Under the Income Tax Act, a taxpayer may claim a charitable donation tax credit for a gift made to a Canadian registered charity, if such gift is supported by an official donation receipt issued by the charity. According to Canada Revenue Agency's Summary Policy CSP-F02, the fair market value of a gift (used to determine the eligible amount of a donation receipt) represents "the highest price [...] that a property would bring 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."
In a recent case from the Tax Court of Canada, the Court was tasked with drawing a conclusion as to the disputed fair market value of certain gifts-in-kind. In De Santis v. The Queen, Mr. De Santis appealed from reassessments in which the Minister of National Revenue (the "Minister") reduced the value of the bottles of wine that he had donated to a charity in 2009, 2010 and 2011.
The bottles of wine had been appraised by a certified wine appraiser and sommelier (the "Appraiser"), for the purpose of issuing a charitable donation receipt to Mr. De Santis. The Appraiser valued three bottles of wine donated by Mr. De Santis in 2009 cumulatively at $1,050, three bottles of wine donated in 2010 cumulatively at $1,100, and seven bottles of wine donated in 2011 cumulatively at $8,550. Each year, the charity used the bottles of wine to fundraise by selling the bottles together (i.e., in lots) at its annual premium wine auction (the "Auction").
In the notices of reassessment, the Minister reduced the total value of the bottles of wine by a factor of 3.2, thereby reducing the eligible amount of the gifts to $328, $344, and $2,672 in 2009, 2010, and 2011, respectively.
For each of the relevant years, the auditor found that the fair market value provided by the Appraiser was, on average, more than three times higher than the amounts paid for the bottles by bidders at the Auction.
Further, the auditor disagreed with the appraisal method used by the Appraiser on the basis that:
- The Appraiser took into account the international wine market, rather than the most relevant market – that of the Auction at which the wine was sold; and
- Assets sold in groups devalues the assets, such that the assets must be valued together at a discount. Accordingly, each year the donated bottles of wine should have been appraised together (as a discounted lot) rather than as individual bottles.
In his decision, Justice Hogan cited Hickman Motors Ltd. v. Canada, in which the Supreme Court of Canada established the principle that in challenging an assessment, the initial onus is on the taxpayer to "demolish" the Minister's assumptions in support of the assessment. If the taxpayer is able to do so, the burden of proof shifts to the Minister to establish the correctness of the assessment on a balance of probabilities. One of the ways the taxpayer can discharge his or her burden is by producing credible and uncontradicted evidence that one or more of the Minister's assumptions was incorrect.
To discharge this burden, Mr. De Santis sought to prove the following assumption of the Minister to be incorrect:
(d) As of the date of the donations, the fair market value of the wines donated by the appellant was at most $328 for the wines donated in 2009, $344 for the wines donated in 2010 and $2,672 for the wines donated in 2011.
Mr. De Santis disputed the assumption of the Minister on five grounds:
- The Minister selectively read and misinterpreted the Appraiser's appraisal procedures;
- The Minister did not consider the Société des alcools du Québec mark-up representing approximately 50% of the retail price that applies to importing foreign wine into Quebec;
- The Minister erred in concluding that the Appraiser failed to adjust the value of the bottles on account of the fact that they were auctioned in lots, since Mr. De Santis donated the bottles individually and was not involved in the decision to group the bottles for the purpose of the Auction;
- By failing to identify the property to be appraised (i.e., the individual bottles of wine), the Minister incorrectly found a discount factor of 3.2 for each bottle of wine; and
- The relevant market to consider in valuing the fair market value of the wine should not be the Auction on the basis that:
(a) bidders were required to pay $50
to take part in the auction;
(b) the bottles of wine were auctioned in lots at the charity's discretion; and
(c) the charity was obliged to award all of the lots to the successful bidder.
Justice Hogan found that Mr. De Santis rebutted the Minister's assumption. Since the Minister did not establish that the assessments were well-founded or contradict the evidence of Mr. De Santis, Justice Hogan allowed the appeal and ordered that the assessments at issue be vacated.
This decision can be distilled into two critical statements about determining fair market value for the purpose of issuing a donation receipt:
- A charity's decision to bundle and auction gifts-in-kind donated by a single donor does not automatically result in a reduction of the fair market value of a gift; and
- When gifts-in-kind are auctioned by a charity, the auction may not necessarily be the appropriate market for determining the fair market value of the gift.
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