By: Adam Aptowitzer
A recently released decision of the Tax Court of Canada illustrates some of the problems with donations of gifts in kind and their valuation.
Donors typically accept the valuation on receipts as accurate. For donations of cash this is not a problem – particularly where the donation is one of cash. However, where the donation is a gift in kind (i.e. a gift of an item rather than cash) the valuation of the item – particularly for unique items – is always open to debate and attack.
This is so because gifts in kind must be appraised in order for the proper value to be recorded on the receipt. Appraisals as a matter of necessity, are a question of opinion. They require the appraiser to opine on the price at which an arm’s length buyer would have purchased the item being donated at the time it was donated.
The Courts have previously had the opportunity to opine on appraisal methodology. The most important case on this point related to the ‘art flips’ that were prominent years ago. There, the Federal Court of Appeal cited older law to say that fair market value is determined with reference to the highest price a knowledgeable buyer would pay in a normal market transaction applicable to that item. In application though the results can be complicated.
In a recent case of the Tax Court of Canada a wine collector donated wine to certain Ottawa charities. The question before the Court involved the valuation of the donated wine. As required by the Income Tax Act, the charities attempted to secure reliable valuations for the gifts. The CRA challenged these valuations and reduced the acceptable amount to approximately 20% of the amount used by the charity.
Much of the decision is an interesting dive into the intricacies of the Ontario wine market. That was not, strictly speaking, necessary. The burden to prove the receipts were accurate rested with the taxpayer. Justice Boyle decided early in the decision that the taxpayer’s expert simply did not have the data to discharge this burden. Consequently, the decision could have ended there, but Justice Boyle provided additional reasons to give guidance to others (and there are apparently several) who are waiting in the wings to fight over disallowed receipts regarding the donation of wine.
The sale of alcohol in Ontario is restricted and can only be purchased through the LCBO. This is true for rare wines as well, which can be purchased through at auction via the LCBO. The Court determined that given that is how alcohol can be bought and sold in Ontario that was the relevant market to be used in determining the valuation of wine donated to an Ontario charity.
The valuation of wine specifically in Ontario is interesting, given that wine and spirits are sold through provincially owned stores. In other words, the market is controlled but not closed and so, the legal restrictions must be taken into account when determining the appraisal.
The implication of Justice Boyle’s reasoning is interesting. Not only does an appraisal necessarily require an in-depth understanding of a complicated, government controlled market, but it also may result in a different valuation in different provinces (given that alcohol regulation changes from Province to Province). For example, a donor in Alberta does not need to engage in the LCBO process to secure rare wine and so the commercial reality that exists in Alberta is different than in Ontario hence a different appraisal methodology and (at least theoretically) a different appraisal value.
In Canada there are other examples of situations where the market is less than ideal for the determination of value. For example, we have seen the donation of egg production licenses and the opening of a regulated marijuana market will undoubtedly engender new questions.
The fact that the Court looked at wine is instructive for donors of other novel items. In our own practice, we have been involved in the donation of multiple unique items – everything from flight simulators to name rights and their appraisal is difficult. it is clear that the appraisers that are retained to assess the value of the donated item must take into account the commercial realities that exist in the specific market in which the gift is taking place. Moreover, evidence must be gathered and meticulously maintained should the CRA wish to challenge the appraisal in later years. In all of the circumstances, Drache Aptowitzer lawyers have significant expertise in the subject and would be happy to help you should you have any questions about these types of donations.
 2005 FCA 386
 McCuaig Balkwill v. HMQ 2018 TCC 99