Introduction – Buy Low, Sell High Donation Arrangement and the Issue of Roher v the Queen
Over the past decade, there has been a flurry of CRA audit of "buy low, sell high" donation arrangements as well as subsequent appeals to the Tax Court of Canada. The basis for CRA's reassessment of a buy low sell high donation tax shelter is simple: the item donated by an individual donor had a lower fair market value than what was initially reported by the donor. However, various related legal and evidentiary issues were disputed and given answers by the Court as different buy low sell high donation schemes were litigated between taxpayers and the CRA.
One of the common issues that arises during the tax litigation of a buy low sell high donation arrangement is the admissibility of expert evaluation or expert appraisals of the fair market value of the donated items. The taxpayer in these tax cases would often present expert testimony from professional appraisers as well as supporting documents that support their preferred valuations. The recent Federal Court of Appeals case Roher v. the Queen addresses an evidentiary issue whether such evidence is admissible.
The facts of Roher v the Queen
The taxpayer, Mr. Roher, participated in a donation arrangement from 1998 to 2004 tax years. Between taxation years 1998 and 2004, Mr. Roher paid $383,937 into the program but claimed $2.3 million in donation tax credits.
After the CRA reassessed Mr. Roher and several other participants of this donation program, Mr. Roher was chosen as one of the lead litigants in a test case. Since the crucial facts regarding Mr. Roher’s appeals are substantially similar to the other participants.
Trial Judge’s Ruling on Evidence
At the trial level, the litigants submitted appraisal reports prepared by two art appraisers, Ms. Edith Yeomans and Mr. Charles Rosoff, as expert evidence. However, the admissibility of these pieces of evidence was challenged by the CRA on the ground that both Ms. Yeomans and Mr. Rosoff had been directly involved for several years in the art donation program. Specifically, they were hired by the promoters of the program to appraise individual prints to be used in the donation program.
More specifically, the CRA argued Mr. Rosoff’s expert report was inadmissible because Mr. Rosoff failed to include the literature and other materials he relied on to support his opinion. The CRA argued Ms. Yeomans’ report was inadmissible because Ms. Yeomans did not meet the threshold of impartiality, objectiveness, and independence. The issue of her impartiality was heard in a separate hearing known as voir dire. During the voir dire, the trial judge determined that Ms. Yeoman’s had a personal interest at stake because she proposed to give an expert opinion on her previously professional opinions given to the program. The personal stake lies in Ms. Yeomans' interest to protect her professional reputation and her future marketability as an art appraiser.
Furthermore, the trial judge made ruling on the admissibility of the appraiser’s working papers, which were not submitted to for discovery before the trial. As a matter of general procedural rule, any documents which are not submitted in the list of documents during the discovery stage of a trial cannot be included during the trial. The trial judge ruled that the opinion testimony of the appraisers would be limited to the content of the Appraisal Reports, which had long been disclosed to the CRA. However, the taxpayers cannot submit any supporting documents in which the appraisers relied on to produce their Appraisal Reports unless these documents have already been submitted to the CRA during the discovery stage of the trial. This ruling excluded the taxpayers’ ability to use the appraisers' previously unsubmitted working papers as exhibits during their examination in chief.
Court of Appeals' Decision
After the trial judge dismissed the appeal in favor of the CRA, Mr. Roher appealed to the Federal Court of Appeals regarding the trial judge’s ruling on the admissibility of Mr. Rosoff and Ms. Yeomans’ expert testimonies as well as the admissibility of the working papers.
The Appeals Judge's reasoning can be summarized as the following:
The Trial Judge is entitled to infer Ms. Yeomans lacked impartiality from the circumstances without directly putting this question to her. Facts such as her involvement with the donation scheme and the short amount of time elapsed between her original appraisal report and the trial support the conclusion that Ms. Yeomans had a personal interest in defending her appraisal report.
The time given to the taxpayer in preparing for discovery, as well as the notices given by the opposing counsel, supports the decision to exclude the working papers from the trial. The Court considers the taxpayer to have enough time and information available to analyze the issue and make their decision as to whether to include those documents for discovery.
The Trial Judge found issues with the methodology of Ms. Yeomans' appraisal report, which meant that even if supporting invoices and working papers were allowed, they would not help with issues of methodology. This bolsters the conclusion that to disallow the working papers and invoices of Ms. Yeomans’ appraisal report did not amount to a determinative error.
Advice – Retain Experienced Canadian Tax Litigation Lawyers
Regardless of whether the inclusion of expert evidence would have made a difference to Mr. Roher’s chances at winning the case, it is clear his chances of winning are further reduced by the miscalculation made at the discovery stage. Roher v. the Queen made it clear that if the Court considers a taxpayer appellant to have enough time to analyze the situation and make an informed decision at the discovery stage, the Court will not step in to help taxpayers to adduce evidence after discovery is over.
Tax litigation can be long and costly and is something to be avoided if a taxpayer can achieve his or her goals before litigation. However, if a taxpayer chooses to pursue an appeal to the Tax Court of Canada, then he or she would be well advised to retain an experienced Canadian tax litigation lawyer who will make sure every possibility is sufficiently considered to ensure the best chance of winning. Our experienced Toronto tax lawyers can guide you through every stage of your tax objection and tax litigation with the CRA.