Determining Fair Market Value In “art Flip” Appeals

There are currently a number of “art flip” appeals making their way through the Canada Revenue Agency’s Appeals Division and the Courts.

Generally speaking, an art flip is buy-low, donate-high scheme whereby a taxpayer purchases artwork at a low cost, donates the artwork to a charity and then the charity issues a donation receipt for a significantly higher appraisal value. The result is that the taxpayer saves more on income tax than his or her cost for the artwork. Similar programs have also been promoted to donate other types of goods such as computer software or medicine.

The proposed subsection 248(35) of the Income Tax Act is aimed at preventing this type of scheme, such that property owned by the taxpayer for less than three years prior to the donation (or less than ten years if the property was purchased for the purpose of making a charitable donation) has a deemed fair market value of the cost to the taxpayer. This legislation, however, only applies to donations made after December 5, 2003.

With respect to donations of art made prior to December 5, 2003, there has been a series of cases heard by the Courts to determine what the fair market value of the art work should be. The Canada Revenue Agency’s position is that they do not accept the increase in fair market value.

In April of 2006, the Supreme Court of Canada declined to hear appeals of several Federal Court of Appeal decisions that held that the fair market value of the donated prints should be based on the donor’s cost of purchasing the prints instead of the amount stated on the donation receipt (Canada (Attorney General) v. Nash, 2005 FCA 386 (“Quinn, Tolley and Nash”) and Klotz v. R., 2005 FCA 158 (“Klotz”)).

Notwithstanding the Federal Court of Appeal’s decisions in these four cases, another Federal Court of Appeal decision, Marechal, M.P. v. The Queen, 2005 FCA 124 (“Marechal”), suggests that, in some circumstances, the fair market value of donated artwork may be higher than the cost to the donor. In this case, and although the appeal was dismissed, the Tax Court of Canada accepted that the fair market value of the sculpture was higher than the donor’s cost.

The Marechal decision has not been appealed to the Supreme Court of Canada. As the Quinn, Tolley, Nash and Klotz cases will not be heard by the Supreme Court of Canada, these conflicting decisions are equally binding on lower Courts. It therefore appears that there is still a good argument to be made that the fair market value of donated artwork may be higher than the cost to the donor.

For more information on Tax Law, contact Melodie Lind at:
[email protected]
(250) 861-1210

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