Arvisais v. MNR, 93 DTC 506, [1993] 1 CTC 2473 (TCC)

P.R. Dussault, T.C.C.J. (orally):—These are appeals from reassessments issued by the respondent in respect of the appellant's 1986 and 1987 taxation years. In those assessments, based on expert appraisals, the respondent reduced the value of gifts of works of art made in 1987 by the appellant to the Musée Louis-Hémon and the Musée Pierre Boucher from $15,000 to $1,500 and from $2,400 to $1,200 for 1986 and 1987 respectively. The income tax computations were revised accordingly, and the respondent added to the tax payable a penalty under subsection 163(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") in the amount of $598.29 for 1986 and $333.13 for 1987. Only the penalty for each of the years was disputed.

The appellant, his wife, Mrs. Nicole Tremblay, and Mr. Jacques Demers, an investigator with Revenue Canada (Taxation), testified.

The appellant, currently a portfolio manager with the Royal Bank occupying a position associated with the marketing of services at the same institution during the relevant years, explained the circumstances surrounding the purchase and donation of the works of art. According to him, in 1986, after he had learned that his sister-in-law, Mrs. Aline Tremblay, had in previous years bought works of art from a certain Marc Levert for 25 per cent of their market value in order then to give them to museums and obtain a deduction based on that value, he expressed an interest in entering into similar transactions together with his wife.

Following indirect communications with Mr. Levert in which Mrs. Aline Tremblay served as an intermediary, the appellant was afforded the opportunity to purchase works of art at 25 per cent of their value so that they could then be given to a museum. Thus, in December 1986, he purchased ten water colours from an artist named Elisabeth [sic] Sewell for the price of $3,750. The purchase price had to be paid in 1987 out of the tax refunds expected with respect to the 1986 taxation year. It should be noted that, under this arrangement, Mr. Levert would handle everything, that is select the works, have them appraised and forward them to the donee.

According to the appellant, the information that he had obtained from his sister-in-law was to the effect that Mr. Levert was a prominent person in Québec City, that he was the owner of two art galleries and that, inter alia, he liquidated works of art for estates.

Although no invoice was issued attesting to the purchase, the appellant subsequently received an appraisal signed by a certain Michel Champagne in the amount of $15,000, that is four times the price paid, a receipt from the Fondation du Musée Louis-Hémon for the same amount and a letter of acknowledgement on that same foundation's letterhead entitled "Open letter to all our donor friends" [translation].

In filing his 1986 return, the appellant claimed a deduction for charitable gifts calculated in part, since there were other minor gifts, on the basis of the gift of these works of art appraised at $15,000. It should be noted, however, that the appellant admitted that he had wilfully falsified the year in which the works were purchased by indicating 1985 instead of 1986 in schedule 3 of his return. The explanation provided in his testimony was to the effect that it had been suggested to him that he proceed in this manner, and the instruction allegedly came from Mr. Levert, because of a doubt or uncertainty whether it was possible to claim a deduction for a gift of works of art which occurred in the same year as their acquisition.

In addition, in the same schedule, whereas the total proceeds of disposition of the ten water colours are indicated as $15,000, their adjusted cost base is set at $1,000, and the realized capital gain at $14,000.

For 1987, the transaction concerned an Easter candlestick or chandelier attributed to the artist Louis Jobin. The total price paid by the appellant and his wife, since it was a joint purchase this time, was $1,200, still according to the same agreement at 25 per cent of the value. An invoice from La galerie des Maîtres Anciens, a property of Mr. Levert, attests to this purchase.

The appellant subsequently received a photograph of the work, a receipt in the amount of $2,400 issued by the Musée Pierre Boucher of Trois-Rivières and a letter of acknowledgement from the same organization indicating that the receipt had been issued based on an appraisal provided of $2,400. This amount of $2,400 in fact represented half the total appraisal of $4,800, four times the price paid. However, nowhere was it mentioned that this was a joint purchase of a single item, except in the invoice which Revenue Canada did not examine before it was filed in evidence, any more than it was reported by the appellant or his wife in their respective returns for 1987. Revenue Canada thus reassessed the appellant on the basis of the second appraisal obtained in the amount of $1,200, but nevertheless allocated the full amount to him as the proceeds of disposition and the amount of the gift.

Still according to the appellant, the 1987 transaction was conducted this time after he had met Mr. Levert, whom he invited to his home. He said that he found Mr. Levert honest and that he had been satisfied by the latter's answers to the questions asked. He simply said he had been disappointed that he had been unable to make larger purchases in 1987. According to the information obtained from Mr. Levert, the cause was the scarcity of objets d'art on the market at that time.

Still according to the appellant, this fact helped reassure him that the works donated were of a certain importance. Throughout the process, both in 1986 and in 1987, the appellant said that he had acted in good faith, that he had relied on the explanations provided by his sister-in-law and Mr. Levert himself and on the various documents, that is the appraisals and the receipts provided by persons who appeared competent and organizations that were recognized. According to him, he tried in 1987 to obtain more information on the legality of gifts of works of art and on the manner in which the fair market value of objects purchased at auctions was determined. He thus explained that he had obtained a booklet from Revenue Canada, which was filed in evidence, entitled Registered Charities: Questions & Answers. He also said he had subsequently communicated personally with a certain Mrs. Françoise Boucher of Revenue Canada in Ottawa. When confronted with the fact that the said booklet bore the publication date of May 1988, however, the appellant had to admit that he had been able to examine that document only after that date and that the communication with the public servant mentioned could also only have taken place thereafter.

Lastly, the appellant also affirmed his good faith and based his belief that all these transactions had appeared to him completely normal on the fact that he himself had purchased an oil on canvas by Narcisse Poirier in 1984 for the price of $675 in the winding up of an estate and that that work had been appraised at $1,900 three days later by the Galerie Alexandre in Montreal. According to the appellant, this personal experience made it plausible that Mr. Levert could sell works of art at 25 per cent of their value precisely because he was in the field and therefore in a better position than himself to obtain works at a low price. All the documents relevant to this transaction were filed in evidence.

The testimony of Mrs. Nicole Tremblay confirmed that of the appellant in its essential points.

The testimony of Mr. Jacques Demers concerned the specific computation of the penalty for each of the years and established the facts on which he had relied, following the investigation conducted by Revenue Canada, in making the assessments for 1986 and 1987, more particularly the penalties. According to him, the fact that the transactions were conducted in accordance with the scale agreed upon in advance of 25 per cent of the value, which was also confirmed by the cheques remitted in payment, was taken into account. Furthermore, these were transactions conducted with a dealer, and according to him, that should have raised a doubt in the appellants mind. Still according to Mr. Demers, there was no invoice or receipt attesting to the acquisitions, the payments had to be made out of tax refunds, and the appellant's 1986 return contained false information concerning the year in which the works had been purchased and the price paid. Mr. Demers therefore considered that the appellant had only purchased charitable receipts, since he had never seen or received the works and had never either selected or remitted those works to the donee organizations. On this point, he also recalled that the expected tax benefit was greater than the cash outlay. Lastly, according to him, the appellant, who occupied an important position at the Royal Bank and must have been a circumspect man, should have had doubts about this kind of practice and should have had a second appraisal done of the value of the works.

For the purpose of determining whether the penalty assessed by the Minister under subsection 163(2) of the Act on the ground that the appellant knowingly, or under circumstances amounting to gross negligence, made a false statement in his tax return and whether there had resulted an underestimation of the tax, and thus for the purpose of determining whether this assessed penalty was indeed justified, it appears to me important to set out briefly the framework for the analysis of this provision.

In Cloutier v. The Queen, [1978] C.T.C. 702, 78 D.T.C. 6485, Marceau, J. of the Federal Court wrote the following concerning the assessment of the circumstances leading to the application of this penalty, at page 705 (D.T.C. 6487):

The question that arises is whether the circumstances in which the omission occurred are such that gross negligence may be ascribed to the taxpayer, gross negligence meaning relatively serious negligence in behaviour, difficult to explain and socially intolerable. The facts in themselves do not raise any problem; they are agreed upon. What is involved is their appraisal; it is what can be deduced from them in order to characterize the plaintiff's behaviour that is at issue. This is not a question of fact in the sense of a question concerning a prior factual given or an event that has taken place in time, but a question of legal characterization and judgment which is not subject to evidence, but rather relies on the intimate conviction of the person who has to determine it.

[Translation.]

In the English version of the Act, the expression "gross negligence” is used to designate "faute lourde”. Strayer, J. of the Federal Court, Trial Division, analyzed this expression in the following terms in Venne v. The Queen, [1984] C.T.C. 223, 87 D.T.C. 6247, more specifically at page 234 (D.T.C. 6256):

"Gross negligence” must be taken to involve greater neglect than simply a failure to use reasonable care. It must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.

[Emphasis added.]

Furthermore, in his decision in Morin v. M.N.R., [1988] 2 C.T.C. 2334, 88 D. T.C. 1592, Chief Justice Couture of this Court stated the following, at page 2335 (D.T.C. 1597):

To escape the penalties provided in subsection 163(2) of the Act, it is necessary, in my opinion, that the taxpayer's attitude and general behaviour be such that no doubt can seriously be entertained as to his good faith and credibility throughout the entire period covered by the assessment. . . .

This remark leads me to address a first point which concerns the appellant's wilful falsification of the date of purchase of the works of art in his 1986 return. This falsification done at Mr. Levert's suggestion or request raises more than serious doubts as to the appellant's good faith and credibility. While some might see this as only a minor factor, the context appears to me to lend it a larger dimension since the appellant made this false statement in the hope of being allowed a deduction which he did not believe he could otherwise obtain. It is of little importance in the context that the appellant's belief was erroneous.

The second point concerns the belief which the appellant said he held as to the normal nature of the transactions related to the purchasing of works of art at 25 per cent of their market value, a belief based, inter alia, on his personal experience in 1984.

I shall say first that I am surprised an intelligent and reasonably well- informed person could liken a purchase at the winding up of an estate to a purchase in an independent art gallery or from a third party who is a dealer in works of art. How can one not have any doubts whether a transaction is proper and normal when the price is set in advance at the specific percentage of 25 per cent of what the seller claims to be the fair market value, particularly when that same percentage applies to all the transactions, each year and in respect of a number of purchasers?

Furthermore, had the appellant's sister-in-law and other persons not obtained the same bargain in previous years? How could one not have suspected that the appraisal was being manipulated?

While one may believe in good deals, one wonders why a number of people are not at all surprised to hit the jackpot so systematically, year after year, without raising serious questions. The search for tax shelters appears to me seriously to affect the capacity for discernment of some taxpayers, who would be better off not believing just what they want to believe.

Although, as a result of their particular situation, art galleries are often in a position to obtain works at very good prices, they certainly do not have a reputation for reselling them at 25 per cent of their market value, particularly to strangers (in the sense of people whom they do not know).

This leads me to address a third point, which concerns the checks done by the appellant.

The evidence shows that during the years in issue or for those years, that is 1986 and 1987, the appellant did not check the transactions which were proposed to him and to which he agreed, with persons other than the persons who themselves had an interest therein, that is his sister-in-law, who had already taken part in such transactions in previous years, and Mr. Levert himself, the instigator of those transactions.

The appellant, it is true, reported conducting certain checks with government authorities, particularly one communication with a representative of Revenue Canada. These steps, however, proved to have been taken after May 1988, not in 1986 or even in 1987. If, as he said, the appellant had no doubt as to the validity of the transactions in which he took part, one indeed wonders why he decided to inquire with authorities at such a late date.

When one claims a charitable gift as a deduction which amounts to more than 20 per cent of one's net income, as the appellant did for 1986, one must make more thorough inquiries, conduct checks and seek legal or other advice from competent and disinterested persons before the transaction. This was not done, and the appellant cannot shift liability for his negligence onto third parties, even if they were the instigators of those transactions.

As to the actions taken in 1988, I would add that, while the appellant said he was satisfied with the answers given to his questions by the Revenue Canada employee, the questions themselves which he asked, except the very general one on the legality of gifts of works of art, seemed to me to bear little relation to the particular transactions in which he had already been engaged for two years.

At this stage, and before concluding, I shall make a brief comment concerning Freidberg v. Canada, [1989] 1 C.T.C. 274, D.T.C. 5115 (F.C.T.D.); [1992] 1 C.T.C. 1, 92 D.T.C. 6031 (F.C.A.), to which counsel for the appellant referred at length. It is true that the difference, in that case, between the price paid and the appraisals was much greater than that determined for the transactions which concern us. However, in that case, the appellant, who was clearly seeking a tax benefit, did not engage in transactions on the basis of a preliminary agreement setting the price at a given percentage of the market value. Furthermore, in that case, three independent appraisers were called upon, whose appraisals were accepted by the Federal Court-Trial Division. The taxpayer had no advance knowledge of what the result of those appraisals would be, and he had decided, in any case, to go ahead with the purchase and donation of collections of ancient Islamic fabrics to the Royal Ontario Museum, no matter the appraisal accepted. He was even prepared to make a permanent loan to that museum, the representatives of which had themselves solicited donations from the outset, if certain conditions could not be met. These facts were amply sufficient to show that the circumstances of the instant case are far from comparable.

The taxpayer's behaviour as a whole in the instant case, as revealed by the evidence, leads me to find that one may certainly entertain serious doubts as to his good faith and credibility in this entire matter. I believe that he knowingly agreed to take risks by falsifying his 1986 return at the request or on the instructions of a person whom he did not even know at that time for the avowed purpose of being allowed a deduction. This factor does not appear to me unrelated to the perception he should have had of the transactions in which he agreed to engage.

In this context, I believe that the appellant at least closed his eyes to the true nature of the transactions in circumstances which, given the situation, should doubly have alerted him. The fact that he conducted no more thorough check during the years in issue also goes beyond simple neglect.

The appellant's behaviour as a whole therefore leads me to find that he was grossly negligent. Consequently, I find the penalties assessed justified.

For these reasons, the appeals for the 1986 and 1987 taxation years are dismissed.

Appeals dismissed.