The cartoonist Andrew Donato donated his cartoons and claimed a tax credit for the fair market value of them. The CRA didn’t dispute the amount of the credit he could claim, but it took the position that he had realized a capital gain on making the gift. The Tax Court agreed with the CRA in Donato v. The Queen, 2009 TCC 590.
What I find interesting about the case is the light it casts on the art-flip schemes. Mr. Donato tried to claim that the cartoons were personal use property because, if they were, he would not be required to realize any gains on donations of individual cartoons that were valued at less than $1,000. Mr. Donato would win the tax game if he could make a donation, claim the credit and not have to realize any taxable gains as a result of making the gift. The art-flip shelters depended on this same aspect of the personal use property rules: a taxpayer could win the game only if he paid an amount for the art, he donated it at a higher amount for tax purposes and he was not required to recognize any of the gain for tax purposes. The latter was possible only if the property was personal use property with a value under $1,000.
Mr. Donato went to some lengths to attempt to ensure that the property donated would be regarded as personal use property (see ¶¶17–30). Nevertheless, the Court found that the cartoons could not be characterized as such.
[41] In determining whether the cartoons are personal-use property, the relevant inquiry is whether the cartoons were used primarily for the personal use or enjoyment of the appellant or his spouse.
[42] The conclusion that I have reached is that the property donated to Brock University in 2001 was not personal-use property of the appellant.
[43] The creation of the cartoons by the appellant was for the purpose of fulfilling his contractual commitment to Sun Media to provide a daily cartoon for use in its newspaper. This purpose is commercial rather than personal.
[44] Over the years, a few of the cartoons were subsequently used for personal purposes. These uses included: gifts to relatives or friends, the display of a few cartoons in the home, a single use by the Donatos in a trivia type game with friends in their home, and trading cartoons with other cartoonists for their work. There was very little, if any, evidence linking these uses to cartoons that were donated in 2001, and in any event the personal use was quite minor. …
[50] Based on the evidence, the tangible works of art were used in connection with the Sun Media contract, and this was the primary use of this property. Whether the appellant also used intellectual property rights is not the appropriate question.
The Court found in favour of the Crown on this point, then, but the taxpayer did not go away empty-handed. The CRA had tried to reassess the taxpayer’s 1999 taxation year beyond the normal reassessment period on the ground that he had made a misrepresentation by treating the cartoons as personal use property.
The Court had little difficulty disposing of this argument. It is trite law that taking a filing position for which a reasonable argument can be made will not obviate the protection of the statute bar. The CRA cannot reassess beyond the normal reassessment period merely because it disagrees with a filing position taken by a taxpayer. While the Court disagreed with Donato about the characterization of his cartoons as personal-use property, it did not think his “error” attributable to neglect or carelessness, and so the reassessment for the barred year was vacated.
