Ruling helps define 'fair market value': Ottawa yacht case: FMV is what an item sold for, not seller's asking price

National Post

2004-07-03


Thinking of selling your boat this summer but wary of the hassle? One option
might be to donate it to a willing charity, which would issue you a receipt for
its fair market value, then presumably sell it for cash to fund its charitable
activities. You get rid of the boat, and you get a tax write-off, so everybody
wins. Sounds like a plan? Ottawa sailor Norman Carr certainly thought so -- that
is, until his case wound up in Tax Court last month.

In July, 1999, Mr. Carr attempted to sell his Sabre 27, a British sailboat
that had previously been shipped to Canada, by listing it for sale at $27,000
with a prominent Ottawa yacht broker. Three months later, having received no
offers, the broker suggested that he might consider donating the boat.

An independent marine surveyor for the charity valued the boat at $40,710,
and Mr. Carr was issued a receipt for that amount which he proceeded to claim on
his 1999 tax return.

The CRA challenged the fair market value Mr. Carr used and reduced the value
of the boat, and therefore his donation credit, down to $27,000 -- the price at
which he tried to sell it originally. The court was asked to determine what was
the true fair market value.

The concept of fair market value, which is not defined in the Income Tax Act,
has been defined judicially as "the highest price an asset might reasonably be
expected to bring if sold by the owner in the normal method applicable to the
asset in question."

The CRA brought an expert witness, who testified "the highest potential value
of the boat" was actually only $18,000. The expert based this on a direct
comparison analysis of other boats of the same size and age available for sale
domestically, since there was really no known market for the rare U.K. boat in
Canada.

Mr. Carr argued that the highest price available in an open market is
reflected by the asking prices for boats similar to his. In his view, an open
market is not restricted to Canada. Instead, one should look at the highest
price asked for boats of similar quality, age and size anywhere in the world.
Based on his own Internet research regarding prices asked for similar boats in
the U.K., he concluded that the value of $40,710 was, indeed, appropriate.

Unfortunately, the judge disagreed, stating that Mr. Carr "relied mostly on
asking prices... not on prices at which the boats were actually sold... The
method used by (the CRA), although not perfect, is much more reliable than (Mr.
Carr's)." As a result, the judge could not accept the $40,710 valuation, and Mr.
Carr lost his case.

He has not yet decided whether he will appeal the decision to the Federal
Court. While ordinarily one has only 30 days to appeal, the definition of "days"
oddly excludes "any days in July and August" from the deadline, giving Mr. Carr
until mid-September to decide. Perhaps members of the court may be enjoying some
summer boating themselves...