Bruce Thomas Gardner v. Her Majesty the Queen (Informal Procedure), [1993] 2 CTC 2480

Christie, A.C.T.C.C.J.:— This appeal is governed by the informal procedure prescribed by section 18 and following sections of the Tax Court of Canada Act.

It is one of a series of appeals under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") pertaining to deductions made for charitable donations in computing taxable income that have a good deal in common.

in computing his taxable income for 1986 the appellant deducted $16,000 as a charitable donation under paragraph 110(1)(a) of the Act. [1] The donation was made to the Donelian Museum of Oriental Art (“the museum") which was then a registered charity. The gift was a South Caucasian long rug (Lenkoran), mid-nineteenth Century, size: 116” x 3'8"" for which the appellant paid Mr. Gustave Tasch $3,200. The museum was under the control of Mr. John Donelian who was associated with Tasch in promoting improper claims for deductions in computing taxable income under the Act.

In reassessing, the Minister of National Revenue disallowed the donation and, in addition, a penalty was assessed under subsection 163(2)? [2] of the Act.

In his notice of appeal the appellant reduced the amount of the claimed deduction from $16,000 to $3,200. This, as indicated, is what he paid for the rug. He also appealed against the penalty. On January 22, 1993, the appeal was abandoned as it related to claiming a deduction in computing taxable income.

The burden of establishing the facts justifying the assessment of the penalty being on the Minister, the first witness called testified on behalf of the respondent. Mr. Arthur C. Payne has been an employee of Revenue Canada for 15 years and for the past 10 years he has been involved in special investigations. In 1986 he was an investigator with the Special Investigation Section at the Hamilton District Office. He investigated the museum in 1987. It was a charity registered under the Act and operated by Donelian. Its location was in the basement of Donelian’s home in Oakville. His initial involvement was in the execution of a search warrant at Tasch's residence. He was later assigned to the overall investigation. The purchases of various artifacts by persons making donations to the museum were traced as were the purchase of the artifacts bought by Tasch from suppliers in Canada and the United States. About 80 per cent of the artifacts were acquired by Tasch from rug dealers in New York City. The donors' were basically high-income earners, doctors, dentists in the high income tax brackets”. In excess of 70 individuals had made donations over a three to four year period.

Generally speaking individuals were introduced to the donation scheme by Tasch who staged a presentation informing potential donors of the tax benefits that would flow from purchasing an artifact from him and donating it to the museum. Artifacts were displayed at these presentations and Tasch was realizing a profit on their sale. Ordinarily, the value on the receipts issued by the museum exceeded the amount paid for an artifact by four or five times. In the majority of the cases cash was paid to Tasch and no receipts were issued by him to potential donors.

As a result of the investigation Tasch and Donelian were charged with violations of paragraphs 239(1)(d) and (e) of the Act. [3] At the election of the Attorney General of Canada they were prosecuted upon indictment. They were convicted by a court composed of a judge and jury after a trial that spanned a period eight months. The appellant testified on behalf of the prosecution.

The evidence of Payne that is particularly related to this appeal is that by letter dated February 27, 1986, Tasch wrote the appellant as follows: “I have acquired in the U.S. as your agent, a rare nineteenth century South Caucasian carpet. The cost of this piece will work out to $3,200 Canadian funds. I trust this will meet your requirements". The appellant informed the witness that his initial contact with Tasch about rugs was in November or December 1986. From this the witness concluded that the letter had been back-dated. The receipt for $16,000 issued by Donelian on behalf of the museum regarding the rug donated by the appellant is dated December 31, 1986. The carpet was purchased on March 7, 1987, by Tasch in New York City from a Mr. Markarian. Finally the witness said: “We obtained during the course of the investigation a computerized summary of the transactions for his (the appellant’s) bank account at Canada Trust Branch 062 which indicated the payment had been made on March 20, 1987 for $3,200”.

Maria T. Giallonardo also testified on behalf of the respondent. She is also an employee of Revenue Canada and has been for about 16 years. Prior to March 1992 she had spent 12 years in Special Investigations. Between May 1987 and December 1991 she was the supervisor in charge of the investigation into the museum.

She was in command of a search of Donelian’s residence on July 22, 1987. It was located in an "average neighbourhood in Oakville” and it was: “Just an ordinary bungalow with a full basement". They secured receipts showing 1.6 million dollars in donations to the museum. The scene at the time of the search was described thus:

Q. What did you find in the search and seizure?

A. When we entered the residence there was, most of the artifacts were in the basement, in the family room or basement or whatever it was. There were other things in other parts of the house. Some things were mounted on the wall. There were a few things upstairs. Mr. Donelian had said that not everything belonged to the museum so basically what happened then was Mr. Donelian then said okay, this is mine and that was it, nothing was done with those items and he said that this other stuff is the museum’s. Basically what happened was anything that was mounted or segregated was his own personal stuff and the museum things were just piled on the floor and stored under benches in the family room haphazardly wherever space could basically be found.

Q. What else in the basement was there besides the artifacts themselves?

A. The main family room, it was used as a family room. There was a computer there, an ironing board there, there was a bar, there were seats, there was a coffee table. Other than all these rugs piled up underneath there was nothing to indicate the room was anything other than a family room that people used. The rest of the artifacts, what we referred to as non-carpet artifacts were stored in a cupboard ina converted garage with chemicals and all types of other things. Basically there was no care taken. If you walked into the house it doesn't impress you as a museum, It looks like somebody's home.

Seven photographs taken at the time of the search were shown to the Court. They reflect what the witness described. Photostats are in evidence. The testimony goes on:

Q. In general, how would you described your impression of this museum?

A. It was, the basement was damp, it was musty, there was nothing to indicate it was a museum. There was no sign outside the house indicating the Donelian Museum of Oriental Art was located there. It basically was a family room that these things just happened to be in.

With particular reference to this appeal this question was asked and answer given:

Q. Did you seize the item at issue in the appellant's appeal in that particular locale?

A. Yes. All items that were donated to the museum were seized from that location. There were none seized from anywhere else.

The evidence of the appellant is that he is a dentist. At the time he was approached by Tasch about making a donation to the museum he had known him for four or five years. He was a dental ceramist who worked for Rotsaert Dental Laboratory Ltd., which supplied dental material to the appellant. The matter of a donation was first broached during a telephone conversation around November 1986. After a second such conversation, the appellant visited Tasch's home. He found it to be very nice and it contained a number of collector's items such as vases and carpets: "It's like a gallery almost". At this meeting Tasch made a proposal to the appellant that is related in this extract from the transcript of evidence:

Q. Can you give us an idea of what the proposition was?

A. He basically told me that if I made a donation to the Donelian Museum that I would receive a tax receipt that I could use for my 1986 tax return.

Q. And that receipt was at the fair market value?

A. No. At the appraised value.

Q. Were you buying the artifact for the same amount as that appraised value?

A. No, I wasn't.

Q. You were buying it at something less?

A. Yes.

Q. What was your initial response to his proposal?

A. How can that be done? At that point in time he produced several articles from the Financial Post and said that No. 1 he was recognized as a certified art dealer which I read and that was in a couple of articles. Then he went into the definition of cultural property that explained to me that fair market value, and appraised value were two different items and that what I was buying at a fair market value wasn't what the appraised value was. That seemed to make sense to me.

At this time Tasch also gave the appellant an article from Moneywise which is the Financial Post magazine of March 1, 1984. In it Tasch is portrayed as a“ rug expert who has been collecting for 15 years".

Following this meeting the appellant sought advice from Marnie MacKay, C.A., who had been his accountant for four or five years. She said that if a receipt was provided for income tax purposes and the museum was registered under the Act, Revenue Canada would accept the donation. It was the firm of Bateman, MacKay who prepared his 1986 return of income. It was "prepared without audit from information provided by the taxpayer”. He also spoke to Mr. Jeff Ball, a financial adviser, who said there was no problem. In addition he raised the matter with an unidentified colleague who said the same thing. Although still "a little sceptical” he decided in favour of seeking the deduction. Tasch then went to the United States where he purchased a rug for the appellant who gave him $3,200 in cash. Tasch told him that the deduction could still be made in respect of 1986 although these transactions took place in 1987: “He (Tasch) said at that point in time they hadn't closed the books in '86 and yes, I could get a tax receipt for'86." The appellant had no reason to believe that Tasch was dishonest.

Under cross-examination the appellant pointed out that he made his RRSP contributions after the end of a taxation year: "and I didn't see there was a problem with this as well". He paid cash at the request of Tasch and was informed by the latter that the appraised value of the rug was $16,000 although he did not say whose appraisal it was. Also the letter from Tasch to the appellant dated February 27, 1986, is in error, the year should be 1987.

The final item of evidence to be dealt with is a statutory declaration declared before investigator Payne on July 13, 1988. He is described in the jurat as: "An Officer Authorized under subsection 220(5) of the Income Tax Act". [4] The document is signed by the appellant. It reads as amended on its face as follows:

1. I have known Gustave Tasch through my dental practice and dealings at the dental lab where he is employed.

2. Tasch presented to me a means where I could obtain a tax deduction for donating items to the museum.

3. I checked out the deduction and registration of the museum with my personal accountant from Bateman, MacKay and was advised it was OK.

4. I was also aware of other business colleagues who had also made donations to the museum, so it appeared legitimate to me.

5. I attended at Gustave Tasch’s residence on Deer Run in Burlington and reviewed the rugs approximately November or December, 1986.

6. I told Tasch I needed approximately $20,000 for the deduction.

7. I paid Gustave Tasch $3,200 in cash for a $16,000 tax credit. Tasch told me this appraised value but I did not get it in writing at the time of the purchase. I took a picture of the carpet, then left the carpet with Tasch for the donation. I also received the attached articles on the Museum.

8. The cash was (paid at) Tasch’s request and was paid in March, 1987.

9. I received the receipt approximately two weeks later but do not remember if it was delivered by Tasch or received in the mail.

10. I took the receipt to my personal accountant who advised me it was a legitimate donation and claimed it on my 1986 return.

11. I was not approached to donate again in 1987.

12. I have never met John Donelian or attended the museum in Oakville.

The contentious part is paragraph 6. The appellant denies making that statement. The appellant said he signed the document under these circumstances:

When Art Payne and his associate came to me they came to my residence. I was not advised of legal counsel and I was told that they were not trying to get me. They were trying to get Tasch. I was to help them in any way I could. Whether or not I told them what they wanted to hear to protect myself or whatever, I am not sure. So, I can't remember how they worked it exactly but I know they kept pushing at me to say I believe what they wanted to hear. They wanted to hear that I said I needed a $20,000 deduction. That is what I believe. I did not have any legal representation and they sat there, it was about half an hour, wrote down things I had said and at the end they handed this piece of paper to me and said is this what you said and under great duress I signed it, yes I did.

Investigator Payne was called in rebuttal and said that the statutory declaration was: “Explained to him (the appellant), that this is a summary of his evidence if we should go to Court in a criminal proceeding”. The potential criminal proceedings were against the museum, Donelian and Tasch.

In Venne v. The Queen, [1984] C.T.C. 223, 84 D.T.C. 6247 (F.C.T.D.), Mr. Justice Strayer said at page 234 (D.T.C. 6256):

With respect to the possibility of gross negligence, I have with some difficulty come to the conclusion that this has not been established either. “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.

In De Graaf v. The Queen, [1985] 1 C.T.C. 374, 85 D.T.C. 5280 (F.C.T.D.) the same judge said at page 378 (D.T.C. 5284):

In essence, for a taxpayer to be liable to a penalty under subsection 163(2) he must have been responsible for a misstatement or omission in his return, made by or for him knowingly or through his gross negligence. As I have noted elsewhere, the jurisprudence seems to recognize an element of subjectivity in the application of these tests, even to the point of accepting ignorance of the law as excusing misstatements in income tax returns.

In Patricio v. The Queen, [1984] C.T.C. 360, 84 D.T.C. 6413 (F.C.T.D.), Madam Justice Reed said at page 365 (D.T.C. 6418):

In my view, the extent to which he did not know what was required by the tax system was the result of purposely choosing to wear blinkers rather than mere carelessness or simple negligence. Wilful blindness by someone capable of acting in a responsible manner is in my view, in the circumstances of this case, gross negligence.

While the conduct of the appellant borders on what is prohibited by subsection 163(2), l have come to the conclusion that he is not within the ambit of the subsection as interpreted by Strayer and Reed, JJ.

These factors militate in his favour although no single one is conclusive. The museum was registered under the Act as a registered charity. This fact can lead to an understandable assumption by taxpayers that before an organization or foundation is registered, reasonable steps have been taken by Revenue Canada to ascertain that it is bona fide and what it purports to be. There is no evidence that this happened. Indeed the evidence points in the opposite direction. The appellant consulted with a chartered accountant and a financial adviser, both of whom gave him the green light. The appellant did not know that Tasch and Donelian were acting in a dishonest and fraudulent manner.

The appeal is allowed. This is not a proper case for the award of costs.

Appeal allowed.

Peter Hawrylyshyn v. Her Majesty The Queen (informal procedure)

[Indexed as: Hawrylyshyn (P.) v. Canada]

Tax Court of Canada (Christie, A.C.T.C.C.J.), April 28, 1993 (Court File No. 92-2111).

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72,

The appellant is an obstetrician. Since 1983 or 1984 the appellant engaged B to prepare his tax returns. He also referred to B for general financial advice and relied heavily upon B’s advice. In the fall of 1986 the appellant became aware, through colleagues, about donations to a museum. The appellant approached B and asked him to investigate fully the nature of the museum, its legitimacy and what the transaction would involve. The appellant received "assurance" about the proposed tax transaction. In late December 1986, the appellant met with T and B at B’s home. The appellant had not met T prior to the meeting and did not meet him thereafter. Prior to the meeting the appellant was told to bring $3,400 in cash, which he did. The appellant was very impressed with T and was shown a lot of material which authenticated the museum. The appellant then paid the $3,400 to T for a nineteenth century ivory ground Quashqa’i rug. T delivered the rug to the museum and the appellant was given a charitable receipt for $18,000 from the museum. In his income tax return for 1986, the appellant claimed a deduction for a charitable donation of $18,000. By reassessment, the Minister disallowed the deduction and imposed a penalty under subsection 163(2). The appellant appealed. On the appeal, the appellant sought to deduct only the $3,400 he paid for the rug. In addition, he challenged the imposition of the penalty.

HELD:

The appeal from the disallowance of the deduction was dismissed. Since it was unclear how much, if anything, the artifact was worth, the appellant had failed to establish on a balance of probability that he made a charitable contribution in the amount of $3,400. On the other hand, the penalty was to be vacated because the appellant placed almost total reliance on his financial adviser, B. Further the fact that the museum was registered under the Act was a contributing factor to his decision. In addition, the appellant had no reason to know of the dishonesty of T and the owner of the museum. Appeal allowed in part.

D. S. Bellamy for the appellant.

E. Bundgard and D. Spiro for the respondent.

Cases referred to:

Gardner v. Canada, [1993] 2 C.T.C. 2480;

Beverley Ball v. Canada, [1993] 2 C.T.C. 2475.

Christie, A.C.T.C.C J.:—This appeal is governed by the informal procedure prescribed by section 18 and following sections of the Tax Court of Canada Act.

The appellant in this appeal is the fourth appellant in a series of appeals pertaining to the deductibility of charitable gifts allegedly made to the Don- elian Museum of Oriental Art (“the museum”) which was a registered charity under the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") at the time relevant to the appeal. The first appeal was that of Gardner v. Canada, [1993] 2 C.T.C. 2480 (T.C.C.). In that appeal, as in the appeal at hand, Gustave Tasch, John Donelian and the museum were important factors. Reasons for judgment in Gardner are attached. The evidence of Maria T. Giallonardo in that appeal is relevant to the appeal at hand. So is the evidence of Arthur C. Payne in that appeal, to the extent that it did not focus on the actions of Bruce Thomas Gardner. Another person who played an important role in this appeal and who was an appellant along with his wife, Beverley, in the series is Jeffrey R. Ball. Also attached is copy of the reasons for judgment in Beverley Ball v. Canada, [1993] 2 C.T.C. 2475 (T.C.C.).

The appellant is an obstetrician. In his return of income for 1986 he sought to deduct $18,000 as a charitable gift made to the museum. The gift was a" Rare South Persian Quashqa’i rug, late 19th Century". Dr. Hawrylyshyn had purchased the artifact from Tasch for $3,400.

In reassessing the Minister of National Revenue disallowed the deduction and imposed a penalty under subsection 163(2) of the Act. On the appeal to this Court the appellant is seeking to deduct only the $3,400. In addition, he is challenging the imposition of the penalty.

Since 1983 or 1984 the appellant has engaged Jeffrey Ball to prepare his returns of income. He also referred to Ball for general financial advice where no questions about tax were involved. He“ relied heavily” on Ball with respect to what gave rise to this appeal.

In the fall of 1986 the appellant became aware, through colleagues, about donations to the museum. He said:

Prior to entering into any such endeavour the first time I heard about it I asked Jeff specifically to have him investigate fully the nature of the museum, its legitimacy and what the transaction would involve.

He received “assurance” about the proposed tax transaction. In mid or late December 1986 Ball told him a carpet was available. On the last Monday or Tuesday of 1986, i.e. December 29 or 30, 1986, the appellant met with Tasch and Ball at Ball’s home. It was not a condition of attending that the appellant would buy a carpet and donate it to the museum. Prior to the meeting he was told to bring $3,400 in cash, which he did. The appellant had not met Tasch prior to the meeting and has not met with him since.

The appellant noted:

At the meeting, again which lasted about two hours, a lot of material was shown to me which in essence, if you want to call it a sales pitch or what not, authenticated the museum.

There was no reason to suspect that there was anything illegitimate about the museum. He went on:

During the meeting, again because I was not totally familiar with the process, I believe Gustave explained to me how the donation process works. What happened. I would give him the cash, there would be a donation receipt issued and Jeff would get it and basically explained how the process would work as far as how you made donations to a charitable organization. I left and that was the end of it.

The $3,400 was given to Tasch for the artifact previously described and Tasch delivered it to the museum. The appellant never saw the museum. It was left to Ball to complete the transaction and secure a receipt for the sale and a receipt for tax purposes.

In the fall of 1987 the appellant received a call from Revenue Canada. Members thereof were investigating the museum and wanted to interview him. He cooperated fully with the investigators.

Arthur C. Payne of Revenue Canada testified on behalf of the respondent. He identified a copy of the receipt numbered 104 dated December 29, 1986, issued to the appellant by the museum for $18,000 regarding the artifact contributed to it by the appellant. The investigators were unable to trace the acquisition of the artifact by Tasch. Also placed in evidence is a document which Payne received from Jeffrey Ball. The letterhead reads: RARE ANTIQUE ORIENTAL RUGS Old Master Paintings, Gustave Tasch, 2051 Deer Run Avenue, Burlington, Ontario, Canada L7M 2E7 Phone: (416) 336-2103”. It is dated April 5, 1986, and is addressed to the appellant. It is signed by Tasch. The body of the letter reads: “Acquired as your agent in the USA, a 19th Century ivory ground Quashqa'i rug. The cost of this piece will translate to $3,400 Canadian. I trust this will meet your requirements”. It is obvious that the letter was anti-dated when it was signed by Tasch. According to the appellant he had not even met Tasch on or before April 5, 1986.

Payne estimated that if the appellant’s claimed deduction for $18,000 for the artifact had not been disallowed by Revenue Canada the income tax payable by the appellant would have been approximately $10,200 less. In cross- examination the appellant’s agent vigorously suggested that this figure was too high. But it is unnecessary to delve into this conflict because the determination of this appeal does not turn on whether the correct figure is $10,200 or a somewhat smaller amount.

Finally Payne was asked about appraisals obtained by Revenue Canada in the course of the criminal investigation into the conduct of Tasch and Donelian regarding the value of the artifact given to the museum by the appellant. Over objections raised by counsel for the respondent I directed the witness to answer. Two appraisals were obtained. The first was in the range of $100 to $1,000. The second appraisal was $900. I do not regard this evidence as being of assistance to the appellant if for no other reason than that a value between $100 to $1,000 or a value of $900 is not the position of the appellant. He places the value of the artifact at $3,400.

The appeal is allowed, without costs, with respect to the penalty imposed under subsection 163(2) of the Act. This conclusion is based on grounds similar to those relied on in allowing the appeal in Gardner v. Canada. In the case at hand the appellant placed almost total reliance on his financial adviser, Jeffrey Ball. Further, the fact that the museum was registered under the Act was a contributing factor to his decision. Also he had no reason to know of the dishonesty of Tasch and Donelian.

On the other hand the appeal from the disallowance of the deduction is dismissed. It has not been established on a balance of probability that the appellant made a charitable contribution in the amount of $3,400 in 1986 which is the amount he claims is deductible. What is said on page 2479 of the reasons for judgment in Beverley Ball v. Canada about Tasch and Donelian is equally applicable to this case.

Appeal allowed in part.