Duguay v. R., [1999] 3 CTC 2432

Garon 7.C.J.:

These are appeals from income tax assessments for the 1988, 1989 and 1990 taxation years in the case of the appellant Amédée Duguay and for the 1988 and 1989 taxation years in the case of the appellant Diane L. Duguay. 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.

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 Alain Côté (92-2773(IT)G), Louise Marcoux (93-3160(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.

For the purposes of these appeals, I consider it important 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.

I will begin with the evidence of the appellant Amédée Duguay. He was a member of the Sûreté du Québec for 32 years. He worked in criminal investigations and, in particular, was assigned to economic crimes for 12 years. At the time of the hearing, he was retired. He is not a collector of jewellery or paintings.

Mr. Duguay testified that he made gifts in 1986 and 1987. At a meeting with Aline Tremblay, a credit officer at the Royal Bank of Canada, Ms. Tremblay told him that gifts could be made to charities in exchange for tax receipts. Mr. Duguay added that he knew Ms. Tremblay, as she had presented a seminar on economic crime in 1985 and 1986. She told him that she knew a Marc Levert, who acquired works of art at auctions and resold them at a low price — about 25 percent of their value. According to Mr. Duguay, he knew that gifts of works of art were made to museums, but he was not aware of the sale of paintings. He learned from Aline Tremblay that works of art were purchased in lots at auctions (for example, when someone went bankrupt) for low prices and could thus be resold at low prices. She told him that a gift could be made to a charity and that the amount of the gift would correspond to the appraised value of the work of art. At that point, given his job in the economic crimes section of the Sûreté du Québec, Mr. Duguay was not certain that he wanted to get involved in this activity without first making sure that it was perfectly lawful.

At a subsequent meeting in October or early November 1986, Aline Tremblay introduced Mr. Duguay to Marc Levert. It was then that Mr. Duguay decided to get involved in the process of making gifts of works of art. Mr. Levert said that he had an art gallery where he sold works of art and that he looked after purchasing and reselling. Mr. Levert had not brought to the meeting the works of art that were to be given and did not show them to Mr. Duguay. Mr. Duguay said that Ms. Tremblay handled everything and sent him the receipts for 1986, and that he paid her and she in turn gave the payment to Mr. Levert. According to an appraisal report obtained from Michel Champagne, the value of the works of art given in 1986 was between $12,000 and $14,000. Mr. Duguay said that he had met Mr. Champagne in the course of his job in the economic crimes section and considered him an expert on paintings. He said that he gave Ms. Tremblay $4,000 in cash. A receipt for $12,000 was issued by the Fondation du Musée Louis- Hemon. It was dated December 19, 1986, and Mr. Duguay said that he paid within a few days after that. He told the investigators that Mr. Levert had the relevant documents.

Mr. Duguay said that he made gifts worth $3,000 or $4,000 in 1987. He said that he dealt directly with Mr. Levert and paid about 25 percent of the value of the gifts in cash. However, that year he transported the paintings himself to the Société protectrice des animaux and paid for them when Mr. Levert gave him the receipts.

Mr. Duguay also said that he was reassessed for the 1986 and 1987 taxation years. He appealed the reassessments, but the amount of additional tax to be paid was low.

Mr. Duguay met with investigators from the Department on September 2, 1987; they were questioning the validity of the gift and the value of the works. At the meeting, he told them that he had paid $4,000 for the paintings in 1986. However, when he was called to testify, he apparently told Mr. Gagnon, counsel for the Minister of National Revenue in the criminal cases against Gilles Bouchard and Marc Levert, that what he had told the Revenue Canada officers was not true and that he had made the necessary correction. Mr. Duguay did not want to sign a sworn statement, though.

In the 1988 taxation year, Mr. Duguay again met with Mr. Levert, who asked him whether he wanted to make further gifts. Mr. Duguay told Mr. Levert that he would do so but that he wanted to check with the Minister of National Revenue and [TRANSLATION] “to know exactly how it works”. Mr. Duguay went to the Department’s offices in Québec and asked whether, if he made a gift of a work of art worth $4,000 for which he had paid $1,000, he could file a receipt for $4,000. He said he was told that he could. He then agreed with Mr. Levert to purchase a work of art having a market value of $10,000. Mr. Levert offered him a work by Jean-Paul Lemieux. Mr. Duguay explained that it was Mr. Levert who had the work appraised and delivered the gift to Univers du Rail Inc. Mr. Duguay was given the appraisal, the receipt and a photograph of the painting all at the same time. He added that Mr. Levert was the one who chose the charity in question and selected the painting by Jean-Paul Lemieux. Mr. Duguay never had the painting in his home and thinks he saw it at Mr. Levert’s gallery. He also testified that he never contacted the representatives of Univers du Rail Inc. and did not check whether the painting was there. Nor did he wonder about the nature and activities of Univers du Rail Inc. Mr. Duguay paid Mr. Levert for the painting by writing two cheques for $1,820 (March 2, 1989) and $1,800 (July 4, 1989) on his account at the Royal Bank of Canada. He paid a total of $4,000 to acquire the painting. The difference is the amount paid in cash.

Mr. Duguay said that he made further gifts, specifically a jewellery collection, in 1989. That was also when he was transferred to surveillance, where he spent a great deal of time with a Gilles Bouchard. Mr. Duguay said he learned that Mr. Bouchard had also made gifts between 1986 and 1988. Mr. Bouchard had a collection of works of art and was prepared to sell part of it to Mr. Duguay. Mr. Bouchard was to have the collection appraised, after which the sale price would be set. Mr. Duguay also warned Mr. Bouchard that he wanted there to be no doubts about the legality of the transaction. The price was to be set by Mr. Bouchard at about 25 percent of the value of the gift and was to include the appraisal costs. Mr. Duguay testified that he did not ask why the price was set at 25 percent of the value. Photographs of the jewellery were taken. The transaction then took place, and a few days later, Mr. Bouchard gave him a receipt from the Fondation Amérindienne Técumseh dated November 13, 1989. Shortly thereafter, Mr. Duguay received a letter dated November 15, 1989, thanking him for his gift. The letter was accompanied by a descriptive card, which he said may have been given to Revenue Canada. Mr. Bouchard also sent a document attesting that Mr. Duguay had purchased jewellery for $2,910. Mr. Duguay said that he obtained the document to give it to Revenue Canada. He paid the $2,910 with two cheques. That amount was the total owed for the appraisal and for obtaining a receipt for the charitable gift. It should also be noted that Mr. Bouchard was the one who chose the charity. Neither the appellant Amédée Duguay nor the appellant Diane L. Duguay contacted the Fondation’s representatives or went to its offices.

Mr. Duguay said that Mr. Bouchard approached him again in 1990 to ask if he was interested in acquiring works of art. He decided to purchase paintings that year, and Mr. Bouchard handled the transaction as he had done the previous year. Mr. Bouchard had the paintings appraised and went to Mr. Duguay’s home with the appraisals and the paintings. According to Mr. Duguay, the paintings were photographed in front of his fireplace. The receipts were issued by the Société protectrice des animaux and given to Mr. Duguay by Mr. Bouchard. Mr. Duguay paid $2,440 for the paintings. He is the only one who made a gift in 1990. The appellant Diane L. Duguay apparently did not make any gifts in 1990 on the advice of André Dion, CA. The appellant Amédée Duguay could not remember whether he had told Mr. Dion that the purchase price differed substantially from the value of the gift.

On cross-examination, Mr. Duguay said that he would not have entered into the transactions were it not possible to get receipts from charities to obtain tax advantages.

The appellant Diane L. Duguay has been a teacher for 28 years. She stated that she had made gifts of paintings and other property in 1986 and 1987.

Ms. Duguay was told by her husband, the appellant Amédée Duguay, that it was possible to give works of art to charities and claim a deduction for income tax purposes. She said that she and her husband concluded from reading certain unspecified documents that gifts could be made in a perfectly lawful manner. She also testified that she did not discuss the receipts or the gifts with Aline Tremblay.

With regard to the gifts she made during the 1986 to 1989 taxation years, Ms. Duguay said that the transactions were completed by the appellant Amédée Duguay. However, she testified, without providing any details, that she paid her share when the time came to pay for the works of art and jewellery. She was told in due course that Revenue Canada had changed its attitude toward the gifts. The fact that Revenue Canada did not reply to her notice of objection worried her a great deal.

Ms. Duguay admitted that she did not have a say in choosing the works of art, the jewellery or the charities. Mr. Bouchard made those choices.

I will now look at Mr. Levert’s evidence.

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 Body.

Mr. Levert said that he began to be interested in works of art as a collector in the early 19705. 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.

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.

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, 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.

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”.

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 auction price of the paintings, not their 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.

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.

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.

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

1. he 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.

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

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 sales associated with charitable gifts was no more than 10 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.

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 or museum 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 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 price that had been negotiated.

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.

Mr. Levert admitted that he generally gave his clients the receipt, the appraisal and the invoice. 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.

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.

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 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.

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.

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.

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.

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 to run auctions for Univers du Rail Inc., 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.

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 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.

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.

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.

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.

Mr. Levert said that the appellant Amédée Duguay had problems with Revenue Canada in 1987. Mr. Duguay nevertheless did business with Mr. Levert in 1988, but he required Mr. Levert to go to Revenue Canada’s office in Québec to make sure that the gifts were legal. Mr. Duguay asked a government official if it was legal to purchase a work of art for the purpose of giving it to a charity and to pay a fraction of its price. The official said that it was perfectly legal. That was why Mr. Duguay decided to purchase another painting in 1988 to give as a gift.

Mr. Levert purchased a painting by the artist Jean-Paul Lemieux from Guy Gagnon for about $5,000 and resold it to Mr. Duguay. This painting was given to Univers du Rail Inc. in 1988. Mr. Levert put the painting in the name of the Galerie des Maîtres Anciens rather than that of Univers du Rail Inc. He said that he did so for resale purposes. He added that he had been instructed by Univers du Rail Inc. to sell its paintings privately or by auction.

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 the Charities Division referred him to her. He added that he later contacted Carl Juneau of Revenue Canada, to whom he had been referred by 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 of property 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.

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.

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.

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.

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 gifts and issue tax 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.

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 paint- ings. 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.

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.

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.

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.

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.

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.

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.

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:

Mr. Carignan also 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:

1989 $5,000

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.

Mr. Carignan further explained that the initial receipts issued by Univers du Rail Inc. did not state the name of the charity or the name of the appraiser, Mr. Levert. The receipt form was changed after Mr. Demers told the senior managers of Univers du Rail Inc. that it did not meet the applicable requirements.

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.

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.

The investigation conducted by Mr. Demers 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.

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 to museums for the purpose of making gifts to charities. According to Revenue Canada, the scheme specifically involved the sale of 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.

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.

As regards the assessments for the 1988, 1989 and 1990 taxation years, Revenue Canada took the position, based on this Court’s decisions in Dutil v. À. [(1991), 95 D.T.C. 281 (T.C.C.)] and Gagnon v. Canada [(July 25, 1991), Doc. 91 -38(IT) (T.C.C.)], both of which were rendered on July 25, 1991, that there was no intent to give at the time of the gifts.

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.

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 charitable 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 donated 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.

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.

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

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.

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.

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 receipts had been issued in 1990 for a total of $1,728,593.57.

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.

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 values 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 man- agers of that corporation did not meet them. Mr. Levert provided the receipts and appraisals in the name of the Galerie des Maîtres Anciens.

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.

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. All the appraisals were 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.

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.

The appellants Amédée Duguay and Diane L. Duguay claimed a deduction for gifts for the 1986 and 1987 taxation years. The appraisals of the property given by the appellants for the purposes of the deduction were prepared by Michel Champagne.

Following a search at the Musée Louis-Hémon and the Musée Pierre- Boucher, Revenue Canada had the property reappraised and reduced the amount of the appraisals prepared by Mr. Champagne. Revenue Canada’s investigation resulted in conspiracy charges being laid against Michel Champagne and Marc Levert.

Mr. Demers said that from Revenue Canada’s point of view, the gifts had to be reappraised because the price at which the works of art were sold at auctions was a better reflection of their fair market value. He added that there had been an advertising campaign for the auction of the Société protectrice des animaux and that the public had been aware of the auction. However, he said that for 1986 there were appraisals by experts that were taken into account.

Mr. Demers noted that Revenue Canada’s position changed as a result of the judgments in Dutil and Gagnon, supra. At Univers du Rail Inc., Mr. Demers found an appraisal dated December 7, 1988, that had been prepared by the Galerie des Maîtres Anciens for gifts made by the appellants in the 1988 taxation year. The appraisal did not contain a nota bene certifying that all the information in it was true and represented the reasonable and fair market value of the property in question.

For 1988, the Department thus had documents showing that all parts of the process (the sale invoice at 25 percent of the appraised value, the appraisal itself and the issuance of the receipt) took place at once. The Department found that the appellants were dealing with a third party at arm’s length and that the transaction was illogical, which led it to believe that there was a prior agreement. Even after receiving the letter stating that the Department intended to reduce the amounts representing the value of the gifts, the two appellants entered into a second transaction that differed in only one respect: the appraiser and the promoter were the same person, Mr. Levert.

To their tax returns for the 1989 taxation year, the two appellants attached a receipt from the Fondation Amérindienne Tecumseh that bore number 80 and was dated November 13, 1989. No capital gain on either personal-use property or listed personal property was reported in respect of the jewellery.

For the 1990 taxation year, two receipts from the Société protectrice des animaux were filed: receipt number 9423 for $6,750 dated October 15, 1990, and receipt number 9424 for $3,000 dated October 15, 1990. The words [TRANSLATION] “appraised work of art” appeared on both receipts. No gain was reported.

On March 2, 1992, in response to a request for information, the appellant Amédée Duguay sent an invoice from the Galerie des Maîtres Anciens for the purchase of a Jean-Paul Lemieux watercolour together with that gallery’s appraisal, both of which were dated December 7, 1988. There was no nota bene on the invoice. There was also a receipt dated February 24, 1992, certifying that works of art worth $9,750 had been sold for $2,437.50 in the fall of 1990. Another receipt dated February 24, 1992, which was signed by Gilles Bouchard, indicated that he had sold a jewellery collection worth $11,640 to the appellant Amédée Duguay for $2,910 in 1989. There was no proof of payment with that letter. There was also a list dated November 8, 1989 appraising 65 items. No vouchers were provided. Mr. Demers explained that he concluded, based on the fact that Mr. Bouchard had to sell due to financial problems relating to his divorce, that this sale was not made on the open market. He also said that in his opinion, when people who enter into a transaction are dealing with each other at arm’s length, the price that is set should as a rule represent the fair market value. However, he added the following:

[TRANSLATION]

...But if the transaction is so simultaneous that the only possible conclusion is that the invoice is a pretext, the painting is a pretext for the charitable receipt to be issued, then the only conclusion to be drawn is that there was a prior agreement for the transaction to be profitable in tax terms.

With regard to the gifts to the Société protectrice des animaux for the 1990 taxation year, Mr. Demers realized that in the case of the transactions with Mr. Bouchard, the payments made by the appellants always represented 25 percent of the amounts stated on the receipts.

The document at Tab 44 of Exhibit 1-1 shows that given the tax advantage and the purchase price of the property involved, the appellant Amédée Duguay made the following gains for the taxation years at issue referred to below:

$1,583 1989

The appellant Diane L. Duguay’s gains, calculated on the same basis for the taxation years referred to below, were as follows:

Gilles Bouchard’s testimony provides some relevant information.

Mr. Bouchard was a police officer of the Sûreté du Québec for 31 years. He knew the appellants, as they bought works of art and jewellery from him. Mr. Bouchard and the appellant Amédée Duguay met each other at work, as they were colleagues at the Sûreté du Québec and worked together in 1988 and 1989 on the physical surveillance squad.

Mr. Bouchard explained that he and his wife had collected jewellery for a number of years. They purchased it at flea markets and jewellery stores and from individuals. They obtained antiques from individuals, collectors and antique dealers. When Mr. Bouchard and his wife got divorced in 1989, Mr. Bouchard sold his entire collection to Mr. Levert and then bought it all back.

Mr. Bouchard’s co-workers knew that he collected rarities and jewellery. Since he and Mr. Duguay spent a great deal of time together on surveillance duty, they talked about works of art and jewellery a few times. It was during those discussions that the question of gifts to charities came up. Both of them had made gifts in 1986 and 1987. Mr. Bouchard had met Mr. Levert in 1986, and Mr. Levert had told him how he could make gifts of his own property. Mr. Bouchard said that he owned items of sufficient value to make gifts during the following two years, 1987 and 1988, and that he would be able to sell a few items to Mr. Duguay so that he could make gifts to charities.

With regard to the jewellery, Mr. Bouchard said that he met with Daniel Rood of the Fondation Amérindienne Tecumseh and the director of the Musée Coaticook. It was Mr. Bouchard who approached the Fondation, since he wanted to give it some items. He saw to it that the price of the sale of the jewellery to Mr. Duguay represented a quarter of the appraisal amount. After making arrangements for the sale with Mr. Duguay, Mr. Bouchard contacted the Fortuna jewellery store to ensure that the appraisal was prepared in Mr. Duguay’s name. Mr. Bouchard testified that he was the one who took the jewellery to the store and paid for the appraisal.

Mr. Bouchard explained that he sold the jewellery and certain other items at 25 percent of the amount at which they were appraised because he needed cash at the time to pay lawyers’ fees relating to his divorce. He testified that he could have gotten the full value of the jewellery if he had sold each piece separately. Mr. Bouchard said that he was not interested in travelling to another area to make the gifts, that the Fondation Amérindienne Tecumseh was in the Québec area and that it accepted that type of gift. He was even the one who took the items to the Fondation, since the appellants told him that they did not want to deliver them.

At the request of Revenue Canada officers, Mr. Bouchard certified that he had sold the jewellery to Mr. Duguay. He also told them the sale price and value of the jewellery. The payment was made by cheque.

As regards the paintings, Mr. Bouchard explained that he obtained them from Marc Levert. Since Mr. Levert purchased large quantities of paintings, he could get better prices and could then resell at a higher profit. He said that he sold the paintings in 1989 so that they could be given as gifts.

In 1990, Mr. Bouchard offered to sell paintings to Mr. Duguay, who wanted to give them as gifts. Mr. Bouchard suggested the Société protectrice des animaux, set the sale price at 25 percent of the appraisal amount and had the appraisal prepared. He chose the Société protectrice des animaux out of a number of charities. Mr. Bouchard also delivered the paintings to the Société protectrice des animaux. The paintings were appraised by Mr. Levert.

Mr. Bouchard took part in the auction of the Société protectrice des animaux, where he purchased a number of paintings, including a Bernard for $100, a Gisèle Leclerc appraised at $2,008 for $350 and another appraised at $1,200 for $145. The auctioneer was none other than Mr. Levert, who had also prepared the appraisals. Mr. Bouchard added that he purchased some paintings he had sold the previous year to a Mr. Bergeron and to the appellant Amédée Duguay. He explained that he went to auctions with the intention of purchasing lots. It was thus possible for the same paintings that had been given to a charity to end up in the lots of paintings he purchased.

The testimony of Yvon Millard, a development curator at the Musée du Québec, sheds some light on Tab IT of Exhibit 1-1, which is dated December 7, 1988, and was signed by Mr. Levert.

The document in question relates to a watercolour by Jean-Paul Lemieux that was apparently examined and certified by Mr. Moreau from the gallery and by the Musée du Québec. Mr. Millard testified that he was unable to find an offer to give the work to the Musée in the minutes, his personal notes or any of the Musée’s records. He said that no formal offer was made to the Musée by any seller or donor. He also testified that Michel Champagne was employed by the Musée du Québec as a curator until 1989 and was authorized to perform appraisals. More specifically, Mr. Champagne was a curator of modern art, which covers the period from 1880 to 1940. The artist Jean-Paul Lemieux straddles the modern period and the contemporary period. Mr. Millard testified that Mr. Champagne would have been capable of identifying a painting by Jean-Paul Lemieux. He said, however, that Mr. Champagne was responsible for modern art paintings and sculptures, while his colleague, Denis Martin, was the one responsible for works on paper. The work in question was a painting by Jean-Paul Lemieux on paper.

The evidence of Jean Nadeau, the director of operations at the Société protectrice des animaux, provides some interesting information.

Mr. Nadeau has held that position since the fall of 1985. He recognized certain documents relating to an auction held as part of a fundraising campaign for the Société protectrice des animaux. Mr. Levert was the one who appraised the items put up for sale. He also served as auctioneer.

Mr. Nadeau testified that the paintings numbered 133 and 134 sold for $400 and $425, respectively. He added that a painting by Hilpert sold for $190 even though it had been appraised at $1,200. Another painting by Hilpert that had been appraised at $1,500 sold for $180.

Mr. Nadeau also explained that the main sources of income of the Société protectrice des animaux during the years at issue were public donations, known as [TRANSLATION] “shelter donations”, and agreements with municipalities under which the Société acted as a municipal pound. Public donations could account for 50 percent of the Société’s total income of about $800,000 per year.

The Court heard that 159 paintings were sold at the yearly auction in October 1990. The reserve price was about 10 to 30 percent of the value of the paintings; it had been set in accordance with the agreement between the Société protectrice des animaux and Mr. Levert. The amount brought in by the October 1990 auction was $42,770.

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 15 or 20 percent below the price at which it is felt that the painting in question 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.

Mr. Kelsey recognized a painting by Jean-Paul Lemieux that was in the June 1989 catalogue. The consignor was the Galerie des Maîtres Anciens. The reserve price set by the seller was $2,800. The painting did not sell at a large auction attended by an estimated 400 people, at which about 65 to 70 percent of the paintings were sold. The highest bid was below the reserve price.

Finally, Claire Lizotte, a professional gemmologist, gave evidence as an expert witness. She has owned the Fortuna jewellery store since 1983 and has an internationally recognized diploma in gemmology (FCGmA).

Ms. Lizotte appraised some jewellery at the request of Jacques St-Laurent, a regular customer of the Fortuna jewellery store who took jewellery there to be repaired. She appraised some jewellery for the purpose of gifts to a charity, as stated in the heading of her appraisal. The appraisal was performed following the usual procedure (weight, identification of the metal, quality of the product). Ms. Lizotte determined that some of the pieces of jewellery were antiques and that others were not. Antique jewellery that is not mass-produced must be given a higher value.

Ms. Lizotte explained that she appraised the jewellery box at $500. She considered the appearance and weight of the box, which was made of solid silver. It weighed 249 grams, and the cost price of regular silver is $1.50 to $2.00 a gram.

The second item was a silver ring containing smoky quartz, a natural stone. The stone was a marquise-cut stone and weighed 6.74 grams. The value of quartz is about $10.00 a gram. She thus arrived at a value of $75.00 for the ring, including both the silver and the stone. Ms. Lizotte also explained that the jewellery was used but not damaged. The silver was tarnished but not otherwise damaged.

Ms. Lizotte and Mr. St-Laurent agreed on a price of $100 for her services for the appraisal. At Mr. St-Laurent’s request, she prepared an invoice for those services in the appellant Amédée Duguay’s name.

Mr. Whetstone, an antique dealer since 1970 and a professional appraiser, testified as an expert witness. He became a jeweller after going to university. He also studied gemmology (coloured stones and diamonds) at the Gemmological Institute of America and is an accredited member of the International Society of Appraisers.

Mr. Whetstone has acquired extensive professional experience in those fields. He has performed at least 400 appraisals since 1980.

Since the watch, the silver box and the jewellery were not available to be examined, Mr. Whetstone relied, inter alia, on Claire Lizotte’s report of June 13, 1997, and her testimony at the hearing.

Mr. Whetstone expressed the view that the most relevant markets for the property in question were flea markets and antique stores. According to him, the most appropriate market for second-hand jewellery is considered to be the market where the most sales of jewellery similar to the items in question here take place.

In his expert report, Mr. Whetstone provided an elaborate definition of “fair market value”. He determined that the second-hand jewellery in question was near the bottom of its class in value.

Mr. Whetstone also felt that the report by Ms. Lizotte, who is a gemmol- ogist, was not complete and did not contain enough information for a valid appraisal to be performed.

Mr. Whetstone felt that the time needed to appraise the entire jewellery collection in question would be two to three days at the rate of six hours a day.

Mr. Whetstone appraised the silver box at between $250 and $300 in the resale market. He appraised the watch at a maximum of $50. He appraised the entire jewellery collection at $3,500. He added that a dealer would probably sell the entire collection for $2,000.

Appellants’ arguments

in their pleadings, the appellants argued that they had made gifts of works of art and jewellery 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.

The appellants also argued in their pleadings that qualified experts had appraised the works of art and jewellery given as gifts during the years at issue at the amounts shown on the appraisal certificates and that those amounts corresponded to the fair market value of the works of art and jewellery.

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.

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.

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 1s, 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.

One of the appellants’ counsel referred in this regard to R. v. Lagueux & Frères Inc. (1974), 74 D.T.C. 6569 (Fed. T.D.), 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.

Reference was also made to this Court’s decisions in R. c, Construction Bérou Inc. (1996), 96 D.T.C. 6177 (Fr.) (Fed. T.D.), and Francoeur v. R. (1992), [1993] 2 C.T.C. 2440 (T.C.C.). Counsel for the appellants relied in particular on the following passage from the Federal Court of Appeal’s decision in Friedberg v. R. (1991), 92 D.T.C. 6031 (Fed. C.A.), 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.

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.

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.

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.

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.

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 their gifts to charities.

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.

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, in particular, paintings at a price below their fair market value, since Mr. Levert, among others, had explained this to them. The appellants had checked the prices in the Guide Vallée. They knew where the paintings and jewellery 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.

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 (T.C.C.), which concerned lawyers who had purchased a fairly large collection of paintings.

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 Act does not say that the appraiser can have no interest whatsoever in the appraisal of the property.

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”.

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.

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 or jewellery. 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.

it should be noted that, for the 1988 and 1989 taxation years, the property was purchased jointly by the two appellants. Moreover, the appellant Amédée Duguay entered into transactions not with Mr. Levert but with a co-worker, Gilles Bouchard, to acquire a jewellery collection that Mr. Bouchard was prepared to sell once it had been appraised. Ms. Lizotte then appraised the jewellery according to generally accepted practices. Mr. Bouchard reached an agreement with Mr. Duguay under which he was to sell the jewellery to the appellants for 25 percent of the amount at which it had been appraised. It was the first time that Ms. Lizotte had appraised jewellery for gift purposes. After being paid by the appellants, Mr. Bouchard delivered the jewellery to the Fondation Amérindienne Tecumseh, which issued a receipt corresponding to the fair market value of the jewellery according to Ms. Lizotte’s appraisal.

in conclusion, on the issue of penalties, the appellants did not behave like someone who has been grossly negligent. Their conduct was no different from that of thousands of other taxpayers who make use of all kinds of tax shelters. One of the appellants’ counsel referred to a passage from the transcript of the appellant Amédée Duguay’s testimony on May 20, 1997, in which he stated the following at page 102:

[TRANSLATION]

Even though the Department was auditing my gifts for ’86 and ’87,1 gave in ’88 and the following years because I’d checked the legality of the transaction with the Department and my only concern was the appraisal, the value.

Respondent’s arguments

Counsel for the respondent began by arguing that the appellants had not made genuine gifts during the three taxation years at issue.

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 Dutil v. R. and Gagnon v. Canada, both of which were rendered on July 25, 1991, and the Federal Court of Appeal’s decision in Friedberg v. R. (1991), 92 D.T.C. 6031 (Fed. C.A.). The decisions of Judge Mogan of this Court in Whent v. R., [1996] 3 C.T.C. 2542 (T.C.C.), and of Judge Archambault, also of this Court, in Paradis c. R. (1996), [1997] 2 C.T.C. 2557 (T.C.C.), were also referred to.

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 appellants’ only intention 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:

I. for the 1988 taxation year, the paintings in question were chosen not by the appellants but by Mr. Levert;

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

3. the prices agreed on for the property in question represented 25 percent of the amounts shown on the receipts for the 1988, 1989 and 1990 taxation years.

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.

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

1. As regards 1988, the appellants 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. Possession is all the more ambiguous in the case at bar given that Mr. Levert told Guy Gagnon he was the owner of the painting in January 1989, while the Galerie des Maîtres Anciens told Encans Pinney’s it was the owner in April 1989.

2. As regards 1989, Mr. Demers testified that when the Fondation Amérindienne Tecumseh’s operations were audited in 1989 and 1991, the property given by the appellants was no longer on the premises. According to the Fondation’s president, Mr. St-Laurent, it had been resold.

3. As regards 1990, the paintings in question by the artist Fielding Downes do not appear in the catalogue for the auction held by the Société protectrice des animaux on October 28, 1990. According to Jean Nadeau, the director of operations of the Société protectrice des animaux, the paintings may have been added later, at the time of the auction. The said paintings by Fielding Downes were in fact sold on October 28, 1990. However, the respondent went on to say that although Joseph Hilpert’s paintings were supposed to be sold at the auction held by the Société protectrice des animaux on October 28, 1990, no trace of them can be found either at the time of the auction or later, as stated by Mr. Nadeau.

Concerning the property allegedly given to the Fondation Amérindienne Tecumseh, the respondent argued that the evidence shows that Jacques De- mers 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.

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

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]

I. The receipt from Univers du Rail Inc. dated December 7, 1988, does not provide the address of either Univers du Rail Inc. or the appellants. Neither the name nor the address of the appraiser is given even though there was an appraiser: Mr. Levert. The receipt does not state when the gift was received.

2. Receipt No. 80 from the Fondation Amérindienne Tecumseh dated November 13, 1989, provides neither the name nor the address of the appraiser, although it mentions that there was an appraisal. The receipt does not state when the gift was received.

3. Receipts No. 9423 and No. 9424 dated October 15, 1990, from the Société protectrice des animaux state respectively that $3,000 and $6,750 were received, when in fact no amount was paid. The words “appraised work of art” at the bottom of the receipt are not accompanied by either a description, even a brief one, of the work of art in question or a mention of the appraiser’s name and address. The date the “works of art” were received is not given. The address of the organization is not stated either.

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.

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.

The respondent referred to the Federal Court of Canada’s decision in Henderson v. Minister of National Revenue (1973), 73 D.T.C. 5471 (Fed. T.D.), 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.

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.

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

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 the 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.”

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. Rin- fret). 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.

In making the assessments, the respondent assumed that the value reported by the appellants for the works of art and jewellery 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 the independent experts retained by Revenue Canada.

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 paintings 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 the 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.

The respondent argued that Mr. Levert was not an independent expert because he had a personal interest in some of the transactions to which the appellants were parties.

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.”

The appellant Amédée Duguay continued to deal with Mr. Levert to obtain a receipt for 1988. He went to a Revenue Canada office with Mr. Levert in 1988. However, he did not explain to the Revenue Canada official, whose name he does not remember, that Mr. Levert was not only his seller but also the appraiser and the person who provided him with a receipt. He did not explain all the circumstances of the case. He said that he obtained the 1986 Department of National Revenue pamphlet entitled “Gifts in Kind” at that meeting but admitted that he did not really scrutinize it. The appellant Diane L. Duguay did not read it carefully either.

According to the respondent’s oral argument notes, Mr. Duguay [TRANSLATION] “was guilty of gross negligence, or even wilful blindness, in continuing year after year, for five years, to enter into the same kind of simultaneous transaction — paying 25 percent in exchange for a tax receipt, no matter what organization and property were involved — and in not wanting to see, in the case of Mr. Levert, that the appraiser was not independent. Nor did he make a more serious attempt to check the value of the property, although his experience as a police officer in the economic crimes section should have told him it was necessary to do so.”

The respondent argued that the appellant Diane L. Duguay, a teacher, was also grossly negligent in trying to obtain tax receipts in the same circumstances four years in a row. Her husband kept her informed of what he was doing and of the amounts set out on the receipts and the amounts to be paid. She paid her share of those amounts.

Analysis

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 in their tax returns 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.

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., the Fondation Amérindienne Tecumseh and the Société protectrice des animaux.

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 and the organizations that benefited in light of the Civil Code of Lower Canada. It is thus necessary to refer to articles 755 and 776 of the former Civil Code, 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 c, R., supra, three essential conditions must be met for a gift to exist: intent to give, delivery of the property and acceptance by the donor.

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 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 Friedberg v. R., (1991), 92 D.T.C. 6031 (Fed. C.A.). 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 and jewellery to the organizations in question. The appellants owned the works of art and jewellery before making gifts of them. This was not in dispute. The weight of the evidence shows that the appellants left it up to Mr. Levert in some cases and Mr. Bouchard in other cases to choose the charity that would receive the gifts in question.

After carefully reviewing the evidence, I have concluded that the paintings and jewellery at issue in these appeals were identified clearly enough and became the property of the organizations in question. With regard to the property given in 1988, the organization involved obtained possession of it through Mr. Levert. The weight of the evidence shows that Mr. Levert played a dual role. During the 1988 taxation year, he worked both for the appellants, who, as donors, agreed to transfer the painting in question to the charity he had chosen, and for the donee, which entrusted him with possession of that property. The testimony of Mr. Carignan, an entirely credible witness, has persuaded me that the painting in question was given to Univers du Rail Inc.

As regards the gift of jewellery made by the appellants to the Fondation Amérindienne Tecumseh, I have concluded after carefully reviewing the testimony of the appellants, Ms. Lizotte and Mr. Demers that it is probable that the appellants gave the jewellery to the Fondation. Mr. Bouchard acted as a mandatary for the appellants and the Fondation. He played a similar role in the 1990 taxation year in respect of the paintings given to the Société protectrice des animaux. Mr. Levert was the one who appraised the paintings in question.

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.

I will turn now to the second issue, which concerns the fair market value of the property given to Univers du Rail Inc., the Fondation Amérindienne Tecumseh and the Société protectrice des animaux.

The concept of fair market value has been considered by the courts, inter alia in Henderson v. Minister of National Revenue (1973), 73 D.T.C. 5471 (Fed. T.D.). 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. 1 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.]

First of all, I attach little weight to Mr. Levert’s appraisals. With regard to the gift made by the appellants in 1988, he was a party to all the transactions. With regard to the paintings given by the appellants to the Société protectrice des animaux, it was Mr. Levert who sold the paintings to Mr. Bouchard and appraised them for him. The receipts given to the appellants were based on those appraisals. Mr. Levert had an interest in the sales being closed.

In his tax return for the 1988 taxation year, the appellant Amédée Duguay set the value of his interest in the painting by Jean-Paul Lemieux purchased jointly with the appellant Diane L. Duguay at $8,000 for the purposes of the deduction for charitable gifts. Ms. Duguay set the value of her interest in the painting at $7,000. The appellants thus estimated the painting’s value as of the time it was acquired at $15,000. Based on all the evidence regarding the painting’s value, and after considering, inter alia, the testimony of Mr. Levert and Guy Gagnon, I have concluded that it was worth no more than $3,000. The value of the appellant Amédée Duguay’s interest in the painting was therefore /i5 of $3,000, while the value of the appellant Diane L. Duguay’s interest was /15 of $3,000.

in their tax returns for the 1989 taxation year, the appellants estimated the value of their interest in the jewellery given to the Fondation Amérindienne Tecumseh at $5,820 each for the purposes of the deduction for gifts. I do not agree with the opinion expressed by Ms. Lizotte, who is an expert in gemmology, that is, in the identification of stones, as regards the value of the jewellery, which included a watch and a silver box in addition to the jewellery itself. I agree with the respondent that Ms. Lizotte is not an expert in appraising second-hand jewellery. She has neither the experience nor the training that is necessary. She seems to have attributed a replacement value to the jewellery. The respondent’s expert has worked as an antique dealer, appraiser and jeweller. Generally speaking, I accept his approach. All things considered, I find that the jewellery, including the watch and the silver box, was worth about $3,000 at the relevant time. The value of the interest of each of the appellants was thus $1,500.

In his tax return for the 1990 taxation year, the appellant Amédée Duguay indicated a value of $9,750 for the gifts he made to the Société protectrice des animaux in that year. The gifts were two 16-inch by 20-inch oil paintings by Fielding Downes. At Mr. Bouchard’s request, Mr. Levert appraised each of the paintings at $3,000 for insurance purposes. According to Mr. Rinfret, the respondent’s expert witness, few of that artist’s works can be found in galleries. The auction market is where most of his paintings can be found. All things considered, I set the value of each of these paintings at $400 at the relevant time.

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 Part B (which set out the issues to be decided) of the amended replies to the notices of appeal in these two appeals.

I will make only a few comments.

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.

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.

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

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 and 1989 taxation years, and also for the 1990 taxation year in the case of the appellant Amédée Duguay.

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. They were told that Mr. Levert could purchase paintings at auctions from bankruptcy or private sale lots at very attractive prices. Ms. Tremblay also told the appellants 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 made 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’s assessments. Mr. Levert reassured them that all the appraisals were correct and Revenue Canada’s representatives said that only the value of the gifts was being challenged.

Counsel for the respondent stressed, inter alia, the following evidence:

(a) In investigating the Musée Louis-Hémon and the Musée Pierre- Boucher, two Revenue Canada investigators met the appellant Amédée Duguay at his office on September 2, 1987. According to the interview report, Mr. Duguay did not want to say how much he had paid. Following a discussion, he said that he had paid $4,000 for himself and his wife between April and September 1986. He said that he had withdrawn the money from the bank, but he refused to show his bank accounts. He refused to make a sworn statement, saying [TRANSLATION] “I take statements, I don’t make them.” According to Mr. Duguay, he met with the investigators not long after Revenue Canada’s search at the Musée Louis-Hémon in Péribonka. Yet Mr. Demers said that the seizure occurred in 1988.

(b) In spite of the assessments dated December 16, 1988, in the case of the appellant Diane L. Duguay and January 13, 1989, in the case of the appellant Amédée Duguay, Mr. Duguay continued to do business with Mr. Levert to obtain a receipt for 1988. He said that he went to a Revenue Canada office with Mr. Levert in 1988. However, he did not explain to the official, whose name he does not remember, that Mr. Levert was not only his seller but also the appraiser and the person who prepared the receipt. He did not explain all the circumstances of the case.

(c) For 1989 and 1990, Mr. Duguay did business not with Mr. Levert but with a co-worker, Gilles Bouchard, a police officer assigned to surveillance. Mr. Duguay checked nothing. Mr. Bouchard did every

thing: he chose the organizations and provided Mr. Duguay with receipts and appraisals in return for the payment of 25 percent of the amount indicated on the receipt. Mr. Bouchard prepared no invoice for the property acquired by Mr. Duguay, whatever Mr. Duguay may have claimed. No capital gain was reported for either 1989 or 1990. It was the receipts that interested the appellants Amédée Duguay and Diane L. Duguay, and nothing else.

(d) The appellants Amédée Duguay and Diane L. Duguay were not looking for a bargain, that is, purchasing property at a low price, even though they seemed to believe that the value of the property was higher than its cost. All they were looking for was a tax advantage, and they knew nothing whatsoever about the property in question and did no research whatsoever on the subject.

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. 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 facts 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 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.

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 of each of the gifts as established in these Reasons for Judgment.

For these reasons, the appeals from the assessments for the 1988, 1989 and 1990 taxation years in the case of the appellant Amédée Duguay and for the 1988 and 1989 taxation years in the case of the appellant Diane L. Duguay 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.

Costs will be awarded later following a common hearing in these appeals and the appeals of Alain Côté (92-2773(IT)G), Louise Marcoux (93- 3160(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.

Appeal allowed.