It's often said that you get what you pay for -- and a trio of tax cases
confirm this maxim may also be true of tax shelters and the fair market value of
the property being donated.
The release of three Federal Court of Appeal decisions this week coincided
with Canada Revenue Agency's annual warning on certain tax shelters, such as
"gifting trust arrangements, leveraged cash donations, and buy low, donate high
arrangements" that are being aggressively promoted in these last few weeks of
the year as the deadline for donations to be claimed on 2005 income tax returns
approaches.
These shelters often involve a donation of property, such as medical supplies
or computer software, to a registered charity. According to one promoter, the
donor gets a receipt "equal to the appraised fair market value of the property
donated to the [charity]. The fair market value of the property has been
substantiated by an independent appraisal. A donor may request a copy of this
appraisal by contacting [the promoter]."
But just because you have an independent appraisal doesn't mean you are home
free when it comes to defending the fair market value before the CRA. The agency
has been aggressively challenging, and winning, many tax shelter cases in the
past few years on the basis of inflated valuations.
The three decisions released earlier this week by the Federal Court of Appeal
all involved art donations to charities. Each of the taxpayers, identified as
Nash, Tolley and Quinn, purchased a number of limited edition prints through CVI
Art Management, a promoter they learned of through their financial advisors. Mr.
Nash paid approximately $8,500 for about 85 signed and numbered prints. Ms.
Tolley bought 99 prints for slightly more than $8,000, and Ms. Quinn purchased
48 prints for $8,600.
Mr. Nash and Ms. Tolley kept one piece each, and donated the rest to charity.
All three received tax receipts indicating a fair market value of greater than
$20,000.
The CRA argued the donation receipt should be restricted to the lesser
amounts actually paid to purchase the prints, as this was indicative of fair
market value.
The Tax Court of Canada judge had dismissed the CRA's argument, agreeing with
the taxpayers' experts regarding fair market value of the prints. This week,
however, the Federal Court of Appeal reversed all three lower court decisions
and ruled the taxpayers were restricted to claims equal to the amount they paid
for the prints.
The Court of Appeal said the lower court made a "palpable and overriding"
error in finding the "fair market value of property to be three times the amount
paid for the property with no credible explanation."
"Buy low, donate high" tax shelters had almost entirely, been eliminated
under new tax legislation introduced in December, 2003, to effectively block
these types of arrangements. However, the current crop of shelters claim they
are unaffected by the legislation's new proposed rules.
Independent tax and legal advice should be sought before investing in any
donation scheme. The cases released this week demonstrate the fair market value
of donated property is always a contentious issue, and may be aggressively
attacked by the CRA if the agency feels such a value is inflated.
David Chodikoff, the head of the tax litigation group at Goodman and Carr LLP
in Toronto, says these new laws are "unlikely to put a halt to the donation tax
shelter plans. Such shelters have an appeal and promoters will continue to
exploit that interest to recruit participants.... Only when a sufficient number
of taxpayers go to court and lose ... [is it] probable that we will not see
these types of tax shelters again."