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Mother Bruno knows best – Weighing the evidence in tax appeals

In my recent blog post on the Newmont Canada Corporation decision I examined the importance that the Federal Court of Appeal attached to credible evidence put forward by taxpayers in tax appeals. The recent decision of Justice Woods in the Tax Court in Bruno v. The Queen is a good illustration of a fair and balanced approach to weighing that evidence.

The taxpayer, Mrs. Bruno, had a business that specialized in supplying custom window coverings. During the 2007 and 2008 taxation years she employed two of her children in the business on a part-time basis and paid them (in the aggregate) $18,000 and $7,000, in each respective year, for their services.

Justice Woods summarized the evidence as follows:

[6] In the 2007 taxation year, Ms. Bruno reported income from the business in the amount of $11,944. In the 2008 taxation year, she reported a loss from the business in the amount of $16,963.

[7] Ms. Bruno’s two children were 15-16 and 13-14 in the years at issue and helped out in the business on weekends and holidays.

[8] According to Ms. Bruno’s evidence, the younger child did less skilled tasks such as cleaning and answering phones, and the older child did mainly clerical work. Both children also spent time learning sales.

[9] Ms. Bruno entered into evidence a summary of the hours worked and wages earned by the children. Wages were payable at the rate of between $10 and $12 per hour. The summary showed that the children generally worked store hours on both weekend days during 2007 and on one weekend day during 2008, as well as on holidays in both years. The reduction in the hours worked in 2008 was explained by Ms. Bruno on the basis that the business was not doing as well in that year.

[10] The wages were not paid by cheque. Instead, Ms. Bruno paid for some of the children’s personal expenditures which in aggregate are approximately equal to the wages shown on the summary. According to Ms. Bruno’s testimony, the expenditures were luxury items that the children chose to purchase out of the money that they had earned. A list of the expenditures with a brief description was kept by Ms. Bruno.

[11] Ms. Bruno stated that her accountant advised her that she could not take a deduction for expenditures on the children’s basic needs, but that she could take a deduction for luxury items. She said that she followed this advice and kept track of the expenses that would qualify.

[12] Ms. Bruno testified that she could veto any of the children’s purchases that were inappropriate but that she usually approved them.

The Crown’s position was short and to the point:

[15] At the outset, I would comment that the Crown did not argue that the wages were unreasonable based on the services performed and there was virtually no cross-examination of Ms. Bruno on this point. I will therefore accept that the amounts are reasonable.

[16] The Crown argued that the expenditures are not deductible because they are personal or living expenditures of Ms. Bruno and the children did not have sufficient discretion over the funds.

Justice Woods dismissed the Crown’s arguments that the children did not have sufficient discretion over the application of the funds:

[22] As for the Crown’s argument that the children did not have sufficient discretion over the funds, this argument is based on the decision of Beaubier J. in Bradley v The Queen, 2006 TCC 500, 2006 DTC 3535. Paragraph 9 of that decision reads:

[9] But in a related family, parent-child situation, payment must be made and deposited as it would be to a stranger. The payee must receive and control the alleged payment in his or her name and be able to use it for his or her benefit without any further control by the payer. That did not happen in this case.

[23] This comment suggests that the children must have complete discretion over the expenditures made. I would respectfully disagree with this and note that Bradley is not a binding precedent since it was an informal procedure case. I see nothing wrong with parents having a veto over expenditures made by their children.

Her conclusion on this point seems unimpeachable. There is little merit in the suggestion that a minor child must have entirely unfettered discretion as to what to do with his or her earnings in order for those amounts to constitute the child’s income. Would it be any less the child’s income if the parents could veto a decision by the minor to purchase a pit bull or pay for hang-glider lessons?

On the broader issue whether wages paid to children were deductible, Justice Woods relied upon the Symes decision of the Supreme Court of Canada:

[19] In considering the interplay between s. 18(1)(a) and (h), the majority decision in Symes concluded that the prohibition for personal expenditures in s. 18(1)(h) does not apply to an expenditure that was laid out for the purpose of earning income. Justice Iacobucci stated, at page 6014:

Upon reflection, therefore, no test has been proposed which improves upon or which substantially modifies a test derived directly from the language of s. 18(1)(a). The analytical trail leads back to its source, and I simply ask the following: did the appellant incur child care expenses for the purpose of gaining or producing income from a business?

[20] Accordingly, if a taxpayer incurs an expense for the purpose of gaining or producing income from a business, the deduction will not be prohibited pursuant to s. 18(1)(h) on the basis that it also has a personal benefit to the taxpayer.

[21] Applying this principle to the facts in this case, if the children are owed wages in reasonable amount, a deduction may be claimed if the wages are paid in the form of purchasing luxury personal items chosen by the children.

Justice Woods then turned to what was undoubtedly the most difficult aspect of this case: weighing and assessing the taxpayer’s evidence.

[24] Turning to the facts of this case, the difficulty that I have with Ms. Bruno’s argument is that the evidence about the expenditures was not sufficiently detailed for me to be satisfied, even on a prima facie basis, that all the expenditures were made for the children’s benefit, let alone that they were for luxury items.

[25] The evidence concerning the nature of the expenditures consisted mainly of Ms. Bruno’s oral testimony and the list that she prepared. As for the oral testimony, it is self‑serving and not sufficiently detailed for me to be satisfied on most of the expenditures. As for the accounting records, a great many of the descriptions of the expenditures were simply too general to be of great assistance.

[26] Based on the evidence as a whole, I am satisfied that some of the expenditures are luxury items for the children’s benefit. However, the evidence is not detailed enough for me to determine which items qualify. It is appropriate in these circumstances, where the appeal is governed by the informal procedure, for the Court to make a rough estimate. On that basis, I propose to allow a deduction for 50 percent of the amounts claimed.

On the one hand she accepted that the services were provided; that the children’s labour actually constituted a tangible benefit to the business. On the other hand the taxpayer had not put forward a sufficiently strong case to persuade Justice Woods that there was not an element of personal benefit to the parents. As a result she split the difference and allowed 50% of the salary expenses claimed.

While the Bruno decision is an informal procedure case and involved relatively small amounts, in my view it clearly illustrates the difficulty a trial judge has in assessing the evidence of a credible witness dealing with difficult or imprecise facts. It further demonstrates the importance of careful preparation of witnesses and the documentary evidence that must be introduced. Finally, it shows once more that counsel must have a finely-tuned ear to anticipate and deal with the types of issues that will likely concern the trial judge.

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Mother Bruno knows best – Weighing the evidence in tax appeals

FCA: Trial court cannot ignore taxpayer’s evidence without good reason

The decision of the Federal Court of Appeal in Newmont Canada Corporation v. Canada delivered July 27, 2012 was primarily concerned with an unsuccessful attempt by the taxpayer to write off the principal amount of a large loan.  What makes the case quite interesting, however, is a side issue concerning the taxpayer’s claim to write off accrued interest on the loan.  That is where the Federal Court of Appeal parted company with the Tax Court of Canada and provided a useful reminder about the importance of evidence in tax appeals.

The interest in question arose in the 1988, 1989 and 1990 taxation years.  The CRA auditor allowed a portion of the interest expense:

[173]  During the course of the CRA audit, [the taxpayer] provided the CRA auditor, Mr. MacGibbon, with the details of the entries recorded in its general ledger account 2101 between August 1, 1989 and the end of May 1990. [The taxpayer] used this general ledger account to record amounts due from Windarra, including accrued interest on the Windarra Loan.

[174]  Mr. MacGibbon testified that [the taxpayer] did not provide him with any books or records for periods prior to August 1, 1989.

[175]  Based upon his review of the general ledger for account 2101, Mr. MacGibbon was able to identify entries totalling $183,336 that recorded interest income in respect of the interest accrued on the Windarra Loan. As a result, he allowed a deduction under subparagraph 20(1)(p)(i) in respect of the accrued interest.

While it is not clear why the earlier records were not produced, it is a reasonable inference that they were simply misplaced; they related to periods 20 or more years prior to the trial, which was held in 2009.

The taxpayer’s evidence was simple and direct:

[176]  The Appellant argued that the Minister understated the subparagraph 20(1)(p)(i) deduction by $156,888. It arrived at this number by performing the following calculation:

First, it determined the amount of accrued interest as at December 31, 1989 as follows:

a. The amount shown on the balance sheet at December 31, 1989 in respect of the Windarra Loan: $8.513 million

b. Less: the principal amount of the loan at December 31, 1989: $8.25 million

c. Equals the amount of accrued interest as at December 31, 1989: $263,000.

The Appellant then compared the $263,000 with the amount of interest income Mr. MacGibbon had calculated for the periods prior to 1989, namely $106,112.

[177]  It is the Appellant’s position that the difference between $263,000 and $106,112, which is $156,888, represents additional accrued interest income that was included in the income reported in [the taxpayer’s] 1988 and 1989 income tax returns.

[178]  During his testimony, Mr. Proctor summarized the Appellant’s argument as follows: “Because we have it on the balance sheet and, since debits must equal credits, it must have been on the Income Statement and we did not adjust it in arriving at net income for income tax purposes. For financial statement purposes it must be in the net income for income tax purposes.”

The Tax Court Judge rejected the taxpayer’s evidence:

[181]  I cannot accept the Appellant’s argument. [The taxpayer] could have recorded the offsetting amount as interest income. Alternatively, it could have recorded the offsetting amount on a balance sheet account such as a deferred revenue account or a reserve account. The only way to determine how the offsetting amounts were recorded in 1988 and the first half of 1989 would be to review the relevant books and records. Unfortunately, the relevant books were not provided to either the Minister or the Court.

[182]  The only evidence before the Court of accrued interest being included in [the taxpayer’s] income was in the working papers of Mr. MacGibbon. I agree with counsel for the Respondent that in order for the Appellant to obtain a deduction in excess of the amount allowed by the Minister “the Court should be presented with something more reliable than a conclusion based on unsubstantiated assumptions.”

Fortunately for the taxpayer, the Federal Court of Appeal held that there was no basis for the Tax Court Judge to reject the taxpayer’s evidence on the point:

[65]  Notwithstanding the auditor’s admission that it was likely that interest accrued in 1988 and the first part of 1989 in the Windarra Loan, the Judge rejected Mr. Proctor’s evidence that additional interest was included in [the taxpayer’s] income on the basis that [the taxpayer] “could have recorded the offsetting amount on a balance sheet account such as a deferred revenue account or a reserve account.” However, for the reasons that follow, there was, in my view, no evidence before the Court to support such a conclusion.

[66]  The Judge found Mr. Proctor to be a credible witness. Mr. Proctor testified that [the taxpayer] would have included the sum of $263,000 in its retained earnings. He reviewed the Reconciliation of Net Income for Tax Purposes form (i.e. the T2S(1) form) provided by [the taxpayer] for each of the 1988 and 1989 taxation years as part of its income tax returns (Appeal Book volume 2, pages 81 and 109) and identified no adjustments “in moving from financial statement income to net income for tax purposes relating to Windarra” (Appeal Book volume 7, page 1699).

[67]  With respect to the Judge’s reference to deferred revenue and reserve accounts, while [the taxpayer’s] 1988 and 1989 balance sheets did show a deferred revenue liability (Appeal Book volume 5, pages 1176 and 1181), the notes to its financial statements specified that the deferred revenue liability related solely to [the taxpayer’s] gold loan owed to a consortium of Canadian banks (Appeal Book volume 5, pages 1178 and 1188). The 1988 and 1989 balance sheets did not record any reserve accounts.

[68]  In this circumstance there was, in my respectful view, no evidence on which to impugn Mr. Proctor’s evidence, so that the Judge committed a reviewable error in rejecting the evidence for the reasons that he gave. Mr. Proctor’s evidence, together with the auditor’s concession established that [the taxpayer] had included the additional sum of $156,888 in interest income in its income tax returns.

[69]  It remained for [the taxpayer] to establish that the interest income was or became a bad debt. This required consideration of whether any monies paid to it pursuant to the Settlement Agreement were allocated to monies owing on account of interest. If so, that portion of the interest income would not be a bad debt.

[70]  Article 1(3) of the Settlement Agreement evidenced the parties’ agreement that the settlement proceeds were to be “applied on account of the principal amount of the [Windarra] Loan.” This established on a prima facie basis that all of the interest owing to [the taxpayer] pursuant to the Windarra Loans was a bad debt.

[71]  To conclude on this point, in my view, this Settlement Agreement combined with the evidence of Mr. Proctor and the auditor’s concession was sufficient to demolish the Minister’s assumption. Further, counsel for the Minister did not point to any evidence which rebutted [the taxpayer’s] prima facie case.

[72]  It follows that [the taxpayer] established its entitlement to deduct $156,888 under subparagraph 20(1)(p)(i) of the Act in 1992.

The case serves as a useful reminder about two important points.  First, the rules of onus are alive and well (as also discussed in my recent blog post on McMillan v. Canada).  Once a taxpayer has raised a prima facie case rebutting the Minister’s assumptions, the Minister cannot succeed unless Crown counsel can adduce additional evidence or otherwise undermine that prima facie case.

Second, and perhaps more important, the case demonstrates that solid evidentiary preparation and strong witnesses are critical if a taxpayer hopes succeed in the courts.  As it is exceedingly rare for the Federal Court of Appeal to overturn findings of fact made by a Tax Court Judge, every effort must be made to adduce evidence, both documentary and viva voce, in the Tax Court of Canada in order to maximize the likelihood of success both at trial and on appeal.

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FCA: Trial court cannot ignore taxpayer’s evidence without good reason

From the intrusive to the abusive – what happens when the CRA goes too far?

In order to administer and enforce the self-reporting system of tax assessment in Canada, the Income Tax Act (ITA) and Excise Tax Act (ETA) provide the CRA with the power to demand certain information from taxpayers. Generally, this information is collected for the purposes of auditing a taxpayer, but may also be obtained where no audit is conducted. For example, the CRA may access such information for the purpose of evaluating whether record-keeping requirements have been complied with. Higher statutory thresholds are imposed on the CRA – such as requiring a search warrant issued by a judge – where the information sought would not normally be required for an audit.

Despite the broad statutory powers conferred on the CRA to ensure compliance, the courts are wary of the potential for abuse and have been careful to circumscribe their application. In James Richardson & Sons v. M.N.R., the Supreme Court of Canada clarified that when requiring the production of documentation there must be a “genuine and serious inquiry” into the tax liability of a specific taxpayer (or taxpayers). Richardson was decided in the context of what is now section 231.2 of the ITA, which requires taxpayers to provide documents or information to the CRA for the enforcement or administration of the Act. In its recent decision in R. v. He, the British Columbia Court of Appeal confirmed that the same principle should be applied to section 231.1 of the ITA (and the corresponding section 288 of the ETA) when inspecting records at the taxpayer’s place of business.

R. v. He concerned a CRA program called the Electronic Records Evaluation Pilot Project (“ERE”) that targeted specific businesses for research purposes – including restaurants, convenience stores and small supermarkets – to evaluate their record-keeping compliance. One business chosen for the program was the restaurant, Sushi Man, run by the He family in Vancouver. Although the initial contact by the CRA indicated that its review would not be an audit, certain inconsistencies were found that led to an audit, investigation and, ultimately, criminal charges. Apparently, CRA thought that Sushi Man had been using some form of sales suppression software (known as a “zapper”) to erase the record of certain transactions and thereby evade taxes. The taxpayer alleged that the CRA’s real purpose was to conduct a criminal investigation into establishments using the zapper software and, therefore, it had strayed outside the scope of section 231 of the ITA (and 288 of the ETA) thereby violating his right against unreasonable search and seizure under section 8 of the Canadian Charter of Rights and Freedoms.

The issue before the courts was whether, under the circumstances, the CRA was entitled to seize information from Sushi Man under section 231.1 of the ITA and 288 of the ETA. The Provincial Court Judge found that there had been no “genuine and serious” inquiry into that taxpayer’s tax liability and concluded that the seizure of information by the CRA was unlawful, implying that the ERE program had been used improperly for an undercover investigation into restaurants using zappers. On appeal, both the Supreme Court of British Columbia and the British Columbia Court of Appeal agreed with the Provincial Court that the rule established in Richardson should be applied to section 231.1 of the ITA (and by extension to section 288 of the ETA).

Writing for the Court of Appeal, Justice Hinkson remarked as follows:

[54] In my opinion, s. 231.1 of the ITA, if interpreted too broadly, is open to that same possibility of abuse. It and its parallel section in the ETA permit the same broad authority to the CRA as does  s. 231.2 and its parallel section in the ETA. Further, as discussed by the appeal judge, s. 231.1 allows for a more intrusive power than that permitted under s. 231.2. It is my opinion that the correct interpretation of s. 231.1 requires that the reasoning in Richardson must therefore be applied to that section.

With respect to the conduct of the CRA investigation, Justice Hinkson deferred to the Provincial Court Judge’s conclusion that the ERE’s true purpose was not to review books and records nor to audit the individual businesses selected. Therefore, the seizure of information was not permissible under section 231.1 of the ITA (or section 288 of the ETA).

While it is not yet certain whether the Crown will seek leave to appeal to the Supreme Court of Canada (no leave application has been filed at the time of this post), it seems clear that unless it has secured prior judicial authorization, the CRA cannot obtain information from a taxpayer in the absence of a “genuine and serious” inquiry into the taxpayer’s tax liability.

From the intrusive to the abusive – what happens when the CRA goes too far?

Federal Court of Appeal Reaffirms the Onus of Proof Rules in Tax Appeals

In the recent case of McMillan v. Canada, the Federal Court of Appeal has reaffirmed the onus of proof rules in tax appeals. While the rules were never particularly unsettled at the federal level, the somewhat anomalous decision of the British Columbia Court of Appeal in Northland Properties v. The Queen in Right of the Province of British Columbia, appeared to cast doubt on prior Federal Court of Appeal pronouncements as well as the decision of Justice L’Heureux-Dubé in Hickman Motors Ltd. v. Canada. In Northland, the B.C. Court of Appeal took issue with the concept, articulated by Justice L’Heureux-Dubé in Hickman, that the onus was on the taxpayer to “demolish” the assumptions pleaded by the Minister by means of raising a prima facie case at which point the burden shifts to the Minister to prove the assumptions on the balance of probabilities:

[29] Before us, counsel for the Crown made persuasive submissions on the issue of the so-called “prima facie” standard: L’Heureux-Dubé J.’s use of “prima facie” was made in the context of a case in which the Crown had not called any evidence whatsoever; it was relying solely on its assumptions. It is certainly possible in such circumstances that a prima facie case, or even one with “gaps”, would be sufficient to displace the Crown’s assumptions, but the prima facie standard described by Justice L’Heureux-Dubé should not be interpreted as having altered the usual standard of proof in tax cases: see the comments in Sekhon v. Canada, [1997] T.C.J. No. 1145 at para. 37; and Hallat v. The Queen (2000), [2001] 1 C.T.C. 2626 (F.C.A.).

The facts in McMillan are uncomplicated and not particularly interesting. The taxpayer had a business in the Dominican Republic and claimed a number of expenses in connection with that business. The Tax Court denied most of the expenses claimed on the basis that they were not proven by the taxpayer. The taxpayer appealed to the Federal Court of Appeal and her appeal was dismissed on the basis that she did not demonstrate any material error on the part of the Tax Court judge.

The interesting part of the decision is the Federal Court of Appeal’s articulation of the rules relating to onus of proof in tax appeals:

[7] Before concluding these reasons, we note that the appellant did not raise in her memorandum of fact and law any issue with respect to the Judge’s statement at paragraph 19 of the reasons, and repeated at paragraph 21, that the appellant “has the initial onus of proving on a balance of probabilities (i.e. that it is more likely than not), that any of the assumptions that were made by the Minister in assessing (or reassessing) the Appellant with which the Appellant does not agree, are not correct.” In our respectful view, it is settled law that the initial onus on an appellant taxpayer is to “demolish” the Minister’s assumptions in the assessment. This initial onus of “demolishing” the Minister’s assumptions is met where the taxpayer makes out at least a prima facie case. Once the taxpayer shows a prima facie case, the burden is on the Minister to prove, on a balance of probabilities, that the assumptions were correct (Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 at paragraphs 92 to 94; House v. Canada, 2011 FCA 234, 422 N.R. 144 at paragraph 30).

Thus, the Federal Court of Appeal has once again embraced the prima facie standard as the test that must be met by a taxpayer to displace or demolish assumptions pleaded by the Minister. While there may be a different standard applicable in provincial tax appeals in British Columbia, the reaffirmation of the prima facie standard by the Federal Court of Appeal is welcome news in federal tax appeals.

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Federal Court of Appeal Reaffirms the Onus of Proof Rules in Tax Appeals

Successful Challenge to Portions of the Crown’s Reply on the Deductibility of Amounts Paid by CIBC to Settle Enron Litigation

On December 19, 2011, the Tax Court partially granted an application by Canadian Imperial Bank of Commerce (“CIBC”) (2011 TCC 568). The motion concerned whether the Crown’s Reply should be struck out, either wholly or in part (there were actually four separate Replies, but all are substantially similar). Associate Chief Justice Rossiter did not strike out the entire Crown pleading, but ordered 98 paragraphs struck out and 92 paragraphs amended from the main Reply (with the same amendments to be made to the other three Replies). The main Reply was 94 pages long with 70 pages of assumptions.

The Tax Court appeals involve the deductibility of amounts paid by CIBC to settle litigation arising from the failure of Enron in 2001. CIBC was named (along with a number of other parties) as a defendant in a pair of law suits filed after Enron went bankrupt. CIBC settled the claims against it in consideration for a payment of $2.65 billion in 2005 and deducted those amounts, along with related interest and legal expenses in computing income for its 2005 and 2006 taxation years.

The Minister of National Revenue denied the deduction of the settlement amounts. CIBC appealed to the Tax Court of Canada. The Crown filed a Reply, and CIBC filed a motion to have the Reply struck out in its entirety. The contentious point is whether the “egregious or repulsive” principle can be used to determine whether expenses are deductible. The concept was referred to at paragraph 69 of the reasons for judgment in 65302 British Columbia Ltd. v. Canada where a majority of the Supreme Court of Canada (per Iacobucci J.) made the following observation:

It is conceivable that a breach could be so egregious or repulsive that the fine subsequently imposed could not be justified as being incurred for the purpose of producing income. However, such a situation would likely be rare and requires no further consideration in the context of this case, especially given that Parliament itself may choose to delineate such fines and penalties, as it has with fines imposed by the Income Tax Act.

On this motion, the Crown argued that it should be open to it to establish that the “egregious or repulsive” principle could also apply in respect of amounts paid in order to settle litigation. CIBC contended that this concept has never been held to apply to settlement amounts and that, as a result, the Reply was fatally deficient.

Associate Chief Justice Rossiter first concluded that part of a pleading should only be struck where it is “certain to fail because it contains a radical defect.” Here, the Crown was trying to use the “egregious or repulsive” principle to justify denying the deduction of amounts paid to settle a law suit rather than amounts laid out to pay fines. The Court acknowledged that the “egregious or repulsive” principle had been developed by the courts in the context of fines, but noted that it could apply to settlement payments, and so the Respondent’s pleadings did have a chance of success. He refused to strike the Crown’s entire pleading as a result.

However, Associate Chief Justice Rossiter found that in the Reply the Crown pleaded evidence, conclusions of law or mixed fact and law, immaterial facts or advanced prejudicial or scandalous claims or claims that were an abuse of process of the Court. In the result, the Court held that portions of the Reply were improper and had to be removed. The Crown was given 60 days to file a less argumentative Amended Reply with the offending portions deleted.

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Successful Challenge to Portions of the Crown’s Reply on the Deductibility of Amounts Paid by CIBC to Settle Enron Litigation

Tax Court of Canada Authorizes Commission Evidence to be Taken in the U.S. on an Art Valuation Case: Sackman v. The Queen

On October 21, 2011, the Tax Court of Canada (Justice Valerie Miller) released her decision on a motion brought by the Crown for commission evidence to be taken in California from an art dealer (see our earlier post). The Court held that the art dealer’s testimony is material to the appeal, which deals with the valuation of artwork in the context of a charitable donation program, and ordered that a Commission and a Letter of Request be issued to allow the examination of Mr. Sloan in California under section 112 of the Tax Court of Canada Rules (General Procedure).

The Court took into account the following factors in exercising its discretion to make the order:

(a) the convenience of the person whom the party seeks to examine,

(b) the possibility that the person will be unavailable to testify at the hearing by reason of death, infirmity or sickness,

(c) the possibility that the person will be beyond the jurisdiction of the Court at the time of the hearing,

(d) the expense of bringing the person to the hearing,

(e) whether the witness ought to give evidence in person at the hearing, and

(f) any other relevant consideration.

The Court was satisfied that the Crown had fulfilled the traditional tests for commission evidence, namely:

1. the application is made bona fide;

2. the issue is one which the court ought to try;

3. the witnesses to be examined can give evidence material to the issue;

4. there is some good reason why he or she cannot be examined here.

The only real issue was materiality of the dealer’s evidence.  The Crown submitted that its:

. . . theory of the case is that there was no identifiable market for the prints before Coleman, Silver and Artistic [the promoters] created a market through the donation program. Mr. Sloan is able to give evidence concerning the origins of the donation program and the absence of any discernible market for the artwork before it was packaged as part of the Artistic program. His testimony is also necessary to authenticate documents necessary to challenge the appellant’s anticipated expert evidence.

The Court also noted that the Crown is entitled “to put its best foot forward in this litigation” and should be allowed to obtain the evidence necessary to accomplish that objective.

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Tax Court of Canada Authorizes Commission Evidence to be Taken in the U.S. on an Art Valuation Case: Sackman v. The Queen

Request for Commission Evidence in the Tax Court of Canada – Sackman v. The Queen

On October 14, 2011, the Tax Court of Canada heard a Crown motion requesting an order for commission evidence in the case of Sackman v. The Queen (Court file 2002-4824(IT)G). The issue in the appeal is whether the amount Mr. Sackman is entitled to claim as a charitable deduction for artwork obtained from Artistic Ideas Inc. and donated to various charities is (a) the appraised value of the artwork or (b) the purchase price of the artwork.

The motion was brought by the Crown so that the Tax Court may receive the evidence of Mr. Paul Sloan (who lives in California) prior to the hearing pursuant to Section 119 of the Tax Court of Canada Rules (General Procedure). Mr. Sloan had provided works of art to Artistic Ideas Inc., which he obtained through past ownership of various art galleries in the United States.

The Crown argued that Mr. Sloan’s evidence is material. In light of the fact that Mr. Sackman obtained the artwork from Mr. Sloan, Mr. Sloan could provide evidence as to the true value of the artwork. The Crown described the test in GlaxoSmithKline Inc. v. The Queen, which sets out the factors the Tax Court will consider in determining whether to grant a request for commission evidence. The Crown submitted that the request satisfied those criteria.

Counsel for Mr. Sackman submitted that the crux of the GlaxoSmithKline test is to determine whether the evidence is relevant to the case. Counsel argued that the Crown had not provided any evidence or support, either in its written or oral submissions, to demonstrate why Mr. Sloan’s evidence will be material. Counsel also submitted that should the Court grant the request for commission evidence, Mr. Sackman would be prejudiced through yet another delay (the Notice of Appeal was filed on December 16, 2002). Finally, counsel argued that the value of the artwork was supported by reputable appraisers and the manner in which the artwork was acquired or the individual from whom it was acquired should have no bearing on the decision of the Court.

Justice Valerie Miller reserved judgment on the motion.

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Request for Commission Evidence in the Tax Court of Canada – Sackman v. The Queen