A tangled web of taxes

Can someone actually enjoy an insect collection? Maybe not in the strict sense of the word, but as this case will show, one may nonetheless enjoy the tax results that derive from it.

This question of enjoyment was canvassed in a recent appeal heard at the Tax Court of Canada. It was an appeal from the assessment of tax associated with the charitable donation of an insect collection, which was ultimately decided on the issue of whether or not the collection was a set.

The Plamondons and PUP

Danielle Plamondon and her spouse were amateur entomologists who collected insects from all over the world. In recent years, they had donated specimens to various non-profit organizations, for which they would receive donation tax receipts.

It was a donation to Laval University in 2005 that became the subject of dispute between Plamondon and the Canada Revenue Agency. The donation tax receipt referenced a “collection of insects,” and indicated a value of $25,419.

CRA interpreted this as a single donation of “personal-use property” (PUP), for which the prescribed adjusted cost base would be $1,000, with the value of disposition being the greater of $1,000 and the actual proceeds. This resulted in the assessment of a capital gain of $24,419.

While not the determining factor in the case, the Court scrutinized the issue of enjoyment.

Plamondon testified the specimens “are beautiful to an entomologist who is passionate about this, but we don’t have any insects displayed in the house. I have no need to see any [of the specimens] on my walls.”

What the case really turned on was whether the insect collection truly constituted a “set” under the PUP rules. Plamondon had donated 2,158 insects from 46 different counties, covering at least 268 different species.

Each insect was independently evaluated by a professional appraiser who took into account the preparation, humidification, display, pinning and identification to attribute a value to each specimen.

Based on these facts, the judge held that the donated insects are distinct properties, not linked to one another, and do not form an unbreakable set. The PUP rules should therefore apply to each item separately, and as none of the insects had a value higher than $1,000, there would be no tax owing on the donation.

Recall Donato and his cartoons

The present case brings to mind a similar case from a few years ago that dealt with the donation of cartoons. Andy Donato produced political cartoons for daily publication in the Toronto Sun. Over the years, he donated some of the cartoons to museums, educational institutions and other recipients. In 2007, Donato was assessed for the 1999 and 2001 taxation years on the basis that he realized taxable capital gains when the works were gifted to charities.

The judge in the Donato case determined that the cartoons were not personal in nature, but rather arose out of commercial obligations with his publisher.

With respect to 2001, the PUP rules therefore did not apply, and the assessment of a taxable capital gain was upheld. The distinction between individual items and a collective “set” was also mentioned, but it had no bearing on the result, given the determination that the PUP rules did not apply.

With respect to 1999, the judge held that the assessment was statute-barred. Mrs. Donato made the donation after being gifted the pieces from her husband; the gift was subsequently reversed via a Rectification Order.

Still, the judge held that Mrs. Donato’s claim as to personal use property (and thus not reporting a capital gain) was a reasonably held belief in 1999, and subsequent events did not enable CRA to assess beyond the normal re-assessment period.

Doug Carroll, JD, LLM (Tax), CFP, TEP, is vice president of tax and estate planning at Invesco Trimark Ltd.