Over the last decade or so, thousands have reduced their tax bills by millions of dollars by purchasing prints, paintings, comic books, medical supplies and other items at one price and then donating the items to a charity at another, higher price. The CRA has aggressively attacked these donation arrangements to try to claw back the tax. Will it succeed? It might, if Canada (Attorney General) v. Nash, 2005 FCA 386, is any indication.
In Nash, the Federal Court of Appeal unanimously allowed the government’s appeal even though it meant overturning a finding of fact by the trial judge as to the fair market value of the prints donated by the appellants (see 2005 TCC 651). Ordinarily, appeal courts do not overturn findings of fact made at the trial level. In Nash, the trial judge had accepted expert evidence given on behalf of the appellants; moreover, the Crown did not call any such evidence. Nevertheless, the Federal Court of Appeal held that
[37] The Tax Court Judge made two palpable and overriding errors. The first was to accept Ms. Tropper’s [the expert witness’] valuation evidence based on the retail market for individual prints when there was a normal market for the groups of prints, the specific property he was required to value. The second was to find the fair market value of the property to be approximately three times the amount paid for the property with no credible explanation for the apparent three-fold increase.
The Court specifically approved the “self-evident” logic used by Chief Justice Bowman in Klotz v. The Queen, 2004 TCC 147, a Tax Court appeal with facts similar to those in Nash:
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.
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.
Nash represents a set-back for donation tax shelters and their participants. It illustrates just how far some judges are willing to go to curtail certain kinds of tax shelters.
