Canada v. Zelinski
A-742-96 / A-743-96 / A-744-96
Sexton J.A.
10/12/99
24 pp.
Beginning in March 1984 taxpayers (respondents) purchasing paintings by famous native artist, Norval Morisseau-Over two years purchasing approximately 215 paintings for $129,350-Each painting certified by Canadian Cultural Property Export Review Board as required by Income Tax Act, s. 39(1)(a)(i.1)-Fair market value of paintings appraised at $992,900-Taxpayers donating paintings to various public galleries, museums in return for tax receipts pursuant to former s. 110(1)(b.1) for amounts equal to fair market value-Deducting those amounts from professional income; claiming exemptions for any capital gains might be deemed to have received as result of donations by s. 69(1)(b) (deemed to have received proceeds of disposition equal to fair market value)-Exemption, outlined at s. 39(1)(a)(i.1) excluding from taxpayer's capital gains any gains resulting from disposition of Canadian Cultural Property to prescribed public institutions-In reassessment Minister determining taxpayers could not avail themselves of s. 39(1)(a)(i.1) since purchases constituted adventure in nature of trade; accordingly any deemed proceeds of disposition on account of income, not capital-Also holding fair market value of paintings cost taxpayers paid, or alternatively $255,155-On appeal, Tax Court of Canada holding taxpayers' purchases not constituting adventure in nature of trade, rejecting experts' opinions, holding fair market value of paintings $660,000; holding as s. 152(3) establishing liability for tax existing from date when income tax return due to be filed, Minister able to assess interest on taxes as of date on which taxpayer required to file tax return-(1) Whether taxpayers engaged in adventure in nature of trade-Tax Court finding taxpayers initially motivated to purchase paintings because bargains-Acquisitions after learned of tax advantages for purpose of donation-Donations prompted by intention to reduce taxes, avoid tax on any deemed gains, and to permit paintings to be seen by wide cross-section of Canadians-Insufficient evidence to demonstrate taxpayers purchased paintings with intention to sell-Mere intention to purchase property on basis bargain not sufficient to establish adventure in nature of trade-First few purchases cannot colour subsequent purchases made with knowledge of tax advantages and with intention to donate paintings-Taxpayers not purchasing paintings as single transaction-Engaged in series of transactions-Vast majority of purchases made with view to donating paintings-Property purchased solely for purpose of donation not constituting adventure in nature of trade-Paintings purchased with intention to donate not purchased with intention of gaining profit-Purchases not qualifying as adventure in nature of trade-Anticipated tax advantage not determinative of whether or not transaction trading operation-To forbid deductions herein would frustrate objectives of Income Tax Act, Cultural Property Export and Import Act-"Secondary intention" to resell so as to constitute adventure in nature of trade only existing where purchaser having in mind at moment of purchase possibility of reselling as operating motivation for acquisition-Secondary intention important only where primary intention frustrated or impracticable-Taxpayers' primary intention not thwarted: purchased paintings either with no specific intention, or with intention to donate them-Since carried out primary intention, any secondary intention immaterial to whether engaged in adventure in nature of trade-Secondary intention to resell at profit only important where taxpayer following through on intention-Since taxpayers not carrying out any purported secondary intention might have had, those intentions not transforming de facto decision to not follow through on secondary intention so as to make it appear as if did so-Appeal from determination taxpayers not engaged in adventure in nature of trade dismissed-(2) What was fair market value of paintings-Tax Court Judge's determination of valuation reasonable-Considered each expert's appraisal methods, concluded no one method satisfying-Arrived at own opinion of valuation based on careful consideration of all conflicting evidence-Did not proceed on wrong principle or make palpable error-Cross-appeal from determination of fair market value dismissed-(3) Whether interest assessed on tax as of date on which taxpayer required to file return or only as of date of reassessment-Income Tax Act, s. 161(1)(b) requiring person liable to pay tax to pay interest for period during which excess outstanding-Acceptance of argument s. 161(1) only permitting imposition of interest as of date of reassessment would encourage taxpayers to underestimate taxes-Also inconsistent with plain language of s. 161-"Outstanding" broadly defined as undetermined, unsettled, unpaid-Taxes underestimated in tax return unpaid, therefore outstanding, regardless of date on which reassessed-Cross-appeal from conclusion required to pay interest on taxes owing as of date returns required to be filed dismissed-Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 39(1)(a)(i.1) (as am. by S.C. 1994, c. 7, Sch. II, s. 22), 69(1)(b), 152(3), 161(1)-Income Tax Act, S.C. 197071-72, c. 63, s. 110(1)(b.1) (as am. by S.C. 1985, c. 45, s. 55; rep. by S.C. 1988, c. 55, s. 77).