“Fair market value” is an important concept in tax law. That phrase, FMV, is used throughout our Income Tax Act, appearing literally hundreds of times, from the rules to be used to value inventory (“lower of cost and fair market value”) to the determination of the appropriate amount that a charity should put on a donation receipt when property is donated “in-kind” to the charity.
How fair market value is actually established, however, can be the subject of some disagreement, as we learned in a decision released by the Tax Court this week concerning the appropriate value to be ascribed to wine that was donated to two Ottawa charities.
In 2005 and 2006, the taxpayer donated 21 bottles of wine, consisting of 19 different labels and vintages, for use in charity wine auctions held to benefit the Ottawa Food Bank and the Ottawa Chamber Music Society.
When it comes to the valuation of donations of property to charity, the Canada Revenue Agency has stated that fair market value means “the highest price that a property would bring, expressed in dollars, in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.”
The charities appraised the donated bottles’ fair market value at $23,600. The CRA reassessed the taxpayer using a value of $4,700, based on the actual selling prices of the wines at the charity auctions.
At first glance, valuing wine may seem quite straightforward. Just walk into your local wine or liquor store and see how much the wine costs. But the issue with the donated wines was that none of them were available at the Liquor Control Board of Ontario (“LCBO”).
The trial, which lasted four days, involved duelling experts. The taxpayer’s expert, an accredited sommelier, was a qualified appraiser of personal property, specializing in wine. The CRA’s expert was also a qualified appraiser of personal property who specialized in fine art.
It seems the taxpayer’s expert didn’t have a lot respect for the CRA’s expert, even going so far as to challenge, “in rather strong terms,” whether the CRA’s expert was “even competent or qualified” to value wine and suggesting that she had breached the applicable rules of their accrediting body.
The judge dismissed these criticisms, calling those remarks “intemperate, unnecessary and uncalled for … entirely unfounded and without any merit. It appeared to be little more than the folly of the novice up against the experienced.”
The taxpayer’s position was that the fair market value of a bottle of wine in Ontario should be “the amount that would have been charged for each bottle had it been ordered through LCBO’s Private Ordering program.” The LCBO’s Private Ordering pricing methodology starts with the actual cost to the LCBO to buy the particular wine in the global wine market, either directly from the vineyard or from a reseller. To that are added markups, levies, taxes, tariffs, duties, freight transportation costs and so forth to arrive at the fair market value.
Since the wines in question were not otherwise available in Ontario, the taxpayer’s expert maintained that using this methodology or pricing was the appropriate way to determine the price or fair market value which an Ontario resident would have to pay if they purchased the wine in Ontario.
While the taxpayer’s expert was unable to locate data on the comparable sales prices of these same (or comparable) wines for 2005 and 2006, she used 2016 data, being list prices from an online wine source website whose sellers are wine sellers around the world. She found that the total of the global wine sellers’ 2016 prices for these wines was approximately $5,500. Applying her understanding of the LCBO’s pricing methodology to this amount, she arrived at a total 2016 fair market value of approximately $17,200.
The CRA’s expert believed an entirely different valuation methodology was appropriate to value the wines in question which was to simply rely on known sales from 2005 and 2006 wine auctions available to the taxpayer/donor to sell her wines as a resident of Ontario. She provided data to the court on actual auction sales in the U.S. in or near those years of the same label and vintage of the donated wines. The CRA’s expert arrived at a total fair market value for the taxpayer’s donated wines of about $2,650 in 2005 and 2006. The judge attributed the difference between the CRA’s $2,650 valuation (which was based on 2005 and 2006 auction sales) and the taxpayer’s $5,500 valuation (based on aggregate list prices at global merchants in 2016) to appreciation in the price of the wines over ten-plus years.
The judge focused on the true meaning of fair market value, citing a seminal 1973 case in which FMV can be defined as “the highest price an asset might reasonably be expected to bring if sold by the owner … in an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand.”
In reality, however, because of Ontario’s regulated liquor market, an Ontario resident wanting to sell their wine only has three options: LCBO auctions, non-LCBO global consignment auctions and sellers, and Ontario charity auctions. Indeed, this third method was how the taxpayer chose to dispose of her wines.
The judge concluded that since “there are actual, normal, functioning, lawful, and available real markets in which an Ontario resident wanting to obtain as high a price as they can for their bottle of wine can participate, and that are open to Ontario and non-Ontario purchasers, the Court sees no need to consider creating a proxy market that is fictional and hypothetical and does not in fact exist.”
The judge, ruling in favour of the CRA, dismissed the taxpayer’s valuation, calling the use of the LCBO Private Ordering pricing methodology, in the way the taxpayer in this case used it, “devoid of common sense and out of touch with ordinary commercial reality.”