a penalty. If there is a reasonable interpretation which will avoid the penalty in any particular case, we must adopt that construction.

and at page 6026:

   I take it to be a clear rule of construction that in the imposition of a tax or a duty, and still more of a penalty if there be any fair and reasonable doubt the statute is to be construed so as to give the party sought to be charged the benefit of the doubt.

       See also Holley v. M.N.R., 89 DTC 366 at 369; De Graaf v. The Queen, 85 DTC 5280.

       A court must be extremely cautious in sanctioning the imposition of penalties under subsection 163(2). Conduct that warrants reopening a statute-barred year does not automatically justify a penalty and the routine imposition of penalties by the Minister is to be discouraged. Conduct of the type contemplated in paragraph 152(4)(a)(i) may in some circumstances also be used as the basis of a penalty under subsection 163(2), which involves the penalizing of conduct that requires a higher degree of reprehensibility. In such a case a court must, even in applying a civil standard of proof, scrutinize the evidence with great care and look for a higher degree of probability than would be expected where allegations of a less serious nature are sought to be established.³ Moreover, where a penalty is imposed under subsection 163(2) although a civil standard of proof is required, if a taxpayer's conduct is consistent with two viable and reasonable hypotheses, one justifying the penalty and one not, the benefit of the doubt must be given to the taxpayer and the penalty must be deleted.⁴ I think that in this case the required degree of probability has been established by the respondent, and that no hypothesis that is inconsistent with that advanced by the respondent is sustainable on the basis of the evidence adduced.

_________________

       ³ Cf. Continental Insurance Co. v. Dalton Cartage Co., [1982] 1 S.C.R. 164; 131 D.L.R. (3d) 599; 25 C.P.C. 72, per Laskin, C.J.C. at 168-171; D.L.R. 562-564; C.P.C. 75-77; Bater v. Bater, [1950] 2 All E.R. 458 at 459; Pallan et al. v. M.N.R., 90 DTC 1102 at 1106; W. Tatarchuk Estate v. M.N.R., [1993] 1 C.T.C. 2440 at 2443.

       ⁴ This is not simply an extrapolation from the rule in Hodge's Case (1838) 2 Lewin 227; 168 E.R. 1136, applicable in criminal matters such, for example, as section 239 of the Income Tax Act where proof beyond reasonable doubt is required. It is merely an application of the principle that a penalty may be imposed only where the evidence clearly warrants it. If the evidence is consistent with both the state of mind justifying a penalty under subsection 163(2) and the absence thereof - I hesitate to use the words innocence or guilt in these circumstances - it would mean that the Crown's onus had not been satisfied.

I have obtained great assistance in this matter from two decisions of Strayer J. in Venne v. The Queen, 84 DTC 6247 and De Graaf v. The Queen, 85 DTC 5280. None of the cases I have mentioned were referred to by counsel.

At page 6256 in the Venne decision Strayer J. said:

       With respect to the possibility of gross negligence, I have with some difficulty come to the conclusion that this has not been established either. "Gross negligence" must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not. I do not find that high degree of negligence in connection with the misstatements of business income. To be sure, the plaintiff did not exercise the care of a reasonable man and, as I have noted earlier, should have at least reviewed his tax returns before signing them. A reasonable man in doing so, having regard to other information available to him, would have been led to believe that something was amiss and would have pursued the matter further with his bookkeeper.

[70]     I have concluded that this is not an appropriate case for a penalty under subsection 163(2). The AFE program was admittedly aggressive. Counsel submitted that Mr. Klotz was cavalier about checking the values. Cavalier may be an accurate enough expression. Counsel noted that he sought no independent advice and did not pay sufficient attention to the advice in the legal opinions that he examined to the effect that he should independently verify the appraisals.

[71]     Counsel's criticism of Mr. Klotz has some validity. He was careless about verifying the value. Nonetheless a penalty under subsection 163(2) for gross negligence is a punishment for reprehensible behaviour. Here he relied upon his financial advisor Mr. Brill. He had what on the face of it was an appraisal by a qualified appraiser. He had two legal opinions which, however qualified they might be, would be taken by the average layman as implicitly putting the imprimatur of two major law firms on the program.

[72]     In light of these considerations, I am allowing the appeal and referring the assessment back to the Minister for reassessment solely for the purpose of deleting the penalties under subsection 163(2).

[73]     I shall defer the issuance of the formal judgment for two weeks to permit counsel to make representations as to costs. The Crown has been successful on the issue of valuation, but not on the issue of personal-use property or penalties. Moreover, I should like to have some representations on the question of who should bear the costs of preparing 54 books of documents. Counsel are requested to communicate with the court with respect to a suitable method of making representations, whether in open court, by writing or by telephone conference.

Signed at Ottawa, Canada, this 13^th day of February 2004.

"D.G.H. Bowman"

Bowman, A.C.J.

CITATION:

2003TCC147

COURT FILE NO.:

2003-308(IT)G

STYLE OF CAUSE:

Frank Klotz v.    Her Majesty The Queen

PLACE OF HEARING:

Toronto, Ontario

DATES OF HEARING:

January 26 to 29, 2004 and February 3, 2004

REASONS FOR JUDGMENT BY:

The Honourable D.G.H. Bowman, Associate Chief Justice

DATE OF JUDGMENT AND AMENDED REASONS FOR JUDGMENT:

February 13, 2004

APPEARANCES:

Counsel for the Appellant:

Douglas H. Mathew Thomas Boddez L. Michele Anderson

Counsel for the Respondent:

David E. Spiro Arnold H. Bornstein Sointula Kirkpatrick

COUNSEL OF RECORD:

For the Appellant:
	Name:
	Firm:

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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