Tax Court of Canada Judgments

Date: 19981113

Docket: 92-2773-IT-G; 93-3160-IT-G

BETWEEN:

ALAIN CÔTÉ,

LOUISE MARCOUX,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

GARON, J.T.C.C.

[1] These are appeals from income tax assessments for the 1988, 1989 and 1990 taxation years. In assessing the appellants for those years, the Minister of National Revenue reduced to nil the deduction for charitable gifts both of them had claimed in respect of certain works of art in each of the three years at issue. The appellants are also contesting the penalties imposed in those assessments for the same taxation years.

[2] The appeals were heard on common evidence. There was also a common hearing for part of the evidence and argument in these appeals and the appeals from income tax assessments of Amédée Duguay (94-1081(IT)G), Diane L. Duguay (94-1084(IT)G) and François Langlois (92-1124(IT)G and 94-3007(IT)G). It should be noted at this point that the appellants in the instant appeals and the three individuals referred to in the preceding sentence are part of a group of about 200 people who purchased various works of art and other property in order to give them to registered charities.

[3] For the purposes of these appeals, I consider it appropriate to begin by presenting a fairly detailed account of the testimony of both appellants, which will be followed by a detailed account of the evidence of Marc Levert, a key player in the events on which this case is based. The version of events given by Julien Carignan, a senior manager of an organization that received gifts, will be considered at some length. Finally, an exhaustive account will be presented of the testimony of Jacques Demers, a Revenue Canada appeals officer, because he played a key role in the issuing of the assessments under appeal. The investigation he conducted was supplemented by Réjean Juneau, on one topic only.

[4] I will begin with the evidence of the appellant Alain Côté. He had been employed as a chief technician at the Canadian Broadcasting Corporation in Québec since 1984 and had been an employee of the CBC since 1969. He described the events that led up to his first gift of works of art, testifying that in 1986, his wife, the appellant Louise Marcoux, told him that Aline Tremblay, a co-worker of hers at a Royal Bank of Canada branch, had told her about an interesting tax advantage that involved donating works of art to charities. Mr. Côté knew Ms. Tremblay at that time because, in her capacity as a Royal Bank loans officer, she handled the transactions, such as loans and hypothecs, that he conducted at that branch.

[5] Mr. Côté stated that in late September or early October of that year, he met with Ms. Tremblay at the bank to discuss gifts of works of art. He said that the first question he put to Ms. Tremblay was whether this tax advantage was legal. He also mentioned that Ms. Tremblay showed him a pamphlet entitled "Gifts to Canada or a Province, Charitable Gifts" which explained the procedure for obtaining a tax deduction. She gave him a copy of the pamphlet, but Mr. Côté no longer had it in his possession at the time of the hearing.

[6] Mr. Côté testified that Ms. Tremblay had told him how to go about making such gifts. She told him she would handle everything because she knew someone who had an art gallery and who conducted transactions, bought works of art from individuals at auctions and performed appraisals in accordance with professional criteria and specialized books. The figure established in the appraisal became the amount on the receipt provided by the charity. The receipt would then be filed with Revenue Canada. Ms. Tremblay added that the specialist concerned, the intermediary who found paintings, purchased them and appraised them, was Marc Levert. Mr. Côté said that he did not know Mr. Levert at that time.

[7] Mr. Côté added that he met with Ms. Tremblay once again the following fall and that she told him that there were auctions held every year at which paintings by well-known painters were sold. Gallery owners got together at all the auctions and bought paintings at "fire sale" or liquidation prices. The paintings were reappraised based on guides and brochures. Ms. Tremblay then discussed Mr. Levert's role with him and told him that in 1986, Mr. Levert was associated with the curator of the Musée du Québec and was well known in the Québec area. Ms. Tremblay also told Mr. Côté that in light of his salary at the time, he could make approximately $10,000 in charitable gifts.

[8] Mr. Côté added that Ms. Tremblay handled dealings with Mr. Levert. She and Mr. Levert checked the works that were purchased and identified those that could be donated, and submitted a report together with a purchase proposal which included the selection of a foundation that would issue a receipt for the current year. Mr. Côté stated that he was intrigued by the fact that he could pay $3,000 for a work and obtain a receipt for $10,000. He explained that the tax advantage arose because there was a disparity between the amount on the receipt issued by the organization in question and the amount he had paid. This difference was due to the fact that the works of art were purchased at auctions or were offered by artists or by persons who owned the works and were selling them off for a cash consideration.

[9] Mr. Côté also acknowledged that he had read the tax guide entitled "Gifts to Canada or a Province" at the time, although he did not remember reading that he had to deal with independent appraisers. He admitted that Mr. Levert was simultaneously the seller, the appraiser and the person who provided receipts.

[10] Mr. Côté stated that the works of art in question were well known and that he was able to consult the Guide Vallée, which can be found in specialized houses and is like a dictionary in the field. He did not make these checks until some unspecified time after 1986.

[11] Mr. Côté described how the transaction was conducted. After the transaction with Mr. Levert was completed, he met with Ms. Tremblay, the intermediary at the Bank, through the appellant Louise Marcoux, at which time Ms. Tremblay gave him the document constituting the receipt from the organization in question. A second document, generally in writing, accompanied the receipt: it attested the purchase of a work of art and indicated the work's origin, format, book value and fair market value. The transaction was conducted by Ms. Tremblay with the appellants. Mr. Côté told Ms. Tremblay that he wanted to acquire paintings in the fall of the current year and the transaction was in fact conducted in the fall. However, Mr. Côté said that he may have issued cheques in January and February of the following year rather than in the fall of the current year.

[12] Mr. Côté also mentioned that after he had received the receipts, he wrote two cheques, one payable at the start of the following year and the other dated a few months later, in late May or early June. This last payment represented the second half of the purchase price he owed for the work of art in question.

[13] Mr. Côté added that in a number of cases, they were given photographs of the donated works because the works in question were immediately delivered to the museums or foundations concerned. The appellants never had the works in their possession, but Mr. Côté stated that he went to Marc Levert's gallery a few times in and after 1989 and saw works of art there, although they were not necessarily the ones he had purchased. He said that Mr. Levert had only given him photographs of the paintings for 1988, 1989 and 1990.

[14] Mr. Côté testified that he did not remember exactly when he received the invoices for the works given in 1989 and 1990. He knew that he had as a rule been given the documentation in November or early December of the year concerned, although he did not remember whether all the invoices had accompanied the documentation. He admitted that he would not have been prepared to conduct the transactions with Mr. Levert if he had not been given receipts.

[15] Mr. Côté also mentioned that he made a gift to the Fondation Amérindienne Tecumseh in 1989. He never approached the organizations to which he made gifts during the three years at issue. It was only after he received the invoices that he realized professional fees were included in the amounts indicated on them. He found out that these professional fees were compensation for Mr. Levert's work of finding, handling, acquiring and transporting the works of art. He did not question Mr. Levert about this. Nor did he submit the invoices to Revenue Canada. Mr. Levert had sent a circular to his clients in which he asked them not to submit purchase invoices or proof of payment documents.

[16] According to Mr. Côté, Ms. Tremblay told the two appellants the total amount payable in the fall of each of the three years in question when giving them the amount of the gifts they were supposed to make. In each of the years at issue, Mr. Côté then wrote one cheque, dated March 1 of the following year, for half the price of the gifts on behalf of himself and the appellant Louise Marcoux and a second cheque, dated the following June 1, also on behalf of both the appellants. Ms. Marcoux wrote her own cheques for the paintings she purchased for the 1990 taxation year.

[17] Mr. Côté stated that he continued to make gifts for the years at issue even though the amounts relating to the paintings he gave in 1986 and 1987 had been revised by the Minister of National Revenue in the spring of 1989. He mentioned that Revenue Canada's position on this revision concerned the appraisal of the works of art, not the legality of the gifts. He added that he did not make any gifts in 1991 because a friend in his group, an officer of the Sûreté du Québec who was also one of those who were giving works of art to charities, told him that charges had been laid against Galerie des Maîtres Anciens Inc. and Mr. Levert. This information led him to stop making gifts. Mr. Côté stated that prior to 1991, he had no doubts or suspicions as to the legality of the gifts made in the three taxation years at issue or in the preceding two taxation years. He also read in the newspapers in late 1991 that Mr. Levert was in trouble with the law.

[18] After the group of which Mr. Côté was a member retained new lawyers in late 1991, the appellants, on their new lawyer's recommendation, discontinued their appeals in respect of the assessments for 1986 and 1987, which are not at issue in the instant appeals.

[19] The evidence of the appellant Louise Marcoux confirms certain aspects of Mr. Côté's testimony and provides some additional information. Ms. Marcoux was a receptionist at the Royal Bank of Canada and had been employed by the Bank since 1968. During the years 1986 to 1990, her work required her to go to various branches of the Royal Bank. She knew Ms. Tremblay, who worked at the Bank's Charlesbourg branch, where the appellants had an account.

[20] Ms. Marcoux and Ms. Tremblay first spoke about works of art by telephone. Ms. Tremblay told her that acquiring works of art might be one way to reduce her taxes. After that, it was mainly Mr. Côté who took part in the discussions with Ms. Tremblay. The appellants discussed the matter between them.

[21] Ms. Marcoux said that the appellants received documents such as receipts from the charity during the fall, or definitely before the end of the year, although it was Mr. Côté who handled all that. She also testified that the appellants made payments for the works of art twice a year and that either Mr. Côté sent the cheques to Ms. Tremblay or she herself sent them to Ms. Tremblay through the Bank's internal mail when she and Ms. Tremblay were working at the same branch. Ms. Tremblay had been Mr. Côté's credit officer since the appellants arrived in Charlesbourg in 1975 or 1976.

[22] Ms. Marcoux stated that Mr. Levert was a customer at the same Royal Bank branch but that he had never spoken to her about tax shelters. She said that Ms. Tremblay first told her about the tax shelter at issue in these appeals in 1986. Ms. Marcoux acknowledged that one quarter of the amount on each receipt represented the amount the purchaser of the property to be given had to pay in accordance with the arrangements Mr. Côté had made with Mr. Levert. For example, for 1986, the purchase price of the painting was $850 and the corresponding receipt was for $3,400. Ms. Marcoux signed the cheque dated July 6, 1987, for the first transaction in 1986. She admitted that she never saw the paintings that were purchased for gift purposes and had no interest in seeing them.

[23] Invoice No. 1139 for the 1989 taxation year was not dated. Ms. Marcoux testified that she likely received that invoice and the corresponding appraisal from Ms. Tremblay. It did not bother her that the appraisal indicating the market value of the property to be given was not dated either.

[24] Ms. Marcoux remembered receiving a letter dated January 25, 1992, from Revenue Canada and answering it on February 25, 1992. She admitted that she signed her letter, in which she stated that she could not provide the documents requested by Revenue Canada (invoices, proof of payment documents and certificates of appraisal). She said that it was not Ms. Tremblay who had suggested they not supply these documents.

[25] Ms. Marcoux admitted that she never contacted the organizations that issued the receipts to find out whether they had actually received the paintings. She saw only one photograph of a painting given in 1988. She also acknowledged that she chose neither the paintings nor the charities.

[26] I will now look at Mr. Levert's evidence.

[27] Mr. Levert was unemployed at the time he gave his evidence. He had worked as an inspector for the parity committee "on automotive services" in the Québec area from the 1970s until he quit that job in 1995. In 1987, he established the Galerie des Maîtres Anciens Inc. and La Tourelle, Maison d’encans Inc., both of which were incorporated in March 1987. Starting in 1987, he ran those two firms with his wife, Denise Boily.

[28] Mr. Levert said that he began to be interested in works of art as a collector in the early 1970s. He was especially interested in oil paintings and watercolours. He was also interested in antiques such as items made of bronze or porcelain. Mr. Levert added that he travelled a great deal to galleries, mainly in Quebec, to learn about paintings. He also read books on the subject. He then began purchasing paintings from galleries, including the Galerie Charles Huot and the Galerie de Michel Décardo. Using auction catalogues he received from Fraser and Sotheby’s, he began going to auction houses in Montréal, such as Pinney’s, Fraser and Empire. He also went to auctions in Toronto and received catalogues of works of art from New York.

[29] Mr. Levert said that he has been appraising paintings, mainly for insurance purposes and for gifts, since beginning to work in the art field. In 1983 and the following years, he appraised paintings as a Québec representative of Pinney’s of Montréal.

[30] Mr. Levert said that he was especially interested in the periods that include the 17th, 18th and 19th centuries, and the early 20th century up to about 1930. He had to adapt to the market's requirements, since people in the Québec area were more familiar with artists from the contemporary period, which runs from 1920 to the present. He is still consulted today about the earlier period, inter alia to determine whether it is really the period involved, whether a painting can be restored or whether there is a good market for an artist’s works. He often used to be consulted by antique dealers.

[31] Based on his experience, Mr. Levert noted that there are two markets, the gallery market and the auction market, which are totally separate from each other. The gallery market involves far more paintings by contemporary artists who are currently working or have died fairly recently. For example, Jean-Paul Lemieux is a contemporary artist even though he is dead. Fielding Downes is also a contemporary artist, although he is [TRANSLATION] "on the borderline".

[32] The auction market for paintings includes international auction houses like Sotheby’s in Toronto, which has offices in London and New York; these auction houses use a very sophisticated system. For such auctions, catalogues of colour photographs provide an estimate of the price a painting would ordinarily be expected to command at the auction, not its market value. The second category of auctions involves local auction houses, in Montréal or Toronto for example, that are not in the same league as the big auction houses. Their catalogues are not in colour; instead, they publish a list of auctions. The third category is made up of small auction houses that hold auctions occasionally.

[33] The difference between these auction houses is that the larger the house, the more extensive the advertising done, the greater the number of clients reached and the closer the price will be to the gallery price for certain artists. Paintings by local artists are not sold at major auctions.

[34] Mr. Levert said that in 1988, 1989 and 1990 his two businesses, the Galerie des Maîtres Anciens and La Tourelle, Maison d’encans, were operated out of the same building. After the building was sold, the Galerie des Maîtres Anciens moved to another location. Mr. Levert’s business objective was to operate an auction house, contacting various people to ask them to bring him paintings they wished to resell. The Galerie des Maîtres Anciens also purchased paintings from time to time, and they were sent to La Tourelle, Maison d’encans, to be resold at public auctions. The Galerie des Maîtres Anciens also made private sales.

[35] Mr. Levert’s explanation of why he sold paintings for gift purposes was basically as follows:

1. he himself made gifts and sales directly to governments and various other organizations before 1986;

2. when his employer, the parity committee, temporarily ceased operations, his friends asked him to sell paintings for gift purposes.

Mr. Levert and his wife therefore went to the office of a Revenue Canada official in Ottawa in 1986 to find out whether the process was lawful. A Mr. Boutet (apparently a lawyer for the federal government) told them that [TRANSLATION] "it’s perfectly legal". It was then that Mr. Levert, before opening his business, began selling paintings openly to people he knew.

[36] Before Mr. Levert opened his gallery, he had already dealt with the two appellants in 1986 and 1987 at Ms. Tremblay’s request.

[37] In 1987, Mr. Levert opened La Tourelle, Maison d’encans and the Galerie des Maîtres Anciens. The sales for gift purposes that he was making at that time were not the main aspect of his activities. He was convinced that purchasing paintings to make gifts was perfectly legitimate. He said that from 1987 to 1991 the portion of his total sales associated with charitable gifts was no more than 10 or 15 percent. Mr. Levert also testified that he never did any advertising in relation to gifts; although there is a document bearing the logo of the Galerie des Maîtres Anciens that does contain such advertising, he said that his partners were responsible for it.

[38] In general, the way Mr. Levert proceeded with clients to whom he sold paintings for gift purposes was as follows: the clients were referred to him, and he then contacted a charity and asked the person in charge whether he or she was interested in a given type of painting. When he found a painting that was acceptable to the museum or other charity, he informed the donor of the possibility of acquiring a few paintings that Mr. Levert could resell. The amount was usually set in advance at 25 percent of the normal value of the painting in a gallery. Mr. Levert included the professional fees charged to his clients in the total amount on the invoices showing the sale prices that had been negotiated.

[39] Mr. Levert also told the donors what they should do and encouraged them to check the legitimacy of the process with Revenue Canada. He added that a number of people asked him questions about the legitimacy of the process, specifically as regards the difference between the amount at which a work of art was appraised and its sale price. According to Mr. Levert’s evidence, his appraisals were based on the main reference works, in particular the Guide Vallée. When he was in doubt about the value of a painting as shown in a particular guide, he called the gallery that represented the artist or consulted other galleries, for instance in Montréal. However, he acknowledged that the prices of paintings vary significantly in the guides, including the Guide Vallée. He also said that the Guide Vallée is simply a "guide" that suggests prices.

[40] Mr. Levert admitted that he generally gave his clients the receipt, the appraisal and the invoice, as was the case with the painting by Ludger Larose sold to the appellant Alain Côté. He added that there was no particular reason why he rather than the organization concerned sent the donor the organization's receipt. He said that in most cases he was the one who gave the donor the receipt. He placed the said painting by Ludger Larose, which Mr. Côté had given to Univers du Rail Inc., with Pinney's on consignment because he wanted it to be resold for the benefit of the owner Univers du Rail Inc.

[41] Mr. Levert did not dispute the fact that the same paintings ended up at various charities a number of times, since the charities resold them at auctions or even privately. The paintings could be given again to other charities.

[42] Mr. Levert met Mr. Côté through Ms. Tremblay of the Royal Bank of Canada. He did not remember whether he personally met Mr. Côté when he purchased paintings for the first time. However, he stated that he surely met him at some point because he met 99 percent of his clients.

[43] With respect to one particular sale by Mr. Levert to Mr. Côté, there is no invoice according to which Mr. Côté purchased paintings in November and December 1990, but the two cheques were dated March 1991 and June 1991. Mr. Levert testified that the reason for the delay in payment was that he wanted to allow the purchaser to receive his income tax refund before paying.

[44] With respect to the terms of payment agreed upon between Mr. Levert and Mr. Côté for the sale of the painting by Ludger Larose, Mr. Levert stated that in March 1989, Mr. Côté paid $1,838, which was probably the unpaid balance at that time. Mr. Levert did not have a clear recollection of the terms of payment. He added that when he dealt with clients, he did not tell them that a certain amount covered his professional fees. His clients did not ask him to explain this.

[45] Mr. Levert stated that his business's main activity was purchasing very large quantities of paintings at low prices and selling them wholesale rather than selling them retail at their full price through the Galerie des Maîtres Anciens. Auctions were his business's main activity. He added that he also sold to dealers, galleries and collectors, who in turn resold the paintings at 20 to 40 times their purchase price. He explained that he sold paintings at a quarter of the gallery value or the value stated in the Guide Vallée because he had set a rate of 25 percent in that regard for the sale price of paintings that would be given as gifts. He added that he had steered clients to about 15 different charities over the years.

[46] Mr. Levert said that he met Ms. Tremblay, who was in charge of the loans department at the Royal Bank of Canada, several years ago. She referred clients to him who wanted to purchase paintings to make gifts. He added that Ms. Tremblay sent him clients in her private capacity and not as a representative of the Royal Bank.

[47] In reviewing Mr. Levert’s tax returns in the early 1980s, Ms. Tremblay noticed the gifts he had made. She asked him whether she and her friends could take advantage of this process. In some cases, Mr. Levert gave the receipts, appraisals and invoices to Ms. Tremblay and she sent them to the clients concerned. There were also cases in which Ms. Tremblay gave him the cheques written by clients to purchase paintings.

[48] In December 1988, Mr. Levert sent a letter to all those who had purchased paintings from him for gift purposes with a view to forming a group. It was at that time that Revenue Canada had begun assessing people who claimed a deduction for gifts of paintings. On June 5, 1989, Mr. Levert sent another letter to those who had made gifts in the past to tell them that the Income Tax Act had not been amended and to assure them that he would not abandon them as clients. However, some clients asked him to reimburse them because of the problems they were having with the tax authorities. Mr. Levert agreed to either reimburse them or give them paintings as compensation. In the case of the appellants, Mr. Levert chose not to cash one of their cheques.

[49] Mr. Levert said that Gaston Lamy of Univers du Rail Inc. approached him in 1989 to ask if he was interested in organizing a fundraising campaign and holding an auction to benefit Univers du Rail Inc. Mr. Lamy was a collector of paintings, and Univers du Rail Inc. had already started accumulating paintings. Mr. Lamy asked Mr. Levert if he would handle the appraisals and try to find people who would make gifts to Univers du Rail Inc. Mr. Levert subsequently reached an oral agreement with Univers du Rail Inc. under which he would run auctions for it, as he had done for the Société protectrice des animaux. Mr. Levert guaranteed Univers du Rail Inc. a minimum price of 10 percent at the auctions. Mr. Levert said that the condition that Univers du Rail Inc. get a minimum price of 10 percent for paintings at the auctions was not always met. At one point, Univers du Rail Inc. asked Mr. Lamy to store paintings it had been given in the basement of a facility owned by Mr. Levert.

[50] Mr. Levert described the procedure by which gifts were made to Univers du Rail Inc. as follows. He called the charity's president and explained to him that he had someone who wanted to give a certain painting and that the gift would be for a certain amount. The president then issued a receipt, and Mr. Levert forwarded it to the person concerned. Mr. Levert added that he was the one who prepared the appraisal for Univers du Rail Inc. A copy of the appraisal was given to Univers du Rail Inc. along with a list showing that a specified person had made a gift of a specified painting for a specified price. Mr. Carignan of Univers du Rail Inc. went to see the paintings in only some cases. A requirement to provide documents concerning these gifts was issued to Mr. Levert. He admitted that he had destroyed the lists just referred to, which he had kept for a while and given to Univers du Rail Inc.

[51] As regards the Fondation Amérindienne Tecumseh, Mr. Levert was approached by Jacques St-Laurent, who asked if he could send him some clients. The same kind of process was involved as with Univers du Rail Inc. However, Mr. Levert said that in the days or weeks following the gift, either a representative of the Fondation Amérindienne Tecumseh came to get the paintings or Mr. Levert delivered them to the Fondation. The paintings were not stored. Mr. St-Laurent, the president of the Fondation, had his own appraiser, although Mr. Levert acknowledged that he had certainly performed appraisals for the Fondation.

[52] Mr. Levert said that an auction house’s market is established at a specific point in time. Those who are interested have one or two days to visit and see the paintings, and the sale then takes place. The warranty is limited to 15 or 30 days to confirm the painting's value. In the gallery market, there is an exhibit and clients can visit the gallery at their leisure. Clients are not required to pay for a painting in full when they buy it but can work out arrangements regarding payment terms. The warranty is also better than that provided by auction houses. The auction market is one in which people buy for the purpose of reselling.

[53] The auction price can be up to 25 times lower than the normal gallery price for both famous artists and other artists. The lower a painting's value, the greater the difference between the auction price and the gallery price. The gallery price is suggested by either the artist or the gallery. A gallery’s clients are not necessarily the same people who go to auctions.

[54] Mr. Levert said that in the spring of 1988, a search was conducted at his home, the premises of his businesses, his accountant’s office and the premises of other people in Quebec, including appraisers and dealers. The search was part of an investigation into what Revenue Canada considered a tax scheme. Mr. Levert wrote to Ms. Boucher of Revenue Canada in Ottawa on November 14, 1988. Before doing so, he had spoken with Ms. Boucher by telephone after an official from Revenue Canada's Charities Division referred him to her. He added that he later contacted Carl Juneau of Revenue Canada, to whom he had been referred by someone in charge at the Charities Division. He also contacted Laval Mailhot of Revenue Canada’s Québec office to ask him what he considered to be the fair market value of property. Mr. Mailhot told him that, according to the law, the fair market value is the highest price that would be negotiated by a willing seller under no compulsion to sell and a willing buyer under no compulsion to buy. Mr. Levert said that he continued to sell paintings for gift purposes despite the Department’s investigation because he was convinced that the whole process was consistent with and even encouraged by the Act. He also denied access to Revenue Canada’s investigators a number of times, since he had asked them to put down in writing what they wanted to obtain and Revenue Canada had not complied with his requests. According to his evidence, he was harassed by Revenue Canada.

[55] Before ending this summary of Mr. Levert’s evidence, it is important to note that four separate charges were laid against him. Pursuant to arrangements made with counsel for the Government, it was agreed that there would be only one trial on the following basis: if Mr. Levert were acquitted, that would end the proceedings; if he were convicted, he would plead guilty to the other charges. The Court of Quebec, Criminal Division, found Mr. Levert guilty on the basis that he had not reported all his income for 1986. On April 7, 1997, Mr. Levert was sentenced to 10 months in prison and two years on probation. He was prohibited from acting directly or indirectly as an appraiser, promoter, broker or consultant in connection with gifts of works of art to non-profit organizations, such as charities, and in particular museums and fabriques. The probation order was not to take effect until the expiry date of Mr. Levert’s prison sentence, which he has not yet served in full. Mr. Levert added that his guilty plea related more to "backdating", as he put it, than to the issue of appraising paintings.

[56] Julien Carignan’s testimony is interesting because his version of events is from the perspective of a senior manager of an organization that benefited from the gift system at issue in these appeals.

[57] Mr. Carignan became a member of Univers du Rail Inc. in 1986 and a member of the corporation's board of directors in 1987. Univers du Rail Inc. owned a kind of railway museum, which had been established in Charny in 1978. Its members were former railway company employees or railroad enthusiasts. From 1978 to 1986, the main source of financing was the sale of coins, which brought in about $4,000 or $5,000 a year. In 1987, Univers du Rail Inc. acquired two railway cars with money provided by five members.

[58] Univers du Rail Inc. became a registered charity in 1987 after Jacques Lamy, a director and a former engineer for Canadian Pacific Limited, was told that the organization could receive charitable gifts and issue receipts. This would enable it to operate on a larger scale. According to Mr. Carignan, although he was a director at the time in question, it was Alain St-Amand, the president of Univers du Rail Inc., who submitted the application for registration to the tax authorities.

[59] Mr. Carignan met Mr. Levert in 1988 when Mr. Levert was visiting Mr. St-Amand’s home. Mr. Levert told them that he could obtain gifts for Univers du Rail Inc. Mr. Carignan said that an oral agreement was reached pursuant to which Mr. Levert would solicit gifts for Univers du Rail Inc. and Univers du Rail Inc. would receive 10 percent of the value of the paintings. It was Jacques Lamy who took the initiative of contacting Mr. Levert. Mr. Levert sold paintings to donors, not to Univers du Rail Inc., and it was he who appraised the paintings.

[60] Mr. Carignan testified that he trusted Mr. Levert implicitly and relied on the Revenue Canada pamphlet, which discussed the legality of charitable gifts. No one at Univers du Rail Inc. had any reason to think that it was unlawful or fraudulent to make gifts until Revenue Canada informed the organization's management that it should, as a rule, be receiving 90 percent of the proceeds from the sale of the paintings. Mr. Carignan told Revenue Canada that Univers du Rail Inc. was receiving only 10 percent of the proceeds. Since no one at Univers du Rail Inc. was familiar with art, its senior managers had left it up to Mr. Levert to handle the financial aspect of the transactions relating to the acquisition of works of art. Mr. Levert had told them that the Guide Vallée was a catalogue that showed the fair market value of paintings. Mr. Carignan said that he thought the amounts stated on the receipts represented the fair market value of the paintings.

[61] Mr. Carignan testified that the senior managers of Univers du Rail Inc. could have seen the paintings given to the organization if they had wanted to. He went to the Galerie des Maîtres Anciens a number of times but was unable to identify the paintings given to his organization. The paintings in question were stored at the Galerie des Maîtres Anciens because Univers du Rail Inc. did not have appropriate storage facilities. Mr. Carignan added that the Galerie des Maîtres Anciens held auctions in the fall and that a portion of the auction proceeds was sent to Univers du Rail Inc. Five or six paintings were given to Univers du Rail Inc. in 1987; that number rose to about 30 a few years later.

[62] In January 1992, Revenue Canada found fault with the senior managers of Univers du Rail Inc. for having no control over the gifts made to their organization. They therefore decided to rent a heated warehouse where they would store all the paintings before returning them to Mr. Levert in the fall to be sold by auction. Univers du Rail Inc. never put that plan into effect, since Revenue Canada took possession of the paintings in February 1992 and stored them at the Champlain Harbour Station. Mr. Carignan was no longer the president of Univers du Rail Inc. at that time. The paintings were eventually returned to Univers du Rail Inc. and sold at a flea market for a ridiculously low price.

[63] Mr. Carignan said that during the years when he was one of the senior managers of Univers du Rail Inc., a police officer contacted him to inquire about the legality of the gifts. He told the officer that he believed everything was legal. Univers du Rail Inc. never issued fraudulent receipts. Mr. Carignan admitted that he did some television advertising for Univers du Rail Inc. in November 1991 and by this means successfully solicited gifts of works of art for it. Univers du Rail Inc.’s registration was revoked by Revenue Canada in 1992.

[64] Mr. Carignan also said that Mr. Levert told him what had to be written on the receipts, to whom they were to be made out and what works of art they concerned. For some time, the appraisals were given to Univers du Rail Inc. together with certain other documents relating to the transactions in question. Univers du Rail Inc. later had to ask to be given the appraisals.

[65] Mr. Carignan said that Univers du Rail Inc. trusted Mr. Levert implicitly. For two or three years, it obtained 10 percent of the proceeds from the sale of the paintings, as had been agreed. The situation subsequently deteriorated.

[66] Based on Univers du Rail Inc.’s financial statements for the years listed below, Mr. Carignan said that the total amounts shown on the receipts were as follows:

Taxation year    Receipts

1988    $100,000

1989    $250,000

1990    $500,000

1991 $1,000,000

Mr. Carignan told the Court that the sale of the paintings that Univers du Rail Inc. had received as gifts brought in the following amounts in the years listed below:

Taxation year Amount

1989 $10,020

1989 $5,000

1990 $23,500

1991 $15,400

The receipts issued by Univers du Rail Inc. were generally given to Mr. Levert. Mr. Carignan added that he did not know the two appellants.

[67] The evidence given by Jacques Demers sheds light on the nature of Revenue Canada’s investigation and on the factual and legal basis for the assessments made against the appellants in respect of the years in question.

[68] Mr. Demers has been an appeals officer for Revenue Canada since April 1994. His previous job was as an investigator for that department’s Special Investigations Section. Mr. Demers became familiar with the appellants’ files for the 1986, 1987, 1988, 1989 and 1990 taxation years.

[69] The investigation conducted by Revenue Canada had three phases. Phase I related to the 1986 and 1987 taxation years, Phase II to the 1988, 1989 and 1990 taxation years and Phase III to the 1991 and 1992 taxation years.

[70] Phase I of the investigation concerned charities such as the Société protectrice des animaux, the Musée Louis-Hémon in Péribonka and the Musée Pierre-Boucher in Trois-Rivières. The Department decided to investigate after realizing that a tax scheme had been set up by promoters to sell works of art whose value had been inflated for the purpose of making gifts to charities. According to Revenue Canada, the scheme specifically involved the sale of charitable receipts at 20 or 25 percent of the amounts shown on the receipts. The experts retained by Revenue Canada determined that the appraisals of the works of art were excessively high.

[71] In assessing the taxpayers who made gifts during the 1986 and 1987 taxation years and participated in the type of arrangement described in the preceding paragraph, Revenue Canada reduced the value of the gifts, although it acknowledged that the gifts were genuine.

[72] As regards the assessments for the 1988, 1989 and 1990 taxation years in respect of the taxpayers covered by this investigation who made gifts during those years, Revenue Canada took the position, based on this Court's decisions in Guy Dutil v. R. and Réjean Gagnon v. R., Both of which were rendered on July 25, 1991, that there was no intent to give at the time of the gifts.

[73] According to Mr. Demers, Mr. Levert was one of the promoters under investigation. He said that Mr. Levert sold works of art at prices that generally represented 20 percent of the amounts stated on the receipts. Mr. Demers believed that the charities involved were not aware of all the facts and were being manipulated by Mr. Levert. The fact that Mr. Levert was both the seller and the appraiser of the works of art strongly influenced Mr. Demers. The names of the appellants were discovered during Phase I of this investigation because they had made gifts to the Musée Louis-Hémon and the Musée Pierre-Boucher.

[74] In Phase II of the investigation, Revenue Canada focused on the charities and put together files on taxpayers in order to set up a database recording receipts, proof of purchase documents, invoices, proof of payment documents and cheques. These data were gathered to determine which taxpayers were involved in the scheme to sell tax receipts and which of them were genuine donors or, in other words, had owned the works of art for a number of years. In the case of the genuine donors, Revenue Canada would contest only the value of the works of art, while in the case of the other taxpayers, Revenue Canada would refuse to find that genuine gifts were made.

[75] Mr. Demers said that, on the basis of Dutil and Gagnon, supra, a distinction had to be drawn between taxpayers who had owned works for some time and were thus their real owners, and taxpayers who purchased works in order to make gifts. He expressed the view that, to make a gift, ownership and possession of the property and an intent to give are all necessary. The assessments under appeal were based on two factors: there was no intent to give and the organization did not become the owner of the paintings so that it could dispose of them as it liked. Revenue Canada challenged the process under which Mr. Levert sold paintings and acted as mandatary for the consignment of the paintings for resale, while the donors did not choose the charities. Mr. Demers said that his investigation from 1987 on found no cases in which a donor had paid the amount indicated on the tax receipt for a work.

[76] According to Mr. Demers, gifts made to the Fondation Amérindienne Tecumseh, the Société protectrice des animaux and Univers du Rail Inc. were investigated.

[77] The investigation involving the Fondation Amérindienne Tecumseh ended after the death of its president, Alain St-Laurent. The investigation of Univers du Rail Inc. ended with the revocation of its registration as a charity. No criminal proceedings were brought against any of the three charities. No charity was assessed under Part V of the Act, which provides for the payment of tax in certain circumstances by a charity whose registration has been revoked.

[78] Mr. Demers testified that his investigation of the Fondation Amérindienne Tecumseh led him to conclude that the prices of the works of art were based on unofficial, numbered receipts (which could have been obtained at a stationery store) indicating [TRANSLATION] "the file number, the type of system sold and the sale price". The appraisals on the basis of which the tax receipts were issued were obtained following a subsequent meeting between Mr. Demers and Mr. St-Laurent.

[79] Mr. Demers said that after he asked for them, Mr. St-Laurent of the Fondation Amérindienne Tecumseh provided him with 50 receipts, the organization’s minute book and the donors’ files, although these did not contain the appraisals. The works of art were no longer at the Fondation at the time of his audit. In August 1991, Mr. Demers reviewed the Fondation’s books of account and noted that 50 receipts had been issued in 1988 for a total of $373,984, that 108 receipts had been issued in 1989 for $731,158 and that 290 receipts had been issued in 1990 for a total of $1,728,593.57.

[80] Mr. Demers obtained information from Guy Drolet of Revenue Canada’s Special Investigations Section, who had been instructed by his department to investigate the Galerie des Maîtres Anciens six months after the audit of Univers du Rail Inc. Based on that information, Mr. Demers found that there was a link between the Galerie des Maîtres Anciens and the Fondation Amérindienne Tecumseh, as he connected some sales invoices from the former with receipts from the latter. The sales invoices from the Galerie des Maîtres Anciens for 1988 related to works of art that had been given to the Fondation Amérindienne Tecumseh and sold for prices representing 25 percent of the amounts stated on the receipts. Mr. Demers was unable to obtain invoices from the Galerie des Maîtres Anciens for 1989 and 1990. He said that attempts to obtain documentation from the Galerie des Maîtres Anciens on the sale of works of art were in vain. Requirements to provide documents were issued by Revenue Canada, but they too were unsuccessful. Charges were subsequently laid against the entities that owned the Galerie des Maîtres Anciens and La Tourelle, Maison d’encans, and against Mr. Levert as a director of those entities. The court found them guilty of destroying records.

[81] The investigation of Univers du Rail Inc. began in the fall of 1989. For the purposes of that investigation, Mr. Demers met with Alain St-Amand and Julien Carignan, who were respectively the president and a manager of Univers du Rail Inc. The organization’s income statement for the year ending December 31, 1988, showed $10,000 in income from auctions. Mr. St-Amand told Mr. Demers that there was an oral agreement under which the works of art given to Univers du Rail Inc. were to be sold at prices no lower than 10 percent of the amounts stated on the receipts. That arrangement was a source of funding for Univers du Rail Inc. It was Mr. Levert who found the persons who gave works of art to Univers du Rail Inc., and the senior managers of that corporation did not meet them. Mr. Levert provided the receipts and appraisals in the name of the Galerie des Maîtres Anciens.

[82] Mr. Demers also said that a requirement letter was sent to Univers du Rail Inc. and that other action was taken in relation to that organization. Despite those initiatives, he obtained little information from Univers du Rail Inc. In particular, he was unable to see any of the paintings it had been given when he visited its premises.

[83] Mr. Demers also made a connection between invoices from the Galerie des Maîtres Anciens and Univers du Rail Inc. Univers du Rail Inc. had issued 14 receipts on one day, December 7, 1988. The appraisals were also dated December 7, 1988. The amounts on all the invoices for the property acquired by the appellants, like those relating to a number of other taxpayers, represented the same proportion of 25 percent of the amounts stated on the receipts.

[84] In August 1991, Mr. Demers again met with Julien Carignan, who gave him Univers du Rail Inc.’s financial statements for 1989, 1990 and 1991. Mr. Demers reviewed the receipts issued by the organization in 1988. He concluded that 34 receipts had been issued in 1988 for a total of $207,200 and that the consideration shown in Univers du Rail Inc.'s financial statements at the time was $10,000, which represented four percent of the amounts received. For 1989, he noted that 39 receipts had been issued for a total of $215,895 and that the consideration shown in the financial statements was $10,020, or four percent of the amounts shown on the receipts. Finally, he noted that 59 receipts had been issued in 1990 for a total of $621,394 and that the consideration received by the organization was $23,500, which represented three percent of the amounts shown on the receipts.

[85] Mr. Demers then explained how the tax advantage received by the two appellants as a result of their participation in the transactions at issue here was calculated.

[86] The appellant Alain Côté was allowed a deduction of $3,160 under the Income Tax Act for each of the three years at issue. The provincial tax deduction was set at $2,809. The total gain realized by Mr. Côté from the transaction in 1988 was $3,021. For 1989, he was allowed a deduction of $2,640 under the provincial statute with a total incidence of $5,800 and a total gain (under both the federal and provincial statutes) of $2,937 over the acquisition cost of the property he had given. For 1990, the provincial deduction was $2,640, for a total incidence of $5,800 and a net gain of $2,960, computed on the same basis as for the previous years. In computing the return on the tax shelter, Mr. Demers took into account both the deduction for charitable gifts and the capital gains exemption.

[87] During his investigation, Mr. Demers did not concern himself with establishing the fair market value of the works of art that were given to charities from the point of view of the taxpayers concerned because Revenue Canada did not acknowledge the validity of these gifts. According to the Department, what the taxpayers purchased were not works of art, but receipts. The appellants had no intent to give. Revenue Canada did not conduct a counter-appraisal in respect of the value of the works of art established by Mr. Levert. As a result, the value of the works of art was not established by Revenue Canada at the relevant times during the investigation in question.

[88] Lastly, during his testimony, Mr. Demers presented the key information on which Revenue Canada relied in assessing penalties against the appellants.

[89] He first mentioned that the facts on which this decision was based were derived from data gathered when auditing the charities. The scheme set up by Mr. Levert led Mr. Demers to believe that the appellants had been grossly negligent in taking part in transactions in which they had obtained receipts for amounts four times greater than the purchase price of the property, whereas the amount on each receipt was supposed to reflect the market value of the property in question. Among other aspects of the scheme, the taxpayers did not choose the charities and very often did not even see the works of art they were supposed to have given. The appellants did not deliver the works to the charities. In Mr. Côté's case, Revenue Canada reduced the value of the work of art he had given by 78 percent for the 1986 taxation year. As an additional factor, the appraiser, who was the promoter of this scheme, was also an art dealer. Mr. Côté was aware of Revenue Canada's position after a meeting he had in 1987 with representatives of that department. Mr. Demers also discussed the assessment issued in 1989 and the gifts made after that date. As Mr. Demers saw it, Mr. Côté continued to make gifts in the same circumstances with his eyes shut regardless of Revenue Canada's position.

[90] The work of investigator Réjean Juneau of Revenue Canada's Special Investigations Section added to the investigation by Mr. Demers. His work focused on the Fielding Downes drawings. Revenue Canada had noted the large amounts on the receipts for the charitable gifts involving these drawings. Mr. Juneau was the only person to investigate this matter. His research into the value of the Fielding Downes pictures was limited to the Guide Vallée. He determined that the total of the amounts on the receipts for the gifts of the pictures by the artist Fielding Downes was $1,058,050 for the 1989, 1990 and 1991 taxation years. The charities that received these gifts were Univers du Rail Inc., the Fondation Amérindienne Tecumseh, the Société protectrice des animaux and the Fondation Artrix.

[91] All the appraisals of these pictures referred to the Guide Vallée and mentioned the Galerie l'Oeuvre, the owner of which was John Sanchez. During a visit to that gallery, Mr. Juneau noted that four pictures by Fielding Downes were on sale, that the largest of these pictures measured 14 inches by 18 inches and that the stated price for it was $325. The posted price for this watercolour was slightly lower than the price mentioned in the Guide Vallée. Mr. Sanchez told him that the price indicated in the Guide Vallée must be reduced by 20 percent to arrive at the [TRADUCTION] "right price". Mr. Juneau did not go to other galleries to check that the prices of the pictures established as indicated by Mr. Sanchez were accurate. He did not introduce himself as a Revenue Canada officer during that visit.

[92] Mr. Juneau subsequently met with Félix Vallée, the publisher of the Guide Vallée, and told him that he was a Revenue Canada officer. Mr. Vallée was accompanied by his lawyer and refused to show his files.

[93] A few weeks later, Mr. Juneau met with Jacques Morin, Fielding Downes' agent according to the Guide Vallée. Mr. Morin told him that he had agreed to sell pictures by Fielding Downes, with the help of John Sanchez, for Suzanne Moisan and that most of them had been sold to Mr. Levert. Mr. Morin did not provide Mr. Juneau with lists of sales of the Fielding Downes pictures, but one document indicated that Mr. Morin had sold pictures for $7,519 and that he had received a commission of 20 percent of that amount, although no details were provided.

[94] Mr. Juneau returned to the Galerie l'Oeuvre a little later and this time identified himself as a Revenue Canada investigator. Mr. Sanchez provided him with sales invoices, but none of those invoices concerned the pictures by the artist Fielding Downes. Mr. Juneau concluded that, since he had not received invoices from either Mr. Morin or Mr. Sanchez for the Fielding Downes pictures, there had been no sales. Mr. Juneau acknowledged that he had not conducted a thorough investigation into the sales by Mr. Morin and Mr. Sanchez. He also acknowledged that he had not tried to determine whether the prices of paintings in other galleries compared to those appearing in the Guide Vallée. No other Revenue Canada investigator conducted a more thorough review than his into pictures by the artist Fielding Downes. He mentioned that according to Fielding Downes' will, much of Mr. Downes' property was bequeathed to Suzanne Moisan.

[95] In addition to the testimony of the appellants, Mr. Levert, Mr. Carignan, Mr. Demers and Mr. Juneau, who are the key figures in these appeals, the testimony of certain other witnesses must be briefly summarized in order to round out the evidence.

[96] From the testimony of Pierre L'Allier, a curator at the Musée du Québec, it should be noted that Mr. Kramer offered to sell a painting by Ludger Larose to the Musée du Québec for $5,000 in late 1986. No appraisal was provided. The Musée du Québec was not interested in acquiring the painting. According to a document adduced in evidence, Mr. Levert offered to sell the same painting by Ludger Larose to the Musée du Québec for $14,000.

[97] The testimony of Philippe George, an ardent collector, revealed that his wife acquired one of the paintings at issue in this case in April 1989. The purchase price was $300 plus a 10 percent commission and provincial sales tax.

[98] The witness Thomas Kramer told the Court that he purchased a painting by Ludger Larose entitled "Funérailles d'une jeune fille à Venise" for $1,200 in March 1983 from a neighbour, Dorothée Lefrançois, who was experiencing financial difficulties at that time. He offered to sell the painting to the Musée du Québec, but it was not interested. The painting was subsequently left on consignment with Encans Pinney's and was sold for $2,200 less a 10 percent commission.

[99] The following points from the testimony of expert witness Charles Rinfret are relevant:

(a) sales of pictures by the artist Fielding Downes took place mainly in auction houses, and portraits by this artist sold for lower prices than landscapes;

(b) oil paintings are generally more expensive than watercolours, while pastels and watercolours have similar values;

(c) he admitted that, before the Galerie Zanettin closed, the artists represented by that gallery advertised in the Guide Vallée and said that artists at times consulted the gallery before establishing their prices;

(d) he stated that there are differences between the prices indicated in the Guide Vallée and the actual prices; and

(e) he mentioned that an artist's market can be either the gallery market or the auction market and that the appropriate market is the one where the most paintings by a given artist can be obtained.

[100] The Court also had the benefit of hearing the evidence of David Kelsey, an auctioneer at Pinney's. According to Mr. Kelsey, that auction house holds two catalogue sales per year. The price list for these sales refers to auction prices. For such items, the market is a resale market, whereas prices in art galleries are retail prices. Gallery prices can be higher than auction prices. The usual practice in the industry is to set the reserve price for a painting at 15 or 20 percent below the price at which it is felt that the painting can be sold. Mr. Kelsey added that the reserve price is not always known and that some works of art do not even have one.

[101] Mr. Kelsey recognized two paintings that were discussed at the hearing. He had prepared the catalogue in which they both appeared. One of them was "Funérailles d'une jeune fille à Venise" by Ludger Larose; its consignor was Mr. Kramer and its reserve price was $2,000. The price indicated in the catalogue was between $2,500 and $3,500. He confirmed that the price at which it was actually sold was $2,200 plus a 10 percent commission and provincial sales tax. The purchaser was the Galerie des Maîtres Anciens.

[102] As for the painting by the artist Albert Edouard Cloutier entitled "Watching the Harbour Traffic", which appears in Pinney's catalogue, Mr. Kelsey estimated its price at between $500 and $700. It was sold for $300. The consignor was Denise Boily, Mr. Levert's wife.

[103] The testimony of Jules Harvey, who has owned an art gallery for 25 years, provided some information on the art market. Mr. Harvey testified as an expert witness. To determine the value of paintings, he relies on guides which, in many cases, give prices fixed by the artist. He stated that the price at which a painting is sold in a gallery determines its market value.

[104] On April 22, 1992, at Mr. Levert's request, Mr. Harvey appraised two paintings by Fielding Downes at $2,800 and $2,500, respectively, relying on the Guide Vallée to arrive at these appraised values. He stated categorically that the auction price is not decisive in establishing the market value of a painting and added that most paintings sold in Quebec are sold in art galleries. He also mentioned that he sells the paintings of artists listed in a guide, such as the Guide Vallée, at the price indicated in the guide.

[105] Guy Gagnon also testified as an expert witness.

[106] Mr. Gagnon, who was a firefighter with the Department of National Defence beginning in 1966, began to collect paintings in 1972. In 1985, he opened an art gallery, the Galerie Feuille d'Érable, which he operated until June 1995. The gallery was open seven days a week. Mr. Gagnon worked at the gallery in the evenings and on weekends. It sold, in roughly equal proportions, works by two types of artists: those who were not very well known or were starting out, and well-known contemporary artists. When the gallery opened, its inventory included approximately 150 paintings from his personal collection. Most of his gallery's inventory came from art galleries, although one third of it was purchased at auctions in Québec and Montréal. Mr. Gagnon was active in the Quebec art market between 1987 and 1992. In particular, he visited galleries and went to auctions in Québec and Montréal. He was often one of the buyers. He also went to two flea markets in the Québec area.

[107] Mr. Gagnon said that his gallery was a small one. He estimated that he sold approximately 35 paintings a year between 1987 and 1993, either in his gallery, at auction houses or through other galleries. Annual receipts from his sales amounted to approximately $20,000.

[108] He said that the prices at which he sold paintings at his gallery were generally double the prices paid at auctions. Thus, if he paid $1,000 for a painting at an auction, he tried to resell it for $2,000 at his gallery. However, there were cases in which the resale price was three times, or less than double, the price paid for the painting. He said that two thirds of the sales at auctions were made to gallery owners.

[109] Mr. Gagnon mentioned that in setting the prices of the paintings in his gallery, he considered the prices indicated in the Guide Vallée at the request of the artists. The guide was not always up to date and he kept abreast of price developments by consulting magazines such as "Le Collectionneur" or by visiting art galleries. As regards unlisted artists, such as those who had died, he relied on the quality of the paintings and on his own experience in establishing prices.

[110] Mr. Gagnon also appraised one painting by Jean-Paul Lemieux and another by Ludger Larose based on the same criteria as those used for the Fielding Downes drawings. He went to the Galerie des Maîtres Anciens to perform these appraisals. The Jean-Paul Lemieux painting was appraised on January 20, 1989. Mr. Gagnon said he did not see Mr. Levert's appraisal of the Jean-Paul Lemieux painting. Mr. Levert's appraised value was higher than his. Mr. Gagnon appraised the Ludger Larose painting on June 17, 1989.

[111] Mr. Gagnon appraised a portfolio of a series of drawings by Lionel Fielding Downes for Mr. Levert. Mr. Levert was able in this way to obtain a certified appraisal from another gallery. Mr. Levert went to Mr. Gagnon to obtain this appraisal. Following a one-hour examination, Mr. Gagnon performed a general appraisal based on his expertise, the Guide Vallée, prices established at auctions and the renewed interest in pictures by Fielding Downes in the early 1990s. He did not bill Mr. Levert for this appraisal and took no photographs of the pictures. According to Mr. Gagnon, there was a little of everything in this portfolio of pictures. The average size of the pictures was between 18 and 24 inches. They were works on paper, not canvas. Some of the drawings were preparatory sketches, and the paper of some of the drawings may have yellowed.

[112] Mr. Gagnon was visited twice by Revenue Canada representatives concerning the appraisals he had prepared. He turned all his appraisals over to the investigators and they were subsequently returned to him.

[113] It was also adduced in evidence that Mr. Gagnon prepared approximately 35 appraisals for Mr. St-Laurent of the Fondation Amérindienne Tecumseh. The invoices were in the name of that organization, which wrote him a cheque for $875 for his work on the appraisals ($25 per appraisal). At Mr. St-Laurent's suggestion, Mr. Gagnon cancelled his cheque in exchange for a tax receipt for the same amount. He also purchased paintings from the Fondation Amérindienne Tecumseh.

[114] Mr. Gagnon added that he did not know that the appraisals of the drawings in the Fielding Downes portfolio concerned the ADOC group. He testified that he had never met Robert Wright or Jacques Morin. He was also aware that there were people who purchased paintings for the purpose of making gifts, but all he did was sell paintings in his inventory.

[115] The Court learned from Nicole Moisan's testimony that her sister Suzanne Moisan, who lived in Florida after the death of her husband, the artist Fielding Downes, entered into an agreement under which Mr. Morin and Mr. Sanchez were to sell Fielding Downes' paintings for Suzanne Moisan, who had inherited them. Nicole Moisan mentioned that Mr. Morin and Mr. Sanchez worked together until 1991. Mr. Sanchez was the one who took care of the pictures. Ms. Moisan testified that she received the following amounts from the sale of the pictures: $4,300, $1,670 and $1,484. Neither she nor her sister Suzanne Moisan knew the identities of those to whom the pictures were sold. Nicole Moisan also mentioned that she had recovered certain works when she and Suzanne Moisan terminated the agreement with Mr. Sanchez. Some of the works could not be recovered and Mr. Sanchez told them that he was having financial problems and had had property seized and that he could not therefore return the remaining pictures to her. Nicole Moisan said she was aware that other paintings by Fielding Downes had been sold by a gallery, but she was unable to find anything out about the transactions in question.

[116] Jacques Morin's testimony provided certain facts relating to the Fielding Downes pictures. After working as a real estate agent, then as a writer and journalist, Mr. Morin was an art consultant from 1989 to 1991 or 1992. He managed some galleries for a certain period of time.

[117] In the 1989 edition of the Guide Vallée, Mr. Morin is identified as the agent of the artist Fielding Downes, who died in 1992. He testified that he had received a telephone call from Suzanne Moisan in response to an advertisement he had placed in a newspaper to sell a painting. Mr. Morin had no art gallery at the time and was merely a collector of paintings.

[118] Mr. Morin stated that Suzanne Moisan authorized him to sell the pictures belonging to the estate of the artist Fielding Downes. She left some 50 pictures with him on consignment; he stored them at the Galerie l'Oeuvre, which was owned by Mr. Sanchez. According to the agreement reached between Ms. Moisan, Mr. Sanchez and Mr. Morin, the proceeds from the sale of these pictures were to be divided as follows: Mr. Morin and Mr. Sanchez would receive 20 percent each and 60 percent would go to the estate. Mr. Morin mentioned that the prices he proposed were those listed in the Guide Vallée and, in his view, represented the fair market value of the pictures. He added that he had established their fair market value based on information obtained from people in the art community, although he could not remember their names.

[119] Mr. Morin referred to two documents in his possession, one of which shows that the aforementioned agreement was complied with as regards Suzanne Moisan, who received a portion of the proceeds from the sale of the pictures, while the other records the sales of the pictures from the Fielding Downes portfolio. It seems that only Mr. Morin received his 20 percent commission. There is no indication that Mr. Sanchez obtained his 20 percent commission from the proceeds of the sales. Mr. Morin did not remember exactly to whom the sales had been made, although he stated that most of the pictures were purchased by Mr. Levert. He added that the sales prices mentioned in the Guide Vallée were higher than the prices Mr. Levert actually paid for the pictures.

[120] Mr. Morin also indicated that in March 1991, or perhaps earlier, he was no longer authorized to sell the pictures from the Fielding Downes portfolio. He mentioned that the stated price for each picture was raised by approximately 10 percent over the price listed in the 1989 edition of the Guide Vallée. The prices in the second edition of the Guide Vallée no longer reflected the market and the third edition had not yet been published. Mr. Morin also stated that he told Suzanne Moisan that he was no longer selling the Fielding Downes portfolio.

[121] Mr. Sanchez, who was a self-employed framer and owner of the Galerie l'Oeuvre at the time in question, confirmed that his relations with Mr. Morin were limited to providing premises where Mr. Morin could exhibit the pictures by Fielding Downes. He acknowledged that he sold pictures from the Fielding Downes portfolio in 1989 and 1990, but most of the clients contacted Mr. Morin to conduct the transactions. His commission on these sales was approximately 20 percent of the sale price. He mentioned that he and Mr. Morin had decided together on the prices at which the Fielding Downes pictures were to be sold. When Mr. Morin decided to stop selling the Fielding Downes pictures, he returned them to Suzanne Moisan.

Appellants' arguments

[122] In their pleadings, the appellants argued that they had made gifts of works of art during the taxation years in question. They argued, inter alia, that tax receipts for each of the gifts had been issued to them by charities. The charities had official registration numbers and were authorized to issue receipts for the purposes of the Income Tax Act.

[123] The appellants also argued in their pleadings that the value of the works of art in question as appraised by their experts reflected their fair market value. The appellants submitted that the value as determined by the respondent does not take into account the heritage value of the works or other criteria such as the reputation, credibility and fame of the artists who produced them, the artistic quality of the works or supply and demand in the Quebec and Canadian art markets.

[124] The appellants objected, inter alia in their pleadings, to the fact that penalties were assessed against them under subsection 163(2) of the Income Tax Act. They argued that in no way and on no occasion did they knowingly, or under circumstances supporting a finding of gross negligence, make a false statement or omission in their tax returns or in any other document referred to in that subsection.

[125] In the appellants' oral argument, one of their counsel noted that the market for works of art is different, since it is possible to obtain such works in various ways, at various places and at various prices. Counsel argued that the appellants obtained a tax advantage because they dealt with sellers of paintings who were prepared to give up a substantial portion of their profit to build up a volume of transactions from which they would benefit. Dealers in paintings like Mr. Levert simply passed on their professional discount to their clients. When the clients gave paintings to charities, they therefore made a profit. Counsel added on the appellants' behalf that they had purchased consumer goods at the wholesale price, practically at cost price, and that they had used the market price in making gifts.

[126] Counsel for the appellants further argued that the paintings were first identified by Mr. Levert, who sold them to the appellants. Ownership of property was then transferred for a price in money. A gift agreement was then entered into. In the case of the appellants, the agreement was between two parties: the donor, that is, each appellant, and the donee, that is, the charity in question. Ownership of property was transferred between the parties, and no consideration was paid by the charity that received the property.

[127] One of the appellants’ counsel referred in this regard to The Queen v. Lagueux & Frères Inc., 74 DTC 6569, in which it was held that to determine the tax consequences of a transaction, the nature of the transaction must be determined under the civil law. The fact that the donors were able to incidentally derive a monetary benefit from the transactions is of no consequence, since the donees paid no consideration.

[128] Reference was also made to this Court’s decisions in The Queen v. Construction Bérou Inc., 96 DTC 6177, and R. Francoeur v. Canada, [1993] 2 C.T.C. 2440. Counsel for the appellants relied in particular on the following passage from the Federal Court of Appeal’s decision in The Queen v. Friedberg, 92 DTC 6031, at page 6033:

It is clear that it is possible to make a "profitable" gift in the case of certain cultural property. Where the actual cost of acquiring the gift is low, and the fair market value is high, it is possible that the tax benefits of the gift will be greater than the cost of acquisition. A substantial incentive for giving property of cultural and national importance is thus created through these benefits. But not every gift will be found to benefit from these provisions.

[129] One of the appellants’ counsel noted that, according to the Federal Court of Appeal, the system for making gifts of cultural property was designed to produce a greater tax advantage than the one that exists for ordinary gifts. However, the circumstances are what produces the advantage.

[130] It was stated that, pursuant to section 69 of the Act, property given is disposed of at its fair market value. The appellants thus realized a capital gain on their gifts, and that gain can be exempted.

[131] It was also stated that the art market, unlike other markets, has a fairly stable source of supply of works of art at prices below their fair market value and that the appellants benefited from that fact.

[132] In the case of the appellants, Mr. Levert knew the market well and knew how to obtain works of art. He bought them at a low cost and sold them quickly at a low price, and the purchasers made gifts. He profited from this even though he sold at a price that included a lower profit margin.

[133] According to counsel for the appellants, the case at bar is similar to Friedberg, supra, since the donors were able to derive a monetary benefit from the paintings they gave to charities.

[134] According to the appellants, there was a dual intention behind the gifts, but as regards each donor and donee, the intention was pure and consistent with article 1806 of the Civil Code of Québec.

[135] As for the factual aspect of the transactions, it was pointed out to the Court that the appellants understood what they were doing. They knew that they were buying paintings at a price below their fair market value, since Mr. Levert had explained this to them. The appellants had checked the prices in the Guide Vallée. They knew where the paintings came from and realized that they were getting a bargain. They could not have thought that it was illegal to participate in the transactions at issue here.

[136] One of the appellants’ counsel referred to the decision of Judge Mogan of this Court in Whent v. R., [1996] 3 C.T.C. 2542, which concerned lawyers who had purchased a fairly large collection of paintings.

[137] As regards the fair market value of the paintings, the appellants took the precaution of ensuring that the receipts issued to them were not issued for an amount higher than the fair market value of the works of art in question. They obtained appraisals of the paintings that confirmed the basic principle of the transactions they were entering into. As well, the issue of the independence of the appraisals is quite simply a matter of judgment. It was argued that the Income Tax Act does not say that the appraiser can have no interest whatsoever in the appraisal of the property.

[138] The appellants argued that the respondent had adduced little evidence on the issue of the fair market value of the works of art. Some of the respondent’s witnesses felt that auctions provide an indication of fair market value. On this point, there was a basic difference of opinion between the parties. The appellants argued that the gallery market is the most usual market and the one that must be considered to represent the fair market value of a work of art. The gallery market is the largest market. It was added that very few people have the assurance, time or interest to follow auctions, which constitute a very minor market. All the witnesses agreed with this. The Guide Vallée is above all a catalogue of gallery prices. The gallery market is the one that best reflects the definition of "fair market value".

[139] The appellants argued that the Minister of National Revenue’s conduct gave them every reason to believe that they were justified in making gifts if they made sure that the value of the property was accurate for the purposes of the receipt. According to them, the basic issue of the case concerns the appraisals. The appellants argued that it is clear from the evidence that the appraisal was all that was discussed at Mr. Côté's meeting with the Revenue Canada auditors.

[140] With regard to the issue of penalties, the appellants argued that the Minister of National Revenue’s conduct was unacceptable. Reference was made to Mr. Levert’s correspondence, which established an indirect relationship between Mr. Levert’s clients and the Minister of National Revenue. The situation is no different from that of a promoter of tax shelters who has obtained an advance ruling before carrying out his or her transactions. The appellants do not agree with the respondent’s position that the transactions were part of a scheme involving the purchase of receipts. That argument by the Minister of National Revenue implies that the appellants did not purchase paintings. According to the appellants, it was shown beyond any doubt that the property given was purchased and that gifts were made of that property. No one purchased tax receipts, and the appellants did not obtain any consideration or anything else from the registered organizations.

[141] The appellant Alain Côté gave a Ludger Larose in 1988 and the respondent adduced no direct evidence respecting the appraisal of that painting. The same comment applies to the pastel by Iacurto in 1989, an oil painting by K.M. Hamilton in 1989, an oil painting on metal by J. Hilpert, a watercolour by Madeleine Laliberté and, in 1990, oil paintings by Marie Claire and Adrien Hébert. In the case of the appellant Louise Marcoux, no evidence was adduced respecting the value of the painting by Albert Cloutier in 1988 or an oil painting by Graham and the Jean-Paul Lemieux in 1989. In conclusion, on the penalty issue, the appellants did not behave like someone who has been grossly negligent or has attempted to evade taxes. Their conduct was no different from that of thousands of other taxpayers who make use of all kinds of tax shelters.

Respondent's arguments

[142] Counsel for the respondent began by arguing that the appellants had not made genuine gifts in respect of the three taxation years at issue.

[143] After referring to the elements essential to the existence of a gift, one of the respondent’s counsel argued, as can be seen from the notes submitted to the Court in support of her oral argument, that the first essential element of a gift, namely the donor’s intent to give, was not present because the appellants in the case at bar acquired the property and agreed to pay for it only on condition that it be immediately or almost simultaneously given to a charity for an amount four times higher than the price paid; this was done for the sole purpose of obtaining a tax advantage. On this point, the respondent relied on the decisions of Judge Dussault of this Court in Guy Dutil v. R. and Réjean Gagnon v. R., both of which were rendered on July 25, 1991, and the Federal Court of Appeal’s decision in The Queen v. Friedberg, 92 DTC 6031. The decisions of Judge Mogan of this Court in Whent v. The Queen, [1996] 3 C.T.C. 2542, and of Judge Archambault, also of this Court, in Paradis v. R., [1997] 2 C.T.C. 2557, were also referred to.

[144] Based on a review of the evidence relating to the lack of an intent to give, the respondent argued that the facts show that the only intention of the appellants Alain Côté and Louise Marcoux was to reduce their taxes by means of receipts for charitable gifts and that there was no philanthropic intention associated with their intention to reduce their taxes. According to the respondent, the alleged gift was conditional on a tax advantage being obtained. Counsel for the respondent stressed the following factors extracted from the evidence:

[TRANSLATION]

the pictures in question were chosen not by the appellants but by Mr. Levert, and the appellants never had them in their possession aside, perhaps, for the Ludger Larose;

the appellants did not choose the organizations that were the alleged donees and did not approach them at all;

the appellant Alain Côté would not have entered into the transactions with Mr. Levert were it not for the receipts; and

Mr. Levert, through Ms. Tremblay, was the seller and the appraiser in addition to being the person who provided tax receipts.

[145] The respondent also argued that the delivery of movable property, which is another essential element of a don manuel when the gift is not attested by a notarial act, did not take place because the property in this case was not physically delivered to the donee, which must be given unequivocal possession.

[146] With respect to the delivery and possession of the paintings, the respondent relied, inter alia, on the following evidence:

1. The appellants Côté and Marcoux did not deliver the paintings to Univers du Rail Inc., and Univers du Rail Inc. never had physical possession of them. Univers du Rail Inc.'s representative, Mr. Carignan, never saw the paintings.

2. Univers du Rail Inc. entered into an oral agreement with Mr. Levert under which he solicited donors with paintings and Univers du Rail Inc. would receive a minimum of 10 percent of the amount on the receipts. According to Mr. Carignan, Mr. Levert had been retained for this aspect of Univers du Rail Inc.'s funding activities. Mr. Levert said what should be put on the receipts and gave Univers du Rail Inc. his appraisals, sometimes at the same time as his instructions, sometimes later. The receipts were then given to Mr. Levert. The paintings did not go to Univers du Rail Inc. at that time. They were at the Galerie des Maîtres Anciens prior to the purchase, were still there after the purchase and stayed there after the alleged gifts had been made.

3. There was no list of paintings left on consignment with Mr. Levert or his gallery by Univers du Rail Inc. Univers du Rail Inc. had no control over the paintings.

4. Univers du Rail Inc. received only a few cheques from time to time, and they did not even correspond to 10 percent of the total amounts appearing on the receipts.

[147] Based on these facts, the respondent concluded that the property in question was never delivered to Univers du Rail Inc. and that if Mr. Levert did have possession of the property on behalf of Univers du Rail Inc., it was equivocal possession in the circumstances.

[148] Concerning the property allegedly given to the Fondation Amérindienne Tecumseh, the respondent argued that the evidence shows that Jacques Demers found only an empty room when he went for a field audit in March 1989. The receipts were kept at the accountant’s office, and no appraisal report was available when Mr. Demers went to see the accountant in March 1989. Mr. St-Laurent subsequently provided only files that contained no information, and he claimed that all the property had been resold. Mr. Demers said: [TRANSLATION] "The only sales identified thus corresponded to just 11 percent of the amounts shown on the receipts." The purchasers were not identified either. The following was added in the notes submitted in support of the oral argument of counsel for the respondent:

[TRANSLATION]

Mr. Demers conducted another audit in August 1991. Very few appraisals were available, and Mr. St-Laurent said that all the property had been resold. The total sales shown in the financial statements represented only two to three percent of the amount shown on the receipts.

[149] Counsel for the respondent directed the Court’s attention to subsection 118.1(2) of the Act, which provides that no gift can be claimed unless the making of the gift is proven by filing with the Minister of National Revenue a receipt therefor that contains prescribed information. The prescribed information is set out in subsection 3501(1) of the Income Tax Regulations, while subsection 3501(6) of the Regulations adds that every receipt on which the day the gift was received, the year of the gift or the amount of the gift is incorrect must be regarded as spoiled. The respondent argued that the existence of a receipt does not entitle its holder to the deduction for gifts if the content of the receipt is incorrect or incomplete. In this regard, counsel for the respondent made the following comments (footnotes omitted):

[TRANSLATION]

1. Receipts No. 53458 and No. 53466 from Univers du Rail dated December 7, 1988,[1] do not give the address of the organization or that of Alain Côté and Louise Côté. Nor do they indicate the name and address of the appraiser even though there was one: Marc Levert. The receipts do not state when the works were received.

2. Receipts No. 98 and No. 101 dated December 4, 1989, from the Fondation Amérindienne Tecumseh do not give the name and address of the appraiser (although receipt No. 101 mentions that there was a certificate) and do not state when the works were received.

3. Receipts No. 277 dated November 24, 1990, and No. 272 dated November 21, 1990, from the Fondation Amérindienne Tecumseh do not give the name and address of the appraiser, although they mention that there was a certificate of appraisal. The receipts do not state when the works were received.

[150] Based on the foregoing, the respondent concluded that, assuming that genuine gifts were made, subsection 118.1(2) of the Act means that they cannot be included in total gifts because the receipts do not contain all the prescribed information.

[151] Furthermore, one of the respondent's main arguments was that the amounts stated on the receipts did not reflect the value of the property involved.

[152] The respondent referred to the Federal Court of Canada’s decision in Henderson Estate and Bank of New York v. M.N.R., 73 DTC 5471, with regard to the definition of "fair market value". On the basis of that decision, particular reliance was placed on the direct comparison approach. In determining the value of property, reference was also made to the purchase price paid by the owner of the property.

[153] With regard to the Guide Vallée, the respondent stated the following in the notes submitted at the time of the oral argument:

[TRANSLATION]

174. The prices shown in guides like the Guide Vallée are not necessarily real sale prices.

175. The Guide Vallée is an advertising tool in which anyone can buy a full page in colour for between $300 (according to Guy Gagnon) and $400 to $500 (according to Jules Harvey).

176. The guide does not take account of the period during which the works were created, the artist’s subject, the intrinsic quality of the works or their conservation condition. The prices are based on a calculation per square inch, which does not make the necessary distinctions (testimony of Mr. Rinfret).

177. In addition, this type of guide is not reliable, since the information in it is not controlled. Artists or their agents sometimes overstate the prices shown for works in the hope that the market will follow. The artist Lionel Fielding Downes provides the best illustration of this. The facts proven about him show the extent to which real sale prices do not correspond to the prices set out in the Guide Vallée. It is therefore necessary in each case to check whether the information is accurate, as Mr. Rinfret stated several times.

[154] The oral argument of counsel for the respondent also addressed the importance to be attached, for appraisal purposes, to gallery sales and auction sales.

[155] With regard to gallery sales, the respondent argued the following: [TRANSLATION] "if the market identified by the expert for a given artist is the gallery market, then the expert has to clearly identify the galleries in question and comparable paintings in those galleries and to check whether the galleries really sold comparable paintings at the prices they listed. Recent or new paintings by a living artist may sell for more in a gallery if the artist is represented by that gallery (testimony of Mr. Kelsey)."

[156] The notes submitted by the respondent state the following, inter alia, about auction sales:

[TRANSLATION]

179. If the market identified by the expert for a given artist is the auction market (resale market), the indexes that list sales (such as the Canadian Art Sales Index or the International Art Price Annual from Bordas) and the sale invoices from the sales rooms provide objective proof of such sales.

180. Assuming that the indexes contain fictional auction sales to promote sales for an artist, as suggested by Mr. Levert, then it must be proved that this was the case for the artists in question. This seems doubtful, since auction prices would then be much higher (testimony of Mr. Rinfret). In his testimony on May 22, 1997, Mr. Kelsey said that Encans Pinney’s does not allow sellers to bid on their own paintings, which is illegal.

[157] In making the assessments, the respondent assumed that the value reported by the appellants for the works of art did not reflect their fair market value. The respondent also assumed in making the assessments under appeal that Mr. Levert was not an independent expert, since he appraised the paintings in question. According to the respondent, that conclusion was based on Mr. Levert's conduct in 1985, 1986 and 1987, [TRANSLATION] "when the amount paid by the taxpayers was observed to be systematically 20 or 25 percent of the amount of the appraisals on which the tax receipts were based." A systematic overvaluing of the property described in the tax receipts was noted by Revenue Canada and by independent experts.

[158] With regard to Mr. Levert, it was noted that following a lengthy trial, he pleaded guilty to charges of wilfully evading the payment of income tax in 1986 and 1987 by enabling a number of taxpayers, including the appellants, to deduct gifts of overvalued works of art in their tax returns. Mr. Levert was also convicted of failing to report income from his transactions with "donors" in 1985, 1986 and 1987. The respondent further noted that Mr. Levert was not objective: [TRANSLATION] "According to Mr. Levert, the amount to be paid by his clients was fixed in advance at 25 percent of the property's value as listed in the Guide Vallée or of its gallery value." Mr. Levert contrasted the gallery market with the auction market. He assumed that any artist's paintings can be sold in a gallery. He also considered that the prices suggested in the Guide Vallée are real prices for gallery sales and need not be checked. According to the respondent, [TRANSLATION] "in doing so, he suggested completely artificial values that bore no relationship to the real market". The respondent adopted the comment by Mr. Rinfret, an expert witness for the respondent, that what must in fact be done is to situate the market for a given artist and a given work: gallery, auction, flea market or elsewhere. Within that market, it must be determined whether there are comparable real sales, which Mr. Levert did not do. Counsel for the respondent also noted that Mr. Levert and Galerie des Maîtres Anciens Inc. were convicted of wilfully destroying records for the gallery’s taxation years ending March 31, 1989, March 31, 1990, March 31, 1991, and March 31, 1992.

[159] The respondent's argument that Mr. Levert was not an independent expert was based on the fact that Mr. Levert was a party to all the transactions involving, in particular, the appellants, as the person who sold the property, appraised it for the purpose of drawing up receipts and provided the receipts.

[160] The respondent made the following comment about Mr. Levert’s statement that the auction price would only occasionally be close to or higher than the fair market value: [TRANSLATION] "this statement is based on a false premise, namely that the auction price is never the fair market value. This completely disregards the resale market for a purpose that is all too evident: justifying appraisals that are systematically inflated."

[161] On the issue of penalties, the respondent concluded that the appellants were guilty of gross negligence, or at least of wilful blindness, for five years in conducting the same type of purchase transaction, conditional on obtaining a receipt for approximately four times more than the value of the work in question, for the sole purpose of obtaining a tax advantage, even though they knew that the seller, the appraiser and the person who provided them with receipts were one and the same. In support of this conclusion, the respondent noted in particular that Mr. Côté's meeting of September 1987 with Revenue Canada's investigators should have warned him that something was amiss. He nevertheless continued to request receipts for himself and for Ms. Marcoux even after the amounts claimed by the two appellants for gifts in their 1986 tax returns were revised downwards. The two appellants persisted in claiming a deduction for gifts of works of art even though they did not choose the property given or the recipient organization, had no interest in the organization and did not have to deliver the property they gave. The respondent added that they did not co-operate when asked to provide proof of purchase and payment documents for the works in question. They made no effort to provide explanations or comments to Revenue Canada.

Analysis

[162] Based on the arguments made by the appellants and the respondent, it is clear that there are three main issues in this case:

1. whether the appellants made gifts of the property in question or whether the gifts were a sham;

2. assuming that genuine gifts were made, whether the value indicated by the appellants for each item of property given represents the item's fair market value; and

3. whether the Minister of National Revenue validly assessed penalties against the appellants for the 1988, 1989 and 1990 taxation years under subsection 163(2) of the Act.

[163] It is necessary to begin with the first issue, that is, whether, in the circumstances, the appellants made gifts of the property in question to Univers du Rail Inc. and the Fondation Amérindienne Tecumseh.

[164] As was clearly established in Lagueux & Frères, the first thing that must be done is to determine the nature of the transactions entered into by the appellants with Univers du Rail Inc. and the Fondation Amérindienne Tecumseh in light of the Civil Code of Lower Canada. It is thus necessary to refer to articles 755 and 776 of the Civil Code of Lower Canada, which read as follows:

Art. 755. Gift inter vivos is an act by which the donor divests himself, by gratuitous title, of the ownership of a thing, in favor of the donee, whose acceptance is requisite and renders the contract perfect. This acceptance makes it irrevocable, saving the cases provided for by law, or a valid resolutive condition.

. . .

Art. 776. Deeds containing gifts inter vivos must under pain of nullity be executed in notarial form and the original thereof be kept of record. The acceptance must be made in the same form.

Gifts of moveable property, accompanied by delivery, may however be made and accepted by private writings, or verbal agreements.

Gifts validly made out of Québec need not be in notarial form.

As this Court noted in Paradis, supra, three essential conditions must be met for a gift to exist: intent to give, delivery of the property and acceptance by the donor.

[165] With regard to the first condition, I am in complete agreement with the view expressed by Judge Archambault in Paradis that this question must be decided strictly in the context of the legal relationship established between each of the appellants and the organizations that were to receive the gifts in question. In the case at bar, the evidence is clear that neither of the appellants received any consideration whatsoever from the organizations to which the property was to be given. In my opinion, it does not matter that the principal motivation for each of the appellants was to obtain a tax advantage. This approach has been confirmed, at least to some extent, by the Federal Court of Appeal’s decision in The Queen v. Friedberg, 92 DTC 6031. The following passage from page 6032 of that judgment is particularly interesting:

Thus, a gift is a voluntary transfer of property owned by a donor to a donee, in return for which no benefit or consideration flows to the donor (see Heald, J. in The Queen v. Zandstra [74 DTC 6416] [1974] 2 F.C. 254, at p. 261.) The tax advantage which is received from gifts is not normally considered a "benefit" within this definition, for to do so would render the charitable donations deductions unavailable to many donors.

A receipt obtained from the recipient organization cannot be viewed as consideration even though the taxpayer must file the receipt to be entitled to the deduction for gifts. In the circumstances, the receipt simply attests a physical fact, namely that the designated property has been received by the organization in question. It is therefore my view that the appellants had the necessary intent to give the works of art to the organizations in question. The appellants owned the works of art before making gifts of them. This was not in dispute. The evidence shows that the appellants left it up to Mr. Levert to choose the charity that would receive the gifts in question.

[166] After carefully reviewing the evidence, I have concluded that the works of art at issue in these appeals were identified clearly enough and came into the possession of the charities through Mr. Levert. The evidence shows that Mr. Levert played a dual role. He worked both for the appellants, who, as donors, agreed to transfer the property in question to the charities he had chosen, and for the donees, which entrusted him with possession thereof. These findings of fact are based in particular on the testimony of Mr. Carignan, whom I found to be an entirely credible witness, as regards the property given to Univers du Rail Inc. The procedure adopted in respect of the property given to the Fondation Amérindienne Tecumseh was the same, and I have come to the same conclusions regarding Mr. Levert's role and the identification of the property at issue. The property given was clearly identified on the receipts provided to the donors.

[167] Thus, in the case of the appellant Alain Côté, the works of art in question are identified as follows in paragraph 8 of the Amended Reply to the Notice of Appeal for each of the years at issue:

for the 1988 taxation year, an oil painting on canvas by Ludger Larose given to Univers du Rail Inc.;

for the 1989 taxation year, four paintings given to the Fondation Amérindienne Tecumseh, namely a pastel by F. Iacurto, an oil painting by W. Hamilton, an oil painting on metal by J. Hilpert and a watercolour by Madeleine Laliberté; and

for the 1990 taxation year, two paintings given to the Fondation Amérindienne Tecumseh, namely an oil painting by Marie-Claire and an oil painting by Adrien Hébert.

In the case of the appellant Louise Marcoux, the works of art in question are identified as follows in paragraph 8 of the Reply to the Notice of Appeal:

for the 1988 taxation year, an oil painting on hardboard by Albert Cloutier given to Univers du Rail Inc.;

for the 1989 taxation year, an oil painting by Graham given to the Fondation Amérindienne Tecumseh; and

for the 1990 taxation year, an oil painting by Fielding Downes given to the Fondation Amérindienne Tecumseh.

The charities accepted these paintings through their representatives and acknowledged that they had never paid the appellants any consideration for their gifts.

[168] Even though I believe, as I will explain later in these reasons, that the appellants were seriously negligent as regards their tax obligations, I do not consider the sham doctrine applicable here. The appellants genuinely intended to make gifts to charities and did in fact make those gifts, although in doing so they may have been negligent in using receipts based on inflated appraisals in order to obtain the deduction for charitable gifts.

[169] I will turn now to the second issue, which concerns the fair market value of the property given to Univers du Rail Inc. and the Fondation Amérindienne Tecumseh in the years at issue.

[170] The concept of fair market value has been considered by the courts, inter alia in Henderson Estate and Bank of New York v. M.N.R., 73 DTC 5471. The following passage at page 5476 strikes me as highly relevant:

The statute does not define the expression "fair market value" . . . . I do not think it necessary to attempt an exact definition of the expression as used in the statute other than to say that the words must be construed in accordance with the common understanding of them. That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm’s length and under no compulsion to buy or sell. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand. [Emphasis added.]

[171] First of all, I attach little weight to Mr. Levert's appraisals. He was a party to these transactions and had a definite interest in the sales being closed. He was both the seller and the appraiser.

[172] In his tax return for 1988, Mr. Côté indicated that a painting described as an oil painting on canvas by Ludger Larose, which was given to Univers du Rail Inc., was worth $11,000 for the purposes of the deduction for charitable gifts.

[173] This painting was sold by telephone for $2,200 at the auction of December 15, 1987; the reserve price was $2,000. It was purchased by the Galerie des Maîtres Anciens. A review of all the evidence relating to this painting has persuaded me that its value must be set at $2,200. There is no serious basis for Mr. Levert's appraised value of $11,000 for this painting.

[174] In his tax return for the 1989 taxation year, Mr. Côté indicated a value of $11,000, for the purposes of the deduction for charitable gifts, for four paintings given to the Fondation Amérindienne Tecumseh: a pastel by F. Iacurto, an oil painting by W. Hamilton, an oil painting on metal by J. Hilpert and a watercolour by Madeleine Laliberté.

[175] The pastel by F. Iacurto was appraised at $6,000. This appraisal was based on the Guide Vallée, which gave a value of $5,500, to which Mr. Levert added $500 for framing.

[176] Three auction sales of portraits by Iacurto are listed in the Canadian Art Sales Index and they give a good idea of the resale market value of portraits of unknown persons done by this artist:

— portrait of a man, pastel, 23¼ inches by 18 inches, sold for $380 at the Hôtel des Encans de Montréal on October 16, 1990 (an oil painting would have been twice the price, according to Mr. Levert);

— portrait of Dr. Adrien Sarens, pastel, 25 inches by 19 inches, sold for $400 at the Hôtel des Encans de Montréal on April 7, 1992; and

— portrait of a man, 14 inches by 10 inches, pencil crayon, sold for $175 at Fraser-Pinney's on November 24, 1993.

[177] Mr. Levert admitted that, at the Encans Pinney's auction on February 14, 1989, he had purchased a portrait of a man, 17¾ inches by 13¾ inches, by Iacurto for $500; the portrait was an oil painting, not a pastel.[2]

[178] After reviewing the evidence relating to the value of this painting and to framing, I have come to the conclusion that the painting could be appraised at $800.

[179] As regards the painting by W. Hamilton, the evidence shows that Mr. Côté bought it for $475. Mr. Levert appraised the painting at $1,900. No other information was provided in support of this appraisal. I would set its value at $500 at the relevant time.

[180] As for the watercolour by Madeleine Laliberté, Mr. Levert's appraisal of $2,000 is not dated or well documented. He based his appraisal on the fact that an oil painting depicting an orchard sold for $2,000 at an auction at Sotheby's in Toronto on November 12, 1987. The medium is not the same. I conclude that the value of this painting was likely no more than $500.

[181] As for the 8-inch by 10-inch oil painting on metal by J. Hilpert, the subject of the portrait at issue has not been identified. No photographs were submitted by either Mr. Côté or Mr. Levert. Mr. Levert estimated the normal gallery price at $1,100 and contended that his estimate was based on auction sales. He made certain adjustments to the normal price at which Hilpert portraits should sell in a gallery.

[182] Mr. Levert said he had relied on reference books. However, the only document provided consisted of texts from 1935 and 1957 on Josef Hilpert, who was the Director of the Saisset Art Gallery at the University of Santa Clara in California, where a series of portraits painted by him were kept. The document in question was an old piece of publicity for the artist that did not discuss values. For Mr. Levert, this document shows that Josef Hilpert is not a local artist. However, there is no proof that this has had any impact whatever on the value of these portraits in Quebec.

[183] Mr. Levert did confirm that most sales have been at auctions. The listed sales of paintings by Hilpert (including miniatures and landscapes) do not exceed $325, contrary to what Mr. Levert appeared to contend. Mr. Levert purchased a Hilpert oil painting for $50 at Fraser-Pinney's on September 8, 1992.[3] He admitted that the largest paintings are not necessarily more expensive than miniatures and that miniatures are not really comparables, especially those that are not portraits. However, the miniature he said he had used as a basis for his appraisals depicts Niagara Falls and is thus not a portrait.

[184] I would appraise this painting at $300 at the relevant time.

[185] In his tax return for the 1990 taxation year, Mr. Côté indicated a value of $11,000, for the purposes of the deduction for charitable gifts, for two paintings given to the Fondation Amérindienne Tecumseh: an oil painting by Marie Claire and an oil painting by Adrien Hébert.

[186] Mr. Levert's appraised value of $6,000 for the Marie Claire painting is based solely on the Guide Vallée. It is a 24-inch by 30-inch oil painting on canvas, and Mr. Côté paid Mr. Levert $500 for it. I have concluded that this painting was worth no more than $1,000 at the time of the donation.

[187] The painting by Adrien Hébert is a harbour scene. Mr. Levert admitted that, according to the 1990 International Art Price Annual from Bordas, two oil paintings on similar subjects were sold for $375 and $2,000. On the basis of the evidence adduced before me, I set the value of this painting at $1,000.

[188] In her tax return for the 1988 taxation year, Ms. Marcoux indicated a value of $2,750, for the purposes of the deduction for charitable gifts, for an oil painting on hardboard by Albert Cloutier given to Univers du Rail Inc. The amount indicated on the invoice from the Galerie des Maîtres Anciens for this painting is $450. David Kelsey of Encans Pinney's estimated the value of the painting at between $500 and $700. The painting was sold at auction for $300 on April 4, 1989. In light of the evidence, I estimate the value of this painting at $500.

[189] In her tax return for the 1989 taxation year, Ms. Marcoux indicated a value of $2,750, for the purposes of the deduction for charitable gifts, for an oil painting by Graham given to the Fondation Amérindienne Tecumseh. She bought this painting for $387.50. It is described as a 10-inch by 12-inch oil painting on hardboard by James Lillie Graham entitled "Pâturage".

[190] The basis for this appraisal was that a 10.5-inch by 14.25-inch oil painting by this artist depicting a winter scene ("Winter at La Malbaie") sold for $2,100 at Sotheby's in Toronto (Canadian Art Sales Index 1987-88, p. 83)[4] and that, according to Mr. Levert, the gallery price should be higher.

[191] Mr. Levert admitted that he had never seen works by James Lillie Graham in galleries. He also admitted that the subject of the painting in question was a pastoral scene and that oil paintings of pastoral scenes had sold at Fraser Bros. auctions in Quebec at the following prices:

— in December 1979, "Cattle in a Field", 11 inches by 9 inches, $375;[5] and

— on March 12, 1987, "Pastoral Scene", 18 inches by 24 inches, $650.[6]

[192] Mr. Levert stated that the difference between the prices obtained in Quebec and those obtained in Ontario can be explained by the fact that Graham is an Ontario artist and is therefore more popular in Ontario than in Quebec.

[193] In light of the evidence, I would set the value of this painting at $600.

[194] Lastly, in her tax return for the 1990 taxation year, Ms. Marcoux indicated a value of $2,750 for an oil painting by Fielding Downes given to the Fondation Amérindienne Tecumseh.

[195] Ms. Marcoux paid $250 for this painting, the title of which was given by Mr. Levert as "Les Draveurs". Mr. Levert's appraisal is not dated but was apparently based on the price of $3,000 suggested in the Guide Vallée for a 16-inch by 20-inch oil painting. This appraised value was reduced somewhat to take into account the fact that the painting was a 12-inch by 16-inch oil painting.

[196] This appraisal was not consistent with market prices, as Mr. Morin's sales list indicates that the average sale price of 12-inch by 16-inch oil paintings was $204, frames included.

[197] On December 12, 1989, Guy Gagnon of the Galerie Feuille d'Érable purchased another oil painting by Fielding Downes of the same dimensions and on a similar subject entitled "Les Avironneurs" at the Hôtel des Encans de Montréal for $180. He offered it for sale at his gallery but was unable to sell it.

[198] Charles Rinfret showed that the relevant market in 1989 and 1990 for landscapes by the artist Lionel Fielding Downes was the auction market, not the gallery market, since most of the artist's works were to be found in auction halls.

[199] The prices of landscape oil paintings by this artist changed little between 1985 and 1995. Mr. Rinfret testified that the prices of the artist's oil paintings at the Galerie Zanettin varied between $100 and $400.

[200] I conclude from the evidence that a value of $250 should be set for this painting.

[201] In her notes in support of her oral argument on the second issue as worded by her, the respondent also brought up the fact that the receipts did not comply with the Income Tax Act and the Income Tax Regulations. However, this argument was not made in the replies to the notices of appeal in these two appeals.

[202] I will make only a few comments.

[203] First of all, subsection 118.1(2) of the Act provides that a gift cannot be included unless the making of the gift is proven by filing with the Minister a receipt therefor that contains prescribed information. Subsection 3501(1) of the Income Tax Regulations sets out the information that must appear on the receipt. It provides, inter alia, that an official receipt must contain 10 separate items of information. In addition, subsection 3501(4) of the Regulations provides for situations where an official receipt is issued to replace an official receipt previously issued. Finally, subsection 3501(6) of the Regulations provides that an official receipt form on which information, limited to three specified items, is entered incorrectly or illegibly must be regarded as spoiled.

[204] The above-mentioned provisions of the Income Tax Regulations appear to make it possible, at least in some cases, to replace a receipt that is incorrect, illegible or perhaps even incomplete.

[205] In any event, I do not think that I am obliged to rule on this question.

[206] I still have to consider the issue of the penalties assessed against the two appellants by the Minister of National Revenue in the assessments for the 1988, 1989 and 1990 taxation years.

[207] Counsel for the appellants stressed, inter alia, the following facts:

(a) The appellants were told by Aline Tremblay, a financial advisor at their bank whom they trusted, that they could reduce their taxes by giving art objects to registered charities. Ms. Tremblay put the appellants in touch with Mr. Levert and told them that he was associated with the Musée du Québec. The appellants were told that Mr. Levert could purchase paintings at auctions or private sales at very attractive prices. Ms. Tremblay also told them that the appraisals on which the receipts were based had been prepared by competent individuals in accordance with professional criteria and on the basis of specialized books.

(b) The appellants continued to make gifts in 1989 and 1990 despite the fact that the value of the gifts they had made in 1986 and 1987 was reduced by the Minister of National Revenue because Mr. Levert reassured them that all the appraisals were correct.

(c) Counsel for the appellants also argued that Ms. Tremblay was trustworthy, that Mr. Levert appeared to be competent and that the charities in question were accredited by the Minister of National Revenue.

[208] Counsel for the respondent stressed, inter alia, the following evidence:

(a) Mr. Côté claims he read a 1986 Revenue Canada pamphlet at the time, but he did not remember that the guide stated that taxpayers must deal with independent appraisers.

(b) Mr. Côté admitted that Mr. Levert was simultaneously the seller, the appraiser and the person who provided him with receipts. The two appellants used tax shelters for five consecutive years.

(c) In spite of Mr. Côté's September 1987 meeting with Revenue Canada investigators, which should have warned him that something was amiss, Mr. Côté continued to request receipts for the 1987 taxation year for himself and his wife through Aline Tremblay. Thus, Ms. Tremblay provided Mr. Côté with a receipt from the Société protectrice des animaux and the appraisal on which the receipt was based was performed by Mr. Levert.

(d) The only contact Mr. Côté had with Revenue Canada was a vague telephone call he, Ms. Tremblay or Mr. Levert made to the main Revenue Canada number following the transactions and the assessments. He was unable to provide any specific information on this subject. Ms. Marcoux did nothing. Mr. Côté subsequently discontinued his appeals to the Tax Court of Canada from the assessments for the 1986 and 1987 taxation years.

(e) Mr. Côté continued to ask Ms. Tremblay to provide him with receipts for the 1988, 1989 and 1990 taxation years for the same amounts — $11,000 for himself and $2,750 for his wife each year — in exchange for payments corresponding, minus the tax on the paintings, to 25 percent of the receipts that were made in two instalments: the first on March 1 and the second on June 1 of the following year.

(f) The appellants did all this without choosing or seeing the property, without choosing or checking up on the charity, without showing the slightest interest in the charity and without going to the offices of the charity to deliver the property. They did nothing other than to receive official receipts for charitable gifts.

(g) When the two appellants received draft assessments for the 1986 taxation year, that did not prevent them from continuing for 1989 and 1990, although they agreed with Mr. Levert not to pay the full amount agreed upon for the 1988 taxation year.

(h) When the two appellants received a letter from the Department of National Revenue requesting proof of purchase and payment documents, they claimed they could not provide them. When the Department of National Revenue sent them a draft assessment for the 1988, 1989 and 1990 taxation years, they did nothing to provide the Department with comments or explain the situation. The two appellants were guilty of gross negligence, or at least of wilful blindness, for five years in conducting the same kind of purchase transaction, conditional, according to the respondent, on obtaining a receipt for approximately four times more than the value of the work in question, for the sole purpose of obtaining a tax advantage even though they knew that the seller, the appraiser and the person who provided them with the receipt were one and the same.

[209] Based on a careful review of the evidence relating to the assessment of the penalties, I have come to the conclusion that the respondent has discharged the burden of proof she bore under subsection 163(2) of the Act.

[210] In light of all the evidence, I have been persuaded by the appellants’ behaviour that they were extremely reckless or at least grossly negligent in respect of their tax obligations. It seems to me that, particularly after Mr. Côté's meeting with Revenue Canada’s investigators, the appellants should have reconsidered their position in relation to the tax authorities. They should have wondered about the true nature of the arrangements pursuant to which they were obtaining tax receipts for amounts four times higher than the prices of the works of art they had just acquired. That fact alone — the fact that there was so great a difference between the prices paid by the appellants for the paintings and the amounts that appeared on the tax receipts, which supposedly represented the market value of the paintings at the same point in time — leads me to believe that the appellants knew or ought to have known, if they had been mindful of their tax obligations, that the amounts indicated on the receipts were greatly inflated or excessive and did not represent the market value of the paintings in question. Mr. Levert’s role at every stage of these transactions should have raised serious suspicions in their minds. The fairly passive role of the charities to which the works of art were given should have prompted the appellants to be careful. The facts that the charities were for all practical purposes chosen by Mr. Levert and that the appellants displayed a total lack of interest, as donors, in the organizations that received their gifts are also strange and unusual aspects of the transactions in question. Generally speaking, the appellants’ failure to co-operate with the tax authorities when they were asked to provide proof of purchase and payment documents regarding the works of art in question also persuades me that they may have thought their conduct was not beyond reproach.

[211] I therefore conclude that the Minister of National Revenue was correct to assess penalties against the appellants. The amounts of the penalties must be adjusted to take account of the value I established for each of the gifts.

[212] For these reasons, the appeals from the assessments for the 1988, 1989 and 1990 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellants are entitled to the deduction for gifts provided for in section 118.1 of the Income Tax Act, taking into account the value of the gifts as established in these reasons. The capital gains exemption must be taken into account where applicable.

[213] Costs will be awarded later following a common hearing in these appeals and the appeals of Amédée Duguay (94-1081(IT)G), Diane L. Duguay (94-1084(IT)G) and François Langlois (92-1124(IT)G and 94-3007(IT)G). The procedure in and date of the common hearing on the issue of costs will be determined in consultation with counsel for the parties.

Signed at Ottawa, Canada, this 13th day of November 1998.

"Alban Garon"

J.T.C.C.

[OFFICIAL ENGLISH TRANSLATION]

Translation certified true on this 21st day of May 1999.

Stephen Balogh, Revisor

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