Feb 2019 Charity & NFP Law Update
In two recent decisions, the Tax Court of Canada considered claims from taxpayers who had participated in donation programs that involved inflated fair market values (“FMV”) for gifts in kind to charities. In Morrison v The Queen, released on November 23, 2018, the court considered a reassessment appeal by Mr. Morrison, a taxpayer who had participated in pharmaceutical donation programs (the “Pharma Programs”). Although the facts are complex, the Pharma Programs generally involved alleged pharmaceutical gifts in kind to a registered charity, with charitable receipts being issued to the donors which became the subject of a reassessment. In this regard, the court found that the values on the charitable receipts had greatly exceeded the FMV of the gifts in kind.
Mr. Morrison argued that he was unfamiliar with how the Pharma Programs worked and with “what went on behind the curtain.” He argued that, since he had no such knowledge, he should not be required to prove he was entitled to the donation credit he had claimed and, instead, that the burden should be on the CRA since it had made assumptions about how the Pharma Programs worked. However, the court held that Mr. Morrison had consciously chosen to participate in the Pharma Programs without much knowledge of how they worked, and that “by participating in the [Pharma] Programs without further inquiry, the Appellants accepted the risk that the facts behind the curtain were not what they expected them to be.” While the court found that Mr. Morrison had not made a gift in kind, it allowed him to claim a charitable donation tax credit for a $15,350 cash gift he had made to one of the subject charities.
In Kaul v The Queen, released on January 18, 2019, the court considered the FMV of artwork that was purchased and donated through an art donation program that was marketed as a tax savings investment vehicle (the “Art Program”). Through the Art Program, individuals bought sets of 11 prints produced for $20 – $40 each at an inflated price of $3,500 – $3,900, and immediately donated 10 of the prints to a charity. Appraisals were arranged through the Art Program, with the prints being appraised at least three times higher than the donors’ acquisition price. Charitable receipts given to the donors reflected the inflated appraised amount.
Considering the FMV of the donations, the court reviewed the evidence and found that the FMV of the prints at the time of donation had not increased from the purchase price paid by the donors. It agreed with its previous decision in Klotz v The Queen, quoting it and stating that it was “devoid of common sense and out of touch with ordinary commercial reality” for the FMV of the prints to increase threefold during the short span between the donors’ purchases and subsequent donations. It therefore dismissed the appellants’ claims and ordered one appellant’s matter be sent back for reassessment.
These two cases are neither the first instances of individuals attempting to inflate the FMV of gifts in kind in order to receive a higher tax credit, nor are they likely to be the last. Nonetheless, these cases illustrate the importance of conducting proper valuations for gifts in kind to accurately reflect the FMV in charitable donation receipts, and illustrate that the CRA continues to keep a close eye out for donation receipts with inflated values.