Date: 20001103
OTTAWA, ONTARIO, FRIDAY, NOVEMBER 3, 2000
CORAM: DÉCARY J.A.
LÉTOURNEAU J.A.
NOËL J.A.
Docket: A-756-98
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
DIANE L. DUGUAY,
Respondent.
Docket: A-757-98
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
AMÉDÉE DUGUAY,
Respondent.
JUDGMENT
The appeal is dismissed with costs. The cross-appeal is dismissed with costs.
Certified true translation
Suzanne M. Gauthier, LL.L. Trad. a.
Date: 20001103
CORAM: DÉCARY J.A.
LÉTOURNEAU J.A.
NOËL J.A.
Docket: A-756-98
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
DIANE L. DUGUAY,
Respondent.
Docket: A-757-98
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
AMÉDÉE DUGUAY,
Respondent.
Hearing held at Québec, Quebec on Thursday, October 19, 2000
Judgment rendered at Ottawa, Ontario on Friday, November 3, 2000
REASONS FOR JUDGMENT BY: LÉTOURNEAU J.A.
CONCURRED IN BY: DÉCARY J.A.
NOËL J.A.
Date: 20001103
CORAM: DÉCARY J.A.
LÉTOURNEAU J.A.
NOËL J.A.
Docket: A-756-98
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
DIANE L. DUGUAY,
Respondent.
Docket: A-757-98
BETWEEN:
HER MAJESTY THE QUEEN,
Appellant,
AND:
AMÉDÉE DUGUAY,
Respondent.
REASONS FOR JUDGMENT
LÉTOURNEAU J.A.
[1] Was Judge Garon of the Tax Court of Canada (as he then was) mistaken when he concluded that under s. 118.1 of the Income Tax Act ("the Act") the respondents were entitled to a tax credit for charitable gifts? Did he err in determining the fair market value of the property given for purposes of calculating the deduction allowed by the Act? Was he right to subject the respondents to the penalty mentioned in s. 163(2) of the Act?
[2] Those are the three questions submitted to the Court, the first through an appeal by Her Majesty the Queen and the other two through a cross-appeal by the respondents. The two appeals and cross-appeals in these cases were heard concurrently with the appeals and cross-appeals in Côté (A-758-98 and A-759-98) and Langlois (A-760-98 and A-761-98). They were argued on the basis of a number of points common to all, bearing in mind certain factual differences.
Facts
[3] Mr. and Mrs. Duguay were part of a group of several individuals who dealt with Marc Levert, the founder of and principal shareholder in the Galerie des Maîtres Anciens Inc. in Québec. Mr. Levert sold to his clients, generally at 25% of the appraised value, art works (paintings) which the latter transferred to charitable organizations identified and selected by Mr. Levert. It was Mr. Levert who was responsible for finding and selecting the recipient organizations to whom he gave the gifts. To this end, he acted as the donors' mandatary. It was also he who valued the property transferred and provided the receipts necessary to obtain the tax credit. Mr. Levert also acted as mandatary for the recipient organizations. In that capacity, he received the gifts intended for them and immediately resold the gifts, giving the organizations only a minute share of the proceeds of the sale, between 4% and 10%.
[4] By judgment of the Superior Court of Quebec, Criminal Division, on February 28, 1994 Mr. Levert was convicted of destroying documents for the 1984, 1991 and 1992 taxation years. On March 17, 1995 the Court of Quebec, Penal Division, also found him guilty of tax avoidance for the taxation years 1984 to 1988. This judgment was affirmed by the Superior Court on January 11, 1996. Finally, on April 7, 1997 Mr. Levert pleaded guilty in connection with the instant cases to charges of conspiracy to avoid tax and enabling tax of $110,000 to be avoided by taxpayers, including the respondents, for the 1986 to 1988 taxation years. He was sentenced to a term of 10 months' imprisonment. A probation order for two years was also made against him, prohibiting him from acting directly or indirectly as an appraiser, promoter, broker or consultant in connection with gifts of art works to non-profit organizations.
[5] For 1986 to 1989, Mr. and Mrs. Duguay applied for a charitable gifts credit. Mr. Duguay also applied for one in 1990. They dealt with Marc Levert except for 1989, in which they gave a collection of jewellery to a charitable organization. To do this they dealt with Gilles Bouchard, a work colleague of Mr. Duguay. No invoice was issued for the transaction and it was Mr. Bouchard who was responsible for having the appraisal made and finding a recipient for the gift. The appraisal was done by Ms. Lizotte. The latter, who was formerly a nurse, had obtained a certificate in gemology and had owned a jewellery store since 1983. The president of the organization which received the gift was a customer of this jewellery store. Once again, as with the gift of paintings, the purchase price of the jewellery by the respondents corresponded to 25% of the amount at which they were appraised.
[6] Only the 1988 and 1989 taxation years, and in Mr. Duguay's case 1990, are at issue. In fact, the respondents were the subject of a reassessment in 1987 for 1986 and 1987 and the Department of National Revenue at that time disputed the amount of the fair market value assigned by Mr. Levert to the gifts made. The respondents objected to the reassessment but subsequently withdrew their objection.
[7] The receipts obtained by the respondents in 1988 and 1989 amounted to $15,000 and $11,640 respectively. That for 1990 came to $9,750.
Whether respondents entitled to tax credit for charitable gift
[8] The Tax Court of Canada judge applied to the transactions in question the rules in the Civil Code of Lower Canada which at the time governed the making of gifts, and in particular arts. 755 and 776. He concluded that the conditions necessary for a gift to exist, namely the intention to give, delivery of the property and acceptance by the donee, had been met. Applying The Queen v. Friedberg, 92 DTC 6031, a judgment of this Court, he found that even though the respondents' primary motivation in the case at bar was to obtain a tax benefit, that did not nullify the donors' intent to give. He was also of the opinion that obtaining a receipt from the recipient organization could not be regarded as consideration that eliminated the gratuitous and liberal nature of the transaction.
[9] Finally, the subject-matter of the gifts seemed sufficiently clear to him and he was satisfied that the items given had become the property of the charitable organizations that issued the receipts for tax purposes.
[10] In my opinion, the judge correctly directed himself on the legal principles applicable in the case at bar. Similarly, I was not persuaded that he erred in applying these principles to the facts before him. Consequently, I would dismiss the appeal with costs.
Whether judge erred in determining fair market value of items donated
[11] By a cross-appeal the respondents argued that the judge, in determining the fair market value of the property, placed too much emphasis on the prices of that property at auction and systematically disregarded their retail selling price in art galleries. They also objected that he ignored the objective indicators relied on by Mr. Levert in determining the appraised values.
[12] Counsel for the respondents suggested that this Court undertake a fundamental re-valuation of the fair market value based on an average of the amount appearing on the receipt, the value of similar property at an auction sale and the retail price paid by purchasers in galleries.
[13] I do not think that the basis of calculation suggested by counsel for the respondents is appropriate in the case at bar and that the Court should adopt any procedure other than that used by the trial judge: many paintings were not saleable in galleries, the circumstances surrounding the transactions, by any yardstick, were to say the least strange and unusual, not to say suspicious, and the prices were routinely inflated. Such facts do not lend themselves to a general standard or rule of the kind proposed by the respondents.
[14] The judge had then to assess the fair market value of the property at issue in light of its distinctiveness and specific characteristics. "Fair market value" means that obtained in the ordinary market, namely a market not distorted by special economic factors, in which sellers ready but not too anxious to sell deal with purchasers ready and able to purchase: [1945] S.C.R. 267">Attorney General of Alberta v. Royal Trust Co., [1945] S.C.R. 267, at 288. To do this, he relied in part on the testimony of expert witnesses and in part on the fact that the property itself could not even fetch at auction a reserve price well below the appraised value submitted by the respondents, in part on prices currently paid at auction for works which had no other market than sale at auction, in part on prices currently paid for works by the same artist that were comparable both in terms of size and of subject-matter and period covered, and in part on the sale or buy-back price of property immediately resold at auction by the donee. The judge took into account the relevant market, in which the forces of supply and demand operated, and in which the work could be sold, or in fact had been resold, shortly thereafter: his assessment is not open to criticism.
[15] For example, the painting by Jean-Paul Lemieux (a 1931 10 x 14 in. watercolour), for which the respondents submitted a valuation of $15,000 in 1988, could not find a purchaser at auction through Encans Pinney's in 1989 and did not reach the amount of $2,800 corresponding to the reserve price placed on it. In the circumstances, it appears to the Court that the value of $3,000 assigned by the judge reflects the fair market value.
[16] The judge was also sensitive to the limits placed by the experts on the factors used by Mr. Levert in his appraisals. For example, according to the testimony of Messrs. Harvey, Gagnon and Rinfret, the prices in the Guide Vallée, on which Mr. Levert relied heavily in making his appraisals, did not represent actual selling prices but rather prices displayed for advertising purposes by the artists mentioned in it. Those prices are calculated by the square inch, based on the size of the painting, and do not take into account important factors that influence fair market value, such as the period when the painting was done, the artist's subject and the quality of the painting (see Côté, file A-759-98, vol. VIII, at p. 1968, vol. XI, at pp. 2610-11, 2848-57 and 2867-69 and vol. X, at pp. 2508-16).
[17] The judge had the delicate and very difficult task of determining the fair market value of the gifts acquired and resold by Mr. Levert on the auction market, for which the respondents did not provide any retail gallery sale invoice. The judge did this conscientiously for each item of property, referring to the evidence before him. I see no error in his approach that would warrant our intervention. Accepting the valuation method proposed by the respondents would amount to reasoning in the abstract and ignoring both the evidence in the record and the judge's analysis of it. I would dismiss this first ground of the cross-appeal.
Whether judge right to impose penalty prescribed in s. 163(2) of Act
[18] Section 163(2) imposes a penalty on every person who knowingly or under circumstances amounting to gross negligence makes or participates in, assents to or acquiesces in the making of a false statement or omission in a return in respect of a taxation year. In particular, it reads:
| 163. (2) False statements or omissions
Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a "return") filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of the greater of $100 and 50% of the total of
(a) the amount, if any, by which
| (i) the amount, if any, by which |
| (A) the tax for the year that would be payable by the person under this Act |
| (B) the amount that would be deemed by subsection 120(2) to have been paid on account of the person's tax for the year |
| if the person's taxable income for the year were computed by adding to the taxable income reported by the person in the person's return for the year that portion of the person's understatement of income for the year that is reasonably attributable to the false statement or omission and if the person's tax payable for the year were computed by subtracting from the deductions from the tax otherwise payable by the person for the year such portion of any such deduction as may reasonably be attributable to the false statement or omission |
exceeds
| (ii) the amount, if any, by which |
| (A) the tax for the year that would have been payable by the person under this Act |
| (B) the amount that would have been deemed by subsection 120(2) to have been paid on account of the person's tax for the year |
had the person's tax payable for the year been assessed on the basis of the information provided in the person's return for the year . . .
|
|
| 163. (2) Faux énoncés ou omissions
Toute personne qui, sciemment ou dans des circonstances équivalant à faute lourde dans l'exercice d'une obligation prévue à la présente loi ou à un règlement d'application, fait un faux énoncé ou une omission dans une déclaration, un formulaire, un certificat, un état ou une réponse -- appelé "déclaration" au présent article -- rempli ou produit, pour une année d'imposition conformément à la présente loi ou à un règlement d'application, ou y participe, y consent ou y acquiesce est passible d'une pénalité égale, sans être inférieure à 100 $, à 50 % du total :
a) de l'excédent éventuel
| (i) de la fraction de l'excédent éventuel de l'impôt qui serait payable par cette personne pour l'année en vertu de la présente loi qui est en sus du montant qui serait réputé par le paragraphe 120(2) payé au titre de cet impôt pour l'année, s'il était ajouté au revenu imposable déclaré par cette personne dans la déclaration pour l'année la partie de son revenu déclaré en moins pour l'année qu'il est raisonnable d'attribuer au faux énoncé ou à l'omission et si son impôt payable pour l'année était calculé en soustrayant des déductions de l'impôt payable par ailleurs par cette personne pour l'année, la partie de ces déductions qu'il est raisonnable d'attribuer au faux énoncé ou à l'omission, |
sur
| (ii) la fraction éventuelle de l'impôt qui aurait été payable par cette personne pour l'année en vertu de la présente loi qui est en sus du montant qui aurait été réputé par le paragraphe 120(2) payé au titre de cet impôt pour l'année, si l'impôt payable pour l'année avait fait l'objet d'une cotisation établie d'après les renseignements indiqués dans la déclaration pour l'année . . . |
|
|
| [19] The trial judge came to the conclusion that the respondents were extremely reckless, or at least grossly negligent, in respect of their tax obligations. He noted a number of points in support of his conclusion which he described as follows: |
| It seems to me that, particularly after Mr. Duguay'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 fair 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 fair market value of the paintings in question. Mr. Levert's role, particularly in the case of the gift made by the appellants in 1988, in which he was involved at every stage of the transaction, and Mr. Bouchard's role with regard to the gifts made in 1989 and 1990, should have raised serious suspicions in the appellants' minds. The fact that the charities were for all practical purposes chosen by Mr. Levert and Mr. Bouchard 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 cooperate 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. |
| [20] All these facts were entered in evidence and I agree both with his interpretation of the facts and the finding he made. |
| [21] Counsel for the respondents argued that his clients could not be blamed for continuing to make gifts after the reassessment for 1986 and 1987. Referring to Hudson Bay Mining and Smelting Co. v. R., [1986] 1 C.T.C. 414, affirmed by this Court as to the dismissal of the penalty, [1989] 2 C.T.C. 309, he maintained that mere disagreement with the tax authorities does not justify imposition of the penalty prescribed in s. 163(2). He added that his clients, far from being negligent, had on the contrary been doubly vigilant after being alerted by Revenue Canada that the appraisals done by Mr. Levert were inflated and did not reflect the fair market value. |
| [22] With respect, I believe, first, that the respondents' conduct indicated much more than mere disagreement with the tax authorities, and second, that their alleged vigilance was not supported by the evidence of what they did during the taxation years at issue. |
| [23] Revenue Canada informed the respondents in 1987 that the appraisals submitted by Mr. Levert in 1986 and 1987 were inflated. The respondents recognized this by withdrawing their objection. What did they do in 1988? They engaged in fresh dealings with the same Mr. Levert, in the same circumstances where he again acted as mandatary for both the donors and donee, and did nothing to check the appraisal of $15,000 which he gave them. |
| [24] If only 1988 were at issue, it might perhaps be argued that there was room for doubt: but what action was taken in 1989 by the respondents who claimed to be so vigilant and concerned with the accuracy of the appraisals they submitted in support of their application for the tax credit? They purchased from Mr. Bouchard, curiously at a price which, as with the paintings purchased from Mr. Levert, corresponded to 25% of the appraised value, a collection of jewellery which they gave to a charitable organization selected by Mr. Bouchard. They did not know why Mr. Bouchard sold them this jewellery at that price and did not ask why (appeal book, vol. III, pp. 566-67). They did not know the source of the jewellery, except that it came from Mr. Bouchard's personal collection (ibid.), at pp. 646-47). They bought without an invoice (ibid., at pp. 648, 770 and 793). Quite apart from the fact that jewellery might be of doubtful utility to a charitable organization, they relied on Mr. Bouchard to obtain an appraisal and asked no questions about the appraisal given to them by him. |
| [25] What can be said about the vigilance of Mr. Duguay in 1990, when he alone claimed the tax credit? He purchased paintings from Mr. Bouchard of unknown provenance, once again without an invoice and at 25% of the appraised value. Mr. Bouchard gave him an appraisal by the same Mr. Levert whom the respondents said they suspected (ibid., at pp. 574 to 576 and 783). How was Mr. Duguay vigilant? He accepted the appraisal without question and claimed the tax credit. |
| [26] In these circumstances, it is difficult not to conclude that he was wilfully blind, especially as he admitted he did not look at the guide given to him by Revenue Canada for the fair market value and appraisal of the property donated (ibid., at pp. 624 to 627). |
| [27] At the time Mr. Duguay was an experienced police officer with the Sûreté du Québec. He had to his credit 24 years of being involved in investigations, half of them in the economic crimes section. The circumstances surrounding each of the transactions, especially after the warning served by Revenue Canada concerning the appraisals filed, were such that they could not help raising suspicions in the respondents' minds, especially in view of Mr. Duguay's experience. Perhaps this explains why he lied to Revenue Canada officials who came to see him about the deductions claimed in 1986. He told them he had purchased and paid for the paintings between April and September 1986, whereas he did not do so until December 19 or 20 of that year. In his testimony in the Tax Court of Canada he said, at p. 601, referring to the statement made to the officials: |
| A. And then when I went to the Court . . . I told Mr. Gagnon: "We will correct it -- what the officials were told, there is nothing true in it. It is false. We will put back these points so it does not come before the judge and then we will go into a case like that". |
| I corrected -- I made a necessary correction. |
| [28] These self-serving untruthful statements, made subsequent to the returns for 1986 and 1987, lead to the conclusion, so far as the acts prohibited in s. 163(2) of the Act are concerned, that the respondents were aware of the falsity of the statements made by them in their tax returns for 1986 and 1987, and subsequently repeated in identical circumstances for the three taxation years at issue: R. v. White, [1998] 2 S.C.R. 72, at 84-85; R. v. Jacquard, [1997] 1 S.C.R. 314, at 340. I would dismiss this second ground of the cross-appeal. |
| [29] In sum, for the reasons stated I would dismiss the appeal and the cross-appeal with costs. |
| Certified true translation |
| Suzanne M. Gauthier, LL.L. Trad. a. |
FEDERAL COURT OF CANADA
APPEAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
FILE: A-756-98 & A-757-98
STYLE OF CAUSE: HER MAJESTY THE QUEEN
and
DIANE L. DUGUAY ET AL.
PLACE OF HEARING: QUÉBEC, QUEBEC
DATE OF HEARING: OCTOBER 19, 2000
REASONS FOR JUDGMENT BY: LÉTOURNEAU J.A.
DATED: NOVEMBER 3, 2000
CONCURRED IN BY: DÉCARY J.A.
NOËL J.A.
APPEARANCES:
Chantal Jacquier FOR THE APPELLANT
France Bonsaint FOR THE RESPONDENT
Timothé Huot
SOLICITORS OF RECORD:
Morris Rosenberg FOR THE APPELLANT
Deputy Attorney General of Canada
Ottawa, Ontario
McCarthy, Tétrault FOR THE RESPONDENT
Québec, Quebec
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