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

by

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.