Who are More Important: Artists or Investors?
As I see it, Ken Ellacott and John Russell tried to cheat. What they did was legal, but they knew they were on the questionable moral ground of taking personal advantage of a tax loophole. Their story is of interest because it involves the valuation of the artistic process, an issue close to my heart as an advocate for visual artists.
Mr. Ellacott is forty-five years old. He is a salesman who works out of his home in Nepean, Ontario where he lives with his wife and three children. His wife does not work. Mr. Russell is seventy years old and lives on Pender Island in BC. Both men have been told by the Canadian Revenue Agency (CRA) to pay a massive tax bill based on a CRA reassessment of their past tax returns. Why? Because both men tried to benefit from a loophole in Canadian tax law that involved Canadian visual artists; a loophole that was created when Ottawa increased tax incentives for donations of property and other assets to charities in 1966.
The tax revision became known to the public, however, because it facilitated the creation of what became a tax shelter popularly known as the "buy low, donate high" program. Here is how it worked. People such as Ellacott and Russell would buy a volume of artwork at a discount, have it appraised at a much higher amount and then donate the art to a charity in order to receive a tax receipt based on the appraisal. For example, CVI Art Management Inc., sold clients one hundred limited edition prints for $8,500. Appraisers then set a value of the work purchased at $25,000 and when the purchasers donated their work to a federally registered charity, they received a tax receipt for $25,000 that afforded them a tax credit of about $12,000. (Charities accepted the donation of the artwork to use as rewards to donors or volunteers or to sell at special event auctions.) In other words, the people using this program paid $8,500 for a tax credit of $12,000.
Artists loved CVI Art Management. Suddenly printmakers working in the late nineties were finding clients that wanted to purchase entire editions of their work, and there was no shortage of buyers as financial promoters flourished under the program. Promoters, armed with legal opinions confirming that the shelters conformed to the revised law, advised clients into the program. CRA officials, however, saw the transactions as "art flips," and began to disallow the tax credits claimed by the art investors. In 2003, the federal government closed the tax loophole.
A group of over one thousand people who claimed credits under the program went to court to fight the CRA reassessments. In 2004, they won a test case at the Tax Court of Canada, arguing that they should not be reassessed because their actions were legal at the time. But following that win, they lost the case when it was appealed by the CRA in 2005 and while they have been fighting to keep their tax credit, the CRA has been charging them interest on their tax debt (at a rate that at one point reached 10% per annum). Mr. Ellacott, for example, estimates he owes $30,000 in interest payments on a CRA reassessment of $65,000.
The investors then applied to have their case heard in the Supreme Court, but the Court refused to hear their case and that left only one option for relief open to them — they appealed to Revenue Minister Carol Skelton for relief from their debt.
The battle is being waged between the CRA and the thousand-plus people who claimed the tax credits, but it is the appraisers who seem to me to be the bad apples in this story. The investors, though morally questionable to me in their intent, believed they were operating within the law. Many got involved after obtaining a legal opinion supporting the validity of the program. The CRA was right to close down the loophole but I question their retroactive action against the tax benefit opportunists. Lawyers, judges and parliamentarians can sort that out as they did recently for ex-employees of a company called JDS Uniphase.
The Uniphase employees faced hundreds of thousands of dollars in taxes on income they were "deemed to have earned" by the CRA but who, in fact, never made the income on which the tax was based. (Read about their situation by visiting www.canada.com/victoriatimescolonist/news/ and searching "Stock fiasco" in their search engine). These people did something legal and got caught in the quagmire of the dot com crash. They were far more innocent victims that the art "investors" who knew they were involved in a morally questionable exercise. Still, their act was legal. The people who should be in trouble are the appraisers. These are professionals who appraised art collections at $25,000 in the same calendar year in which the collections sold for $8,500?
All this interests me because I have often heard from artists who have had paintings lost or stolen and then left feeling further victimized after talking with their insurance provider. Many of these artists found themselves being offered insurance compensation based on the cost of the materials involved with making the lost or stolen piece. The insurers would not recognize the artistic value of the pieces and expressed difficulty in recognizing any non-material or non-quantifiable artistic value. (This is why I often speak and write about the importance of appropriate professional practices such as recording sales prices and having a professional sales price rationale.) Artists always have to prove artistic value somehow in these situations.
But in the case of Mr. Ellacot and Mr. Russell, they believed in the appraisals they received. Their investment in art was undertaken with an expectation of an increase in artistic value. People do not invest in art based on the value of the materials involved in its creation, their investment is based on the highly unique application of those materials into something of far greater value. Real investors invest in a creative product and in the product's capacity to acquire increased artistic value over time. The appraisers in the "buy low, donate high" program based their assessments on artistic value. It bothers me that "artistic value" is not recognized for artists but it is recognized for investors. Who is more important anyway?
ctyrell@shaw.ca
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