Donations Schemes – Some Reasonable Conclusions

In a recent court case called Klotz, the judge for the Tax Court of Canada, Judge Bowman, looked at the situation where a taxpayer bought artwork (prints) for $75,000 and then donated those prints to a charity for $259,000. This is a common situation with art flips or charitable donation flips that have been seen all over Canada.

Judge Bowman had to determine three key issues:

  1. What was the fair market value of the art that was donated?
  2. Whether the prints were personal use property? and
  3. Should there be penalties pursuant to 163(2) on a gross negligence basis?

Value of Donations

The judge reviewed submissions as to the value of the art that was donated, noting that the art was extremely difficult to value. Therefore, he determined that the best indication of what the art was worth was what the taxpayer initially paid for it, being $300 per print. He made the comment that it is “devoid of common sense and out of touch with ordinary commercial reality” for a taxpayer to buy a print for $300 and claim it to have a fair market value two days later of $1,000.

Personal Use Property

This was an important issue because if the asset is not personal use property, then the entire gain would have to be reported as a capital gain. If it was personal use property, then only those gains in excess of $1,000 would have to be reported. Since no one print had a value over $1000, nothing would be taxable. The judge determined that the prints were indeed personal use property.


The judge mentioned while the taxpayer was careless about verifying the value of the art, subsection 163(2) is a punishment for “reprehensible behaviour.” The judge determined that the taxpayer’s conduct did not warrant the penalty.

The taxpayer won on the issues of personal use property and the removal of the penalties. However, the taxpayer lost in this instance on the bigger issue of getting a significantly larger donation than what he paid in cash for the art. As always, Judge Bowman gave a very reasoned response to what has been going on. We will have to see if this case gets appealed.

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