Back to the Bank
by Stephen P. Sweeting, Appraisal Associates, Toronto
The Art Gallery of Ontario's successful legal action against the Cultural
Property Export Review Board is probably the single most significant donation
program-related event of 1995. The decision resulting from this action focused
on the way the Review Board handled the significant, high profile Sarick
donation of 224 pieces of Inuit sculpture to the Art Gallery of Ontario
(AGO). Like a number of contentious determinations associated with the early
1990s, the Board's approach reflected a "crash and burn" attitude
to art appraisals.
In the case of the Sarick donation, several AGO-commissioned appraisals
were rejected in favour of an unsubstantiated and arbitrary valuation supplied
by a Board consultant. The redetermined value of the collection was considerably
lower than the initial estimates and the AGO petitioned for the opportunity
to make an oral submission to dispute the findings. The Board's staff maintained
that written submissions would be considered, but refused to allow an oral
presentation. Frustrated by the process, and the potential tax impact to
their donor, the AGO's legal counsel challenged the official position through
the Federal Court of Canada, arguing that "natural justice" had
been denied.
After hearing both sides, the Federal Court judge found in favour of the
AGO and ordered an oral redetermination panel. The judge also stipulated
that the Board must "restore, as far as possible, the confidence of
the [AGO] in the fairness of its procedures."
The decision was a significant one because it broke down procedural and
psychological barriers in the donation process. On the procedural side,
the decision indicated that the oral hearing process is permissible under
Review Board statutes and that the associated stonewalling is unacceptable.
On the psychological side, the decision demonstrated that the Board can
be successfully challenged under certain circumstances.
In addition to breaking down procedural psychological barriers, the court
action prompted Board counsel to admit that the "original determination
of fair market value [in the Sarick donation] was made in a manner that
contravened the rules of natural justice or procedural fairness as well
as the Board's own constating (sic) statute..." This admission is particularly
important in light of the controversy that has surrounded Board determinations
over the last few years. Many observers in the museum and donor communities
will view the admission as a statement of much wider significance.
The court decision provided both Review Board and the process as a whole
with a healthy injection of accountability. Rules of natural justice and
procedural fairness cannot be side-stepped and Board determinations must
be based on credible, objective valuations -- not informal, unsubstantiated
opinions. The decision also emphasized the pressing need for a formal appeal
system. Ad hoc redetermination panels will not fit the bill.
On May 19th, 1995, Bill C-93 received first reading in Parliament. The
bill (now passed into law), establishes a mechanism for dealing with value
disputes similar to the one that prompted the AGO/Sarick challenge. The
mechanism includes a framework for Review Board determinations, redeterminations
and a system of appeal through the Tax Court of Canada.
The absence of an appeal system caused a great deal of acrimony within the
community. Museums and galleries were bound by what some regarded as "questionable"
determinations, and donors were not accorded the procedural recourse available
to other citizens in dispute with the federal government over tax issues.
The new appeal system will address these problems and in every likelihood
prevent further debacles like the Sarick controversy. Bill C-93 plots a
timeline for the determination, redetermination and appeal procedure, establishes
a transparent and accountable process and makes the Tax Court -- rather
than the Board -- the ultimate value arbiter in tax-related disputes. The
key points of the bill follow below:
* The Review Board must determine the fair market value of the donated article
within four months.
* The Review Board may redetermine the fair market value of the gift at
any time.
* The Review Board must redetermine the fair market value of a gift within
four months of an official request.
* Unless circumstances require otherwise, the Review Board cannot redetermine
value more than once.
* A redetermination of a proposed disposition is not subject to appeal
by any court.
* A redetermination of an object irrevocably disposed of can be appealed
within a specified time frame.
* Extensions of the time frame are permissible through application to the
court.
* The Tax Court is empowered to confirm or vary the assessed fair market
value of a gift.
Most agree that the passing of this bill is a positive development for the
donation program. Insiders hope that the well-articulated process will take
the guesswork out of donations and stimulate more gifting of cultural properties
to museums and galleries. It should be noted, however, that people who provide
appraisals also will be impactd by this new legislation. The possibility
of standing in front of a Tax Court judge to explain the rationale behind
a valuation will force many art appraisers to approach donations with a
little more care than evidenced in the past. Generally accepted principles
of valuation, substantial evidence, and technically correct valuation methodologies
will carry considerably more weight in a courtroom setting than off-the-cuff
opinion.
Format guidelines issued in 1994 and revised in June, 1995 are a clear
indication that the Review Board is serious about placing a high priority
on establishing and maintaining professional standards in appraisal practice.
Despite shortcomings, the document has a great deal in common with the Uniform
Standards of Professional Appraisal Practice -- the benchmark within
the broader North American valuation field. The format guidelines are a
significant step forward towards improving the quality of valuations associated
with the donation process.
Additionally, there is significant evidence to suggest that the format guidelines
are evolving in a positive direction. Early in 1995, the writer and several
other professional valuators in the Toronto area forwarded detailed critiques
of the 1994 guidelines to the Review Board. We pointed out several inconsistencies
and misleading passages in the document.
After reviewing the latest edition, we are pleased to say that many of our
professional concerns have been addressed. The document's definition of
fair market now dovetails more closely with the Revenue Canada definition.
(The term is defined by Revenue Canada as "the highest price available
in an open and unrestricted market between informed, prudent parties, acting
at arm's length and under no compulsion to act, expressed in terms of money
or money's worth.") The "cost" approach" to value is
now recognized as an acceptable valuation methodology. (This approach to
value is based on replication cost. It is utilised when a property is oversized,
site specific or not part of a definable market.) And, appraisers who are
not dealers are now clearly acknowledged. (In the past, only dealers were
recognised by the Board as appraisers -- in spite of arm's length
concerns and the fact that few have any professional valuation training
or accreditation.) Certain other areas, such as the issue of recent purchases,
still cause us concern, however, in light of the Friedburg legal
decision. This pivotal tax court decision says that the fair market value
of a property does not seem to pay attention to cost of acquisition.
Collectively, these three pivotal events will help to create a fair,
credible and rational donation system. The Review Board now has a clear
mandate to factor rules of natural justice and procedural fairness into
its determinations. The new appeal system through Tax Court will allow donors
to challenge Board redeterminations in a fair and open forum. The appraisal
format guidelines will result in more professional appraisals based upon
evidence of value. All in all, 1995 was a very productive year for the donation
program.
Back to the Bank