What’s Fair?

Not for Profit Law ColumnOne of the far corners of charity law is the fair market value of donations. For economists, the classic definition of fair market value is how much, in an open market, a knowledgeable, willing, and unpressured buyer would pay a knowledgeable, willing, and unpressured seller for a property. In the context of charitable donations and the Income Tax Act (ITA), it is a bit more complicated than that.

Since the advent of preferential ITA treatment for donations to charities, there have been numerous court cases both about what constitutes a donation and, when a gift isn’t of cash, how it should be valued. At common law, a gift has to be a voluntary transfer of property without consideration (i.e., without receiving anything of value in return). For purposes of charitable donations, it has long been established that getting a tax credit or deduction for a donation does not constitute consideration. That said, a credit or deduction for a donation may be disallowed where a transaction is a sham to enrich taxpayers, rather than a bona fide gift.…a credit or deduction for a donation may be disallowed where a transaction is a sham to enrich taxpayers, rather than a bona fide gift.

There is some ambiguity in the case law with respect to valuation of donation property obtained in bulk and assessed as individual items for purposes of determining how much should be receipted when it is gifted. As well, in 2013, the law was changed (with some retroactive application), so that in certain cases where consideration was received by a donor, he or she could still claim a reduced credit or deduction. Such practice is commonly known as split-receipting. The credit or deduction will equal the value of the gift less the value of the consideration received. This allows for situations such as where a property with a mortgage on it is given to a charity to still be eligible for preferential tax treatment. Under the old rule, because the assumption of the mortgage by the charity was consideration the transaction did not qualify as a gift.

But recent legislative measures have not all been favourable to donors. Owing to the proliferation of dubious donation schemes in the early 2000s where a donor often claimed fair market value far exceeding the original cost paid for property, section 248(35) was added to the ITA. The subject matter of these arrangements included everything from time-shares to pharmaceuticals to comic books. The schemes had to register as tax shelters but were not in-and-of-themselves illegal. Section 248(35) deems a generally more modest value (essentially the cost of acquisition) for donations made as part of a tax shelter gifting arrangement or in certain situations where the timing or other factors indicated that the property was acquired with a view to donating it.

Administratively, the Canada Revenue Agency (CRA) does not expect the cost of trinkets, or other items of marginal value provided to a donor in conjunction with the gift, to be deducted when claiming a donation credit or deduction.The opportunity to assert that the fair market value of property exceeds the price that had been paid for it can stem from any of a number of causes: inflation; significant appreciation of a property owing to change in the market, such as for a work of art after the death of the artist; and, more problematic, bulk purchase of items that were valued individually for purposes of assessing the worth as a donation.

The third approach has sometimes been used in widely-marketed schemes to justify a credit on charitable gifts that is considerably more than the cost paid by an individual acquiring the property for use in the scheme. There is some ambiguity in the case law with respect to valuation of donation property obtained in bulk and assessed as individual items for purposes of determining how much should be receipted when it is gifted. In a limited number of cases, often involving works of art and sometimes entailing valuation by the Cultural Property Export Review Board (Review Board), the courts have allowed claims for somewhat more than the cost of acquisition.

Section 248(35) was generally successful in putting an end to such schemes for properties other than art.

Which brings us to 2017 and efforts to donate a collection of Annie Leibowitz photographs to the Art Gallery of Nova Scotia. Leibovitz is perhaps best known for her many celebrity portraits, which often appear in magazines such as Rolling Stone and Vanity Fair.  According to reports in The Globe and Mail, more than 2000 of Leibovitz’s photographs were obtained by a Torontonian at a cost of about U.S. $4.75 million. As part of an initiative to have the works donated to the Art Gallery of Nova Scotia, several attempts were then made to have the collection certified as cultural property through the Review Board and to have them valued at around $20 million for purposes of gifting them to the gallery.

In July 2017, the Review Board announced that major portions of the collection did not meet the criteria for works of outstanding significance or national importance. Thus the works are not cultural property. Because of that, valuation of the collection as a gift to a charity or other qualified donee falls under usual ITA rules, and section 248(35) will likely apply to reduce the value for receipting purposes to the original cost.

At common law, a gift has to be a voluntary transfer of property without consideration (i.e., without receiving anything of value in return). Four years ago, when prospective donation of the collection was first raised, the ITA measures targeting gifting arrangements and the provisions of the Cultural Property Export and Import Act (which mandates existence of the Review Board) hadn’t been fully reconciled so there was uncertainty as to which valuation would prevail. The CRA had historically relied on the Review Board fair market value assessment. In its 2014 Budget, however, the government changed that and moved to deem the value of a gift of certified cultural property to be no greater than the donor’s cost of the property, if it was acquired under a gifting arrangement that is a tax shelter. The CRA’s guidance Gifts and the Income Tax 2016 has been updated to reflect that change. Now even if something qualifies as cultural property (which, in the end, the Review Board found this photography collection didn’t qualify), where it is part of a gifting arrangement, it is valued for donation purposes at the cost of acquisition, not what would generally be considered the fair market value.

So, with having the Leibovitz collection declared cultural property no longer a possibility, a regulatory loophole that has led to so much abuse appears to be fully and finally closed.

Authors:

Peter Broder
Peter Broder is Policy Analyst and General Counsel at The Muttart Foundation in Edmonton, Alberta. The views expressed do not necessarily reflect those of the Foundation.
 


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