Canada Revenue Agency Prevails in Tax Dispute over Charitable Contributions
November 26, 2018
In a dispute over the value of certain generic pharmaceuticals connected to claimed tax credits for charitable contributions, a judge for the Tax Court of Canada favorably cited an Analysis Group affiliate's independent fair market valuation of the at-issue pharmaceuticals.
The Canada Revenue Agency (CRA) reassessed tax returns for a number of taxpayers, on the basis that their claimed tax benefits relied on allegedly inflated charitable donation values for certain generic pharmaceuticals. Several taxpayers appealed those reassessments. The Department of Justice Canada, counsel for CRA, retained Analysis Group affiliate Dr. Ernst Berndt, professor emeritus at the MIT Sloan School of Management, to undertake an independent fair market valuation of the generic pharmaceuticals in question. Professor Berndt was supported by an Analysis Group team led by Managing Principals Alan G. White and Laurits R. Christensen, and Manager Jeremy Smith.
Professor Berndt testified before the Honourable Justice John R. Owen. Judge Owen cited Professor Berndt's expert report, noting that the valuations presented on behalf of the appellants “substantially overstate[d]” the fair market value of the generic pharmaceuticals and that their valuation methodology was “inappropriate.” In contrast, Professor Berndt's analysis relied on invoices for transactions of the underlying generic pharmaceuticals and market research data to calculate prices reflective of the fair market value. Judge Owen also noted that Professor Berndt's conclusion of the fair market value was informed by his empirical evaluation, in addition to his “research, experience, and knowledge of generic prescription drug markets.”
In his final judgement, Judge Owen dismissed all but one of the appeals heard of CRA's income tax reassessments, citing Dr. Berndt's analysis that “…the valuations of the pharmaceuticals provided [on behalf of Appellants]were flawed for several reasons, including significantly the failure to use a comparable uncontrolled price from an appropriate market to value the generic drugs.”