Donating Wine To Charities For Tax Credits? The CRA May Not Agree On What It’s Worth

Introduction: A dispute over wine donations and the rules of charitable tax credits.

The case of Ebert v. The King (2023 TCC 49) was decided by the Tax Court of Canada in April 2023. The case involved three taxpayers—Irving Ebert, Richard Herman, and P. Philippe DesRosiers—who had donated bottles of wine to registered charities and claimed charitable donation tax credits. The Canada Revenue Agency (CRA) reassessed the taxpayers and reduced the value of the donated wine for tax purposes.

The dispute before the Court was not about the final tax liability itself, but about whether certain assumptions made by the CRA in the pleadings should be removed from the CRA’s reply. The taxpayers argued that several assumptions were vague, irrelevant, or improperly referred to other donors. The Court therefore had to decide whether those parts of the pleadings should be struck out before the case proceeded to trial.

Background of the Case in Ebert v. The King

The appellants were experienced wine collectors who lived near Ottawa or Gatineau. During several taxation years, each individual donated bottles of wine to registered charities and received official charitable donation receipts. The taxpayers then used those receipts to claim charitable tax credits under the Income Tax Act.

The CRA later reassessed the taxpayers. According to the reassessments, the fair market value of the donated wines was much lower than the amounts shown on the receipts. In particular, the CRA assumed that the wines appraised by a specific appraiser were worth only about 20 percent of the value listed on the charitable receipts.

The taxpayers challenged these reassessments by filing appeals in the Tax Court of Canada. In response, the CRA filed replies that included a number of “assumptions of fact” used to support the reassessments. The taxpayers then brought motions asking the Court to strike out several of these assumptions.

CRA’s assessments are based on assumptions, and the burden rests on the taxpayer—who is best positioned to understand their own tax affairs—to disprove them. These assumptions are presumed to be correct unless and until the taxpayer rebuts them on a balance of probabilities by establishing a prima facie case. Once this burden is met, the onus shifts to the CRA to refute the taxpayer’s evidence; if it fails to do so, the taxpayer prevails.

Legal Issue in Ebert v. The King

The main issue before the Court was whether certain assumptions in the CRA’s replies should be removed from the pleadings.

Under Rule 53 of the Tax Court of Canada Rules (General Procedure), a court may strike out part of a pleading if it is scandalous, irrelevant, vague, or if it may prejudice the fair hearing of the case.

However, the test for striking a pleading is strict. Courts must be cautious because pleadings set out the factual basis for a party’s case. A motion to strike will only succeed when it is clear that the pleading cannot reasonably support the claim or defence.

Analysis of the Court in Ebert v. The King

The Court examined several assumptions included in the Crown’s replies.

Assumptions That Were Allowed to Remain

Many of the challenged assumptions were allowed to remain in the pleadings. The Court concluded that these statements provided context for the CRA’s valuation of the wine.

For example, the Crown assumed that the donated wines were sold at charity auctions and that large numbers of wines entering the auction market reduced their prices. The Court accepted that these statements could help explain how the Minister calculated fair market value. Even if the taxpayers believed the reasoning was flawed, that argument could be raised at trial rather than through a motion to strike.

Similarly, the Court allowed assumptions describing how the wines were sold at auction, including statements that wines were sold in lots and sold “as is.” These details were considered relevant to the market conditions affecting price.

The Court also allowed assumptions that the appraiser played multiple roles in the donation process and that charities paid the appraiser a percentage of auction sales. These statements were relevant because the taxpayers had argued that the appraiser was independent. Evidence about the appraiser’s activities could therefore affect the credibility of the appraisal.

Assumptions That Were Struck Out

The Court did remove several assumptions from the pleadings.

One assumption claimed that many wine donors actively participated in the charitable auctions. Another suggested that some donors repurchased the wines that had been donated. The Court found these statements too broad. They referred to a general group of donors rather than the specific taxpayers involved in the case. The pleadings did not clearly explain how the behaviour of other donors related to the appellants’ own conduct.

Because of this lack of precision, the Court ordered that those assumptions be struck out. However, the Crown was given permission to amend the pleadings if the statements could be rewritten to show a clear connection between the taxpayers and the alleged conduct.

The Court also struck out another assumption involving earlier transactions allegedly conducted by Mr. Ebert in 2001 and 2004. The Court found the statement ambiguous and lacking a clear link to the taxation years under dispute.

Decision of the Court in Ebert v. The King

The Tax Court partially granted the taxpayers’ motions. Several assumptions in the Crown’s replies were struck out because they were overly broad or unclear. However, most of the assumptions remained because they could still be relevant to the Minister’s reasoning and could be examined more fully during trial.

The Court also allowed the Crown the opportunity to amend the pleadings to correct the deficiencies.

Significance of the Case of Ebert v. The King

This case highlights the importance of clarity and precision in legal pleadings, especially in tax disputes. When the CRA makes assumptions to support a tax assessment, those assumptions must be specific enough for the taxpayer to understand the case that must be answered.

At the same time, the decision shows that courts are reluctant to strike out pleadings unless the problem is obvious. Many disputes about evidence or relevance are better resolved during the trial itself.

The ruling, therefore, balances two important principles: fairness to taxpayers and the need to allow legal arguments to be fully explored during litigation.

Pro Tax Tips: Understand That CRA Assumptions Carry Legal Weight

When the CRA reassesses a taxpayer, the CRA may rely on “assumptions of fact” to justify the assessment. These assumptions shift the burden onto the taxpayer to prove that the assumptions are incorrect. Taxpayers should therefore review the assumptions carefully when filing an appeal. If an assumption is vague, inaccurate, or improperly framed, the taxpayer may ask the court to strike it from the pleadings. Understanding this process is important because unclear assumptions can make it harder to defend a tax appeal if they remain unchallenged. Our experienced Canadian tax lawyers can guide you or represent you in challenging improper CRA assumptions of fact and other questionable positions taken during a reassessment.

Frequently Asked Questions (FAQs):

Can the CRA plead assumptions of fact that relate to third parties?

Yes, the CRA may plead assumptions of fact that relate to third parties in certain situations. The CRA does this where the actions of third parties may be relevant to understanding the taxpayer’s conduct or the structure of a transaction. For example, if the CRA believes that a broader scheme involving several participants affected the taxpayer’s activities, facts about those other participants may be included in the pleadings. However, the connection between the taxpayer and the third parties must be clearly explained. If the CRA refers to the actions of other individuals but fails to show how those actions relate to the specific taxpayer in the case, the pleading may be considered too broad and may be struck out.

2. On an appeal from an income tax assessment, is evidence admissible to show that other taxpayers were treated more favourably in identical circumstances?

No, evidence that other taxpayers were treated more favourably by the CRA in similar or identical circumstances is generally not admissible in an income tax appeal. A tax appeal focuses only on whether the assessment of the particular taxpayer is correct according to the law and the facts of the case. The way the CRA treated other taxpayers does not determine whether the assessment under review is valid. Courts have also warned that allowing such evidence could turn a tax appeal into a broader investigation into the tax affairs of many other individuals who are not parties to the case. For this reason, the fairness of another taxpayer’s assessment is not considered a legal basis for challenging one’s own assessment.

3. Is an assessment conclusive only for the taxation year in which it was made?

Yes. An income tax assessment is conclusive only for the specific taxation year in which it was issued. Each taxation year is treated as a separate matter under Canadian tax law. This means that the way the CRA assessed a taxpayer in one year does not automatically determine how the taxpayer should be assessed in another year. Even if the same type of transaction occurred in several years, the CRA may reach different conclusions for each year depending on the facts and evidence available. Therefore, past assessments or earlier decisions do not bind the court when reviewing a different taxation year. Each year must be examined independently on its own facts and legal considerations.