An artful scheme - Macleans.ca
 

An artful scheme

One firm’s pitch to help people use a tax shelter by buying and then donating old photos is raising eyebrows in the art world and words of caution from experts


 

PHOTOGRAPH BY ANDREW TOLSON

It’s shortly after 6 p.m. and one of the banquet halls at the Old Mill Inn & Spa, a rustic building in the west end of Toronto, is beginning to fill with people. Tonight’s event is billed as “An evening with Rick Mercer,” but the comedian’s routine is a teaser for a sales pitch called the VIA (Vintage Iconic Archives) Project: a tax-shelter scheme that involves buying and donating old photographs to an unnamed Canadian university.

It’s a relatively new twist on an old ploy to reap financial advantages from the country’s generous tax incentives for charitable and cultural donations. There have been dozens of different approaches over the years, most of which attempt to generate a big tax receipt in exchange for a relatively small up-front investment. The schemes frequently test the boundaries of tax laws and have drawn the ire of the Canada Revenue Agency, leading to an avalanche of reassessments, tax penalties and lengthy court battles.

Many of the attendees at the Toronto presentation appeared close to retirement age. It was organized by a Burlington, Ont., company called Sovereign Financial; a company representative told a Maclean’s reporter the private event was closed to the media because it was intended only for “clients.” (Other VIA events featuring Mercer were scheduled in Edmonton, Calgary, Winnipeg and Victoria, although the comedian says he was merely booked as the entertainment and has no affiliation with the promoters.) Outside the banquet room, a man in a sportcoat talks casually with ticket holders about the ongoing litigation associated with similar tax-shelter arrangements, assuring them they have nothing to worry about when it comes to the VIA Project, billed as “simply the most compelling financial opportunity available today.”

The marketing literature touts an opportunity to help promote cultural heritage in Canada by buying and donating important photographs from two collections, totalling some 825,000 images, to institutions properly equipped to display and archive them. Participants are asked to put a down payment on some “vintage” photographs from Toronto’s DeLeon White Vintage Images and commit to holding them for three years (donations made within three years of purchase are valued at the purchase price under current tax rules). The pictures, from a collection of Chicago Tribune press photos, are used to secure a loan from a company called Vintage Capital, created alongside the VIA Project. The borrowed funds are then used to buy another set of photographs—part of the Sovfoto archive, a collection of U.S. press photographs from the former Soviet Union—that are to be donated to an unidentified Canadian university. The university then makes an application to the Canadian Cultural Property Export Review Board, which signs off on the appraised valuations and clears the way for a tax receipt to be issued.

Items certified by the board as being of “outstanding significance and national importance” that are donated to an approved institution can result in a tax credit that can be used against 100 per cent of a donor’s net income, as opposed to 75 per cent for regular charitable donations, and are not subject to capital gains taxes.

The promise is that participants will receive a tax receipt for their donation that is potentially worth more than what was shelled out in the first place. Lenny Karmiol, the president of Sovereign Financial and a former chef who now sells financial products, says the gains result from the expectation that the first set of images, the ones being borrowed against, will increase in value over the three-year period—enough to cover the loan and its prepaid interest, calculated at 1.23 per cent. While he conceded that it’s possible the images may not prove to be as valuable as the VIA Project promises, he dismisses the notion that clients could easily find themselves underwater by emphasizing the rarity of vintage photographs in an increasingly digitized world.

But it’s not just a question of rising (or falling) photograph values that participants need to worry about. The CRA has historically taken a hard stance on so-called “buy low, donate high” schemes in the past and can be expected to put the VIA Project, which made its first round of donations last year, through the ringer. That’s because the tax incentives surrounding charitable and cultural property donations were conceived to encourage Canadians to help institutions and non-profit groups, not provide a way for taxpayers to come out ahead. “The CRA audits all donations related to tax shelters,” says Philippe Brideau, a spokesperson for the government agency, who declined to comment on the VIA Project in particular.

Previous schemes often ran into trouble for attempting to artificially inflate the price of donated items. In what became known as an “art-flip,” a taxpayer would buy a painting from a promoter (who likely purchased artworks of typically lesser-known artists in bulk) and then have the work appraised for a significantly higher price. The piece was then donated to a charity in an exchange for a tax receipt based on the higher valuation. But the government later moved to clamp down on such schemes by basing the “fair market value” of the painting in question on the price paid, not the appraisal price. Other schemes involved taxpayers taking loans from promoters to boost the value of donations, with the loan later being settled for a price that is a fraction of the original loan amount (such “leveraged donation” schemes frequently involve a circular flow of money).

Karmiol says the VIA Project is structured to be in full compliance with the rules. He stresses that participants are on the hook for the full amount of the loan, and that relying on the Canadian Cultural Property Export Review Board to determine the fair market value of donations assumes that the valuations won’t be artificially inflated. But questions remain. Karmiol refuses to disclose the name of the Canadian university that is supposed to be working with the VIA Project, saying that the institution has requested anonymity until the donations have been officially approved. As well, despite his assurances that the unnamed university is working closely with the review board, a spokesperson from the department of Canadian Heritage, which oversees the board, says the board has had “no involvement” with the VIA Project, nor has it been consulted by its promoters. Karmiol responded by saying the board wouldn’t necessarily be aware of who was behind the donations at this stage in the process.

Experts say taxpayers should be cautious of any tax-shelter donation scheme. “The courts have shown little sympathy for inflated donation receipts,” says Mark Blumberg, a Toronto lawyer who specializes in non-profit and charity law. “I would never suggest to a client that they get involved in such a cultural property scheme. There are legal, practical and ethical problems.” Similarly, Daniel Sandler, a professor at the University of Western Ontario’s law faculty, says participants stand a good chance of ending up in court. “You’re buying yourself tax litigation at the end of the day,” he says. “If you want to do it, just be advised that you are going to be reassessed and you may or may not be successful. But odds are the CRA will prevail and you’ll end up owing not only tax, but interest.”

Yet, despite the risks, many Canadians seem to have a hard time resisting the notion that there’s an easy way to sidestep the taxman. After all, isn’t that what big corporations and wealthy individuals do all the time? “There’s tax avoidance and tax evasion,” says Frank Hue, a Toronto man who is marketing the VIA Project. “Tax evasion is illegal, but not avoidance. If Mr. Weston or Mr. Bronfman walks into the office of a tax structuring lawyer do you think he’s doing something wrong?”

One prominent Canadian who is already on board is Jeffrey Spalding. A well-known artist, curator and a recipient of the Order of Canada, Spalding is listed as one of the co-founders of the Cultural Heritage Association that VIA Project participants are asked to join (the other two founders are gallery owners Walter Moos, who declined to be interviewed, and Stephen White, who did not return calls). Spalding says he was consulted on the project because of his vast knowledge of the donation process in Canada. He’s credited for building a massive collection of contemporary art at the University of Lethbridge and also served as CEO of Calgary’s Glenbow museum, although he resigned after just 13 months. Reached in New York, he says he advised the VIA Project’s promoters “to make sure they understood and complied in every way with the letter and spirit of the laws and guidelines governing donations of cultural property.” He called the project bold and innovative and “fully compliant” with tax laws. “As someone who has served to promote the advancement of Canadian cultural institutions my entire career, I wouldn’t proceed if it were otherwise.” Now it’s up to those Canadians who sat through the sales pitch to decide if they’re equally comfortable taking the plunge.


 

An artful scheme

  1. How can photographs that originated with the Chicago Tribune newspaper and the Sovfoto archives even be certified as CANADIAN cultural property? If you look at the CCPERB application information it's obvious that such photographs would not even meet the test of “outstanding significance and national importance” to Canada. That is what the "national" stands for after all.

  2. Jeffrey Spalding may have a vast knowledge of the donation process but he also resigned as CEO of the Glenbow after only 13 months because his expenditure on artwork put the Glenbow in such dire straights that they had to drastically cut their staff, which included almost the entire archives staff. It is archives that collect and preserve photographs of cultural, local and national significance. The value of a photograph is largely dependent on tracing its provenance and often the value is regional as the photos document the history of a specific area or are the documentation of the work of a photographer living in a certain region. One can often find old photographs sold as curiosityies at antique shops or fairs but without any information regarding the subjects in the photo or who took the photos they have no historic or cultural significance.

    • Since all the photographs I have viewed from the collections being offered through the Via Project have been of great historical importance (not the type one might find in an antique shop) and have already previously been deemed Cultural Property by CCPERB, although your comment is valid, it does not apply to the property being offered for sale in this program.

  3. To be specific, although I entirely disagree with the strategy described above, the Income Tax Act is clear in that "CCPERB" is set up to be the policing agency to make sure that schemes such as the above described one cannot be successful.

    The Board has ten prominent and extremely knowledgeable and devoted individuals whose job it is to make sure that an approach like this will not be accepted for donation purposes if the collection is not important to the cultural history of Canada or Canadians. Another point to note is that the Income Tax Act is clear that CRA has NO jurisdiction vis a vis "CCPERB". The Board is the only entity that can reverse the certification of value and that only for two years and only in the situation of an act of fraud.

    So, in summary, the article makes for good reading but in the real world, only sought-after photographs, collections, archives etc., will be processed successfully through the process as set out in the Income Tax Act. Another point to note of extreme importance is that the institution that accepts the gift must itself be approved by CCPERB to be able to even entertain the act of receiving these gifts with a tax receipt.

    It is my opinion that this structure was set up to resemble a Limited Partnership or unassociated group of "investors"
    solely for the purpose of making money via a tax credit. Cultural donations are just that – a set of rules which allow bona fide gifts from the owners of these important properties. They are not intended to permit hundreds (or more) of unsuspecting taxpayers to be destroyed by promoters who come up with these hyper-aggressive tax strategies. If I were Rick Mercer, I would run as fast as I can from this industry.

  4. I was just at a seminar…the ITA says right there…if it has been evaluated by another government agency that the CRA cannot assess it…and by the way phoning the CRA for tax advice is foolish in situations like this call a tax lawyer. This is something these guys never did to get the other side. I don't see this stuff but over the years have found the CRA will try and crush anything wrong or right ….after all their job is collections NOT interpreting the law the court does that

  5. David's right…CRA is a "collection agency" and has registered the "scheme" as a Tax Shelter under the new 12 page application THEY designed.

    CCPERB has valued the Collections in the past deeming them to be of “outstanding significance and national importance” to Canada.

    The photos are purchased, are bona fide gifts and are donated to approved CCPERB institutions. The act of buying, holding and donating Cultural Property is not a hyper-aggressive tax strategy but a strategy used by the very wealthy now being made available to lower income Canadians who could not otherwise afford to save tax like the super rich.

    The inability for lower to middle class Canadians to enjoy tax relief in this realm and the fear instilled by articles like these along with CRA's goal to "scare" ignorant tax payers to give them over half a year's earning income is prejudicial.

    If I were to guess, except for David, I would suspect the anonymous writers above may in fact be CRA employees on a power trip.

  6. Further to Merlin's comment above, the program is fully compliant with the ITA and a copy of excerpts from the act on which the program is based can be obtained from the VIA Project contact information at the site so that intelligent individuals can conduct their own "due diligence" before participating.

  7. My husband & I attended a VIA seminar through a friend who advertised it as Tax Savings Seminar in Calgary in Dec. 2010. A few came & the 3 people I talked to thought it was about how to help them file their income taxes (being new to Canada) and save taxes as well. There were about 15-20 people that came. When they started to talk about the vintage photographs from the Soviet Union and the United States, my husband commented, "How can it help our Canadian culture when these items are overseas and has nothing to do with Canada?" I learned that we don't even get to pick what picture we like to own if we choose to join. It's sort of just assigned to us. A friend of mine from Ontario who visited Calgary came to mind because he said when we met about 3 years ago, he was so upset about having to pay CRA back the money plus interest due to a piece of artwork that he bought into, got a big tax refund, and then later on was re-assessed and had to pay it back w/ interest to CRA. He said other people got involved in it, too. I will try to see if I can get a hold of him and ask for more details because it sounds similar to this VIA Project. Anyway, we did not sign up.

    • I would be very surprised if your friend actually had to pay back the money plus interest – what is more likely is he was reassessed and failed to file a Notice of Objection which places that entire year in limbo until the entire matter is decided in tax court. This is what the legal defence fund is set up for – to counter the games that CRA plays with people. The CRA can say that you 'owe money plus interest', however that is simply their opinion until proven in law. This takes many years – and to date the CRA has not won a case where 100% of the donation has been paid back to CRA. So your friend would be the first – maybe ask him for more information. The sad fact is – and one that CRA loves, is that 90% of all people who get these bogus reassessments simply PAY THEM. That's crazy – they give up the legal right to a review and simply assume that CRA is correct – where is has been proven many times that they are not.

    • Why buy a Piccasso painting or Da Vinci painting when they are from Europe? And it’s got nothing to do with Canada?… my answer is, we need these vintage photos for our kids, in order for them to enjoy and do research. The Canadian government loves these kind of tax shelter because it’s a win win situation….. not only wealthy people can take advantage but also the hard working Canadians like us..

  8. (Continuation) Also, what's interesting is if we join and "donate" a certain dollar amount, a portion of that is from our own money, then their fees, then the interest we will have to pay upfront for the "donated loan amount". I was told that since I will get a tax refund for the donation, I can use that money to pay down the loan. But, after hearing from a friend of mine about what happened to him and other people in Ontario, it just sounds scary. Also, how do I know if that photograph assigned to me (w/ thousands of photographs they have) will be worth so much more after 3 years? It's like a gamble to me. Well, I just thought I share my thought. There are still seminars being held and they are at very nice hotels and sometimes offer lunch or dinner or snacks depending on what time you'll attend.

  9. People must realize that the CRA is not a GOVERNMENT AGENCY. They are a private company – and interpret the laughable 'tax act' to however they see fit. There was an error in the article above referring to the CRA as a Government agency.

    Utilizing legal means of tax reduction is not 'wrong'. The facts remain that while the CRA can challenge any donation arrangement, it does not mean that those arrangements are illegal or the people who utilized them are attempting tax evasion. Fact is, the CRA has yet to win a case against donors in terms of these recent tax donation arrangements. Coupled with that fact that the donation programs set aside over $1 million to handle any games that CRA decides to play with them.

    In terms of VIA – they had to go through the new lengthy, detailed process of applying for tax shelter status through the CRA and were approved. This means that they met several NEW criteria that the CRA set forth to regulate these arrangements – which in my opinion lends more credibility to VIA and the program.

  10. Part 2:

    Do your homework people and don't be so afraid of the private corp known as the CRA – just because you take advantage of legal donation programs doesn't mean you are a criminal – thats for the courts to decide and not for CRA to label you.

  11. These are the same promotors that operated Canadian Humanitarian Trust for three years. All the participants were reassessed after a CRA audit indicated that MAYBE 3% of the funds were used for the medical supplies that were promoted for third world countries. In that case they USED registered charities to issue receipt. The charities received a small amount for their trouble and had their registration revoked by CRA.The majority of the money went back in the pocket of the Promotor of CHT.They run these scams for three years because they know it will three years before the audits are completed.CHT is appealing the reassessments which may take 2-4 more years. Basically if you do not repay the money from the reassessment you will owe the refund amount plus interest on the amount over perhaps 7years.I am speaking from experience. A very painful experience. This is a scam . You need to run not walk from these cons. After each program is audit ed they cook up a new scam. Warn your friends

    • i too am a voice of experience. This is an outright scam! I donated to CHT in 2008 and VIA 2009. The promoters will tell you that you will be reassessed and will have to payback the refund. But what they don’t tell you is that the CRA will deny even the priciple donation amount. For example, if you donate $10,000 one year and $10,000 the next, you will be out $40,000! You lose your initial donation, in this example $20,000 to the promoter. The CRA will then deny this $20,000 and you will have to pay this back as well. Not to mention the fact that the reassessments took up to two years. So i had to pay back interest on top of THAT. You pay back the reassessment to avoid any further interest charges. Your not claiming any guilt. But the CRA’s tactic is to drag it out in court so long that it bleeds the promoters defense fund. And with daily interest, who’s willing to take the chance? I’m holding on to very little hope that the promoters will win this fight or the correspondece from them suddenly stops and they are nowhere to be found. If it sounds to good to be true…it is. if still can’t for resist even after my testimonial… invest $1000 max. and watch the headache and regret unfold before your very own eyes. THIS IS A SCAM.
      People in this forum supporting this, very clearly are the promoters themselves.
      The CRA are currently batting .1000 against any tax shelters and scams like CHT AND VIA Programmes…

  12. Does anyone know if the VIA Program is related to the CHT Program? Recently the CHT promoter has abandoned the donors after 10 years and thrown the donors to the CRA wolves! Is Stephen Rosen involved in the VIA Program because I think he was doing the throwing. Year after year showing up in cities across Canada crying for the children we were helping asking for donations promising tax savings and full support should CRA challenge. Now what, just another scum bag destroying the lives of those who believed and trusted him.

    • Yes, some of the individuals responsible for the VIA Project are from the CHT Program. Stephen Rosen (WHI) is/was the promoter of the CHT Program but there were others behind the scenes who were pulling the strings. Lenny Karmiol, the head of Sovereign Financial, the purported promoter of VIA was integral in CHT along with some guy by the name of James Ciancone – was probably the one that made the most $$…and is most likely also part of VIA the background. These guys demonstrate what is wrong with some tax shelters….not all are bad, despite CRA’s ridiculous and at times non-sensicle, unfair treatment of programs and their participants…however, in this instance (CHT and most likely VIA) their words and commitments are ringing hollow. Stephen preached the commitment of WHI to all donors, that they had the best legal council, they would fight hard etc etc and as soon as CRA put an offer to participants WHI (their 1st offer!) all of a sudden WHI is sending out an 8 page memo essentially leading the reader to conclude that they there is no hope of a better offer and should take it (regardless of the financial consequences) It is extremely shameful…and from what i’ve heard WHI has gone silent in their communication with the agents of that program – almost zero communication – what a bunch of cowards. What are they hiding? I think some of the answers are in their memo. I search the internet about CHT and the current offer from CRA etc and i am flabbergasted that there is not more internet chatter from angry and upset CHT donors….wake up and make a fuss, the picture as CHT/WHI presents it to us is not the real picture! WHI is not fighting to protect their own personal interests….and if VIA is still going – do not give them any more money – they will do the same thing….shall I mention the University of Calgary debacle and VIA’s lack of fight, the disrespect of not honouring the 2nd interest payment cheque, the “give us more money” complete sale/get out of this option….are you kidding me? and to top it off, i just heard that Stephen Rosen is now Moos Collection (a vendor in VIA) since Walter Moos died…are they telling participants that??

      • It should be added – read the WHI memo, where they mention the work that has yet to be done which includes valuation work and transfer of title – again, are you %$&@ kidding me? If they really wanted to fight then wouldn’t this work have already been done?? There was a lien in CHT – who is the real lien holder because they would have made a ton of cash…someone involved in the leadership of CHT? the transfer of title work if done properly would potentially reveal this….hmmm, better not do that work. and what about valuation? if WHI was not really planning to fight this to the end, then why do this expensive work….is it conceivable that they put Osler and the other experts in place simply for optics for the sake of trying to skirt a future class action?
        Yes sounds a bit like crazy talk – but is it? In one of CRA’s early letters of proposed reassessment they made a stink about the millions that went to Cyprus…which was simply dismissed by WHI as “thats where the pharma company was located/the lien holder….the monies were transferred to discharge the lien”. Hmmm – when you start googling different names, countries etc – what interestingly comes up is a birth announcement for a Ciancone, in Cyprus, what i’m guessing to be a close relative of this James guy …
        Why are they not fighting! in 2007/08 donors made all cash donations and they’re not willing to fight that? was it a fraud? was the cash really donated on behalf of donors by the retained lawyer?
        Why are more donors not getting upset for being cut loose by WHI?!!! We must band together!
        just because they may not want to fight, to cover their own bacon, doesn’t mean that us donors can’t keep on the fight….maybe its actually better if WHI/Stephen (and whoever else) bow out so they don’t screw it up for the rest of us. Again, don’t fall for their slanted portrayal – their 180 on this very serious issue is suspicious.
        Thank D. Koch for re-hashing this important and now shameful activity by WHI and CHT….

        • I’m hoping to keep this comment section alive. Unfortunately being a participant of both the CHT program and the VIA project, I’ve been dealing with the nightmare of being re-assessed by CRA and of course the “obligations” of the VIA project to get “get out”. I agree with Bee Frank that we need to put up a fight! Would love to know if anyone else has fallen victim to these scams.