Langlois v. R., [1999] 3 CTC 2589

Garon T.C.J.:

These are appeals from income tax assessments for the 1990 and 1991 taxation years. In assessing the appellant for those years, the Minister of National Revenue reduced to nil the deduction for charitable gifts he had claimed in respect of certain works of art in each of the years at issue. The appellant is also contesting the penalty imposed in the assessment for the 1991 taxation year.

The appellant’s two 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), Amédée Duguay (94- 1081 (IT)G) and Diane L. Duguay (94-1084(IT)G). It should be noted at this point that the appellant in the instant appeals and the four individuals just referred to 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 appellant’s testimony, 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, a fairly lengthy 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 appellant’s evidence.

The appellant was a member of the Sûreté du Québec for 32 years. In September 1990, Robert Wright told him that there was a tax advantage involving charitable gifts. The appellant subsequently requested additional information on this tax benefit from the Revenue Canada office in Québec. While he was at the office, a woman gave him a pamphlet concerning charitable gifts. However, he did not explain all the circumstances of the transaction, including in particular the fact that a single person had received the payment for each work of art, performed the appraisal and provided the receipt.

In September 1990, the appellant met with Mr. Wright, who informed him that Marc Levert of the Galerie des Maîtres Anciens was selling works of art. The appellant went to the office of Mr. Levert, who showed him correspondence he had received from Revenue Canada establishing that the purchase of works of art for the purpose of giving them to charities was consistent with the Income Tax Act. He was told about the Federal Court of Appeal’s decision in Friedberg v. R. (1991), 92 D.T.C. 6031 (Fed. C.A.). He obtained a copy of this documentation after the Minister of National Revenue had made assessments reducing to nil the deduction the appellant had claimed in respect of the works of art.

The appellant selected three paintings and Mr. Levert told him he was selling them at one third of their market value. The appellant told him he wanted to purchase paintings worth approximately $10,500 because he knew this amount represented the maximum value for which he could claim the deduction for charitable gifts. The appellant consulted the Guide Vallée provided by Mr. Levert, which indicated the prices of the works of art the appellant had selected, to ensure that the pictures he had purchased were mentioned in the Guide Vallée and that their value was consistent with the value indicated in that guide. The appellant chose Univers du Rail Inc. at the suggestion of Mr. Levert, who gave him the name and telephone number of Julien Carignan of Univers du Rail Inc. He then contacted Mr. Carignan, who suggested that the appellant leave the three pictures with Mr. Levert on consignment.

Before completing the transaction, the appellant returned to Revenue Canada to ensure that the gifts were legal and an official whose name he did not ask for confirmed that they were consistent with the Act. He did not tell the official that the person who had sold him the paintings had also appraised them and provided the receipts. In late October 1990, the appellant confirmed to Mr. Levert that he wanted to make gifts of three paintings and he then obtained receipts and appraisals relating to the purchase of the three paintings from Mr. Levert.

The appellant also questioned Mr. Levert about the relationship between the prices he was paying for the paintings and their value. Mr. Levert answered that as a dealer, he was not required to sell the paintings at their fair market value. The appellant mentioned that he found it strange that Mr. Levert would sell something at a price below its fair market value but said that he had relied on the opinion obtained from Revenue Canada. He added that he negotiated a price of $3,253.50 for the paintings in question.

The appellant added that he did not remember what the paintings depicted. He did not take them home and never entered the premises of Univers du Rail Inc.

On June 28, 1991, the appellant contacted Revenue Canada and learned from a Ms. Levasseur that his file had been forwarded to the Special Investigations Section in Québec. He spoke once again with Mr. Levert, after which the appellant, his lawyer and Mr. Levert went to meet Mr. Chabot, who told them that there were four or five districts in Quebec where charitable gifts had been “cut”.

On November 15, 1991, the appellant met with Ms. Morin of Revenue Canada for an explanation as to why Revenue Canada had ruled that the appellant had realized a capital gain from the disposition of the paintings but had at the same time reduced the value of the gift to nil. After a review on November 15, 1991, established the value of the gift at $1,139.05 and a capital gain at nil and after the appellant paid another visit to Revenue Canada, Revenue Canada ultimately decided on January 30, 1992, to cancel the taxable capital gain and reduce the value of the gift to nil for the 1990 taxation year. The appellant was assessed no penalty for that taxation year.

With respect to the gift made by the appellant in 1991, the Court was told that the appellant was a member of a group called the “Association des donateurs aux organismes de charité” (ADOC). Art buyers Robert Wright and Jean-Yves Gagnon founded this association in 1990. The appellant was invited to its first meeting, which was attended by a number of police officers.

In 1990, Mr. Wright and Mr. Gagnon purchased works of art. The appellant became the owner of certain drawings by Fielding Downes worth $10,000 by paying ADOC $2,500. The appellant paid $400 in December 1990, made out 11 cheques for $100, the first of which was dated January 31, 1991, and paid the balance in cash. The appellant stated that he went to see the pictures at the Galerie des Maîtres Anciens. Mr. Wright and Mr. Gagnon made the payments that had to be made to Mr. Levert and chose the charity to which the pictures were given. The appellant neither took photographs of the pictures nor checked their chain of ownership. Nor did he receive any invoices for the purchase of this artist’s drawings until late 1991 or early 1992; ADOC kept these source documents.

The appellant contacted Mr. St-Laurent in December 1991 after learning that the four Fielding Downes drawings had been given to the Fondation Amérindienne Tecumseh rather than to Univers du Rail Inc. Mr. St-Laurent confirmed that he had accepted the gift of the drawings in question. With respect to the appraisal of the drawings, the appellant relied on the Guide Vallée; he had called the offices of the La Capitale insurance company to find out what it used if a picture were stolen or burnt. He was told that it relied on guides such as the Guide Vallée.

The appraisals were handed over to the appellant by Robert Wright after Revenue Canada had contacted the appellant. The appellant added that Revenue Canada’s documentation, such as the “Gifts in Kind” pamphlet, mentioned that when taxpayers file their returns of income, they should keep their receipts and appraisals in case these are requested by Revenue Canada.

The appellant also received a letter from Ms. Boucher of Revenue Canada after inquiring once again into the legality of these charitable gifts. On February 16, 1994, the appellant wrote to Revenue Canada again to find out what the basis was for assessing gifts made to charities. Ms. Savard of Revenue Canada then sent him a pamphlet entitled “Gifts in Kind” and a tax guide entitled “Capital Gains”.

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

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. Field- ing 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:

I. 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.

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

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

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 met the appellant through Robert Wright. According to Mr. Levert, at a meeting he had with the appellant, the appellant said he wanted to obtain general information on the process involved in acquiring a work of art for the purpose of making a gift of it and on the legality of the transaction. Mr. Levert said he remembered showing the appellant some correspondence of his with Revenue Canada, including in particular a letter he had written to Guy Drolet of Revenue Canada and a reply from Jacques Demers. Mr. Levert mentioned that the appellant ultimately did business with him and agreed to make a gift to Univers du Rail Inc. in late October 1990. It was Mr. Levert who appraised the paintings acquired by the appellant and gave the appraisals to Univers du Rail Inc. The receipt from Univers du Rail Inc. was transmitted to Mr. Levert, who then gave it to the appellant.

Mr. Levert confirmed that he had met Robert Wright and Jean-Yves Gagnon and conducted transactions with them. He said that Mr. Wright and Mr. Gagnon had formed an association (ADOC) which purchased paintings for gift purposes and that he helped them in their search for pictures. The purpose of the association, he said, was to buy paintings and to resell them shortly afterwards. Mr. Levert informed them of the prices and number of paintings in the gallery, and he made gifts to the Fondation Amérindienne Tecumseh and the Fondation Artrix on ADOC’s behalf. Mr. Levert testified that he called the person in charge of the charity, who came to see the paintings. In some cases, he said, the organization left the paintings at the Galerie des Maîtres Anciens and a representative of the organization came to pick them up later. According to Mr. Levert, only Univers du Rail Inc. left the paintings at the gallery for a long period of time. He added that he may have used the 1993 Guide Vallée, which had not yet been published in 1992, as a basis for appraisals of the Fielding Downes portfolio for ADOC and the Fondation Artrix.

The Fielding Downes portfolio was sold by La Tourelle, Maison d’encans. According to Mr. Levert, he had acquired approximately half the portfolio from Jacques Morin, another portion from Mr. Sanchez and the rest from other individuals.

Mr. Levert also said that he sold a large number of pictures to ADOC at prices representing 25 percent of their purchase price. ADOC purchased from Mr. Levert 80 of the 100 pictures he owned from the portfolio of the artist in question. These pictures were stored at the Galerie des Maîtres Anciens. It was Mr. Levert who appraised them.

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

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, 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 charitable gifts and issue receipts. This would enable it to operate on a larger scale. According to Mr. Carignan, although he was a director at the time in question, it was Alain St-Amand, the president of Univers du Rail Inc., who submitted the application for registration to the tax authorities.

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

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 later rose to about 30.

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

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 appellant 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 appellant’s files for the 1990 and 1991 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 for the purpose of making gifts to charities. According to Revenue Canada, the scheme specifically involved the sale of charitable receipts at 20 or 25 percent of the amounts shown on the receipts. The experts retained by Revenue Canada determined that the appraisals of the works of art were excessively high.

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 in respect of the taxpayers covered by this investigation who made gifts during those years, Revenue Canada took the position, based on this Court’s decisions in Dutil v. R. [(1991), 95 D.T.C. 281 (T.C.C.)] and Gagnon vy. 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 in many cases 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 receipts, proof of purchase documents, invoices, proof of payment documents and cheques. These data were gathered to determine which taxpayers were involved in the scheme to sell tax receipts and which of them were genuine donors or, in other words, had owned the works of art for a number of years. In the case of the genuine donors, Revenue Canada would contest only the value of the works of art, while in the case of the other taxpayers, Revenue Canada would refuse to find that genuine gifts were made.

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, 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 corporations. 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 amounts stated on the receipts. That arrangement was a source of funding for Univers du Rail Inc. It was Mr. Levert who found the persons who gave works of art to Univers du Rail Inc., and the senior managers of that corporation did not meet them. Mr. Levert provided the receipts and some 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. The appraisals were also dated December 7, 1988. The amounts on all the invoices for the property acquired by the appellant, 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.

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

With respect to the ADOC group mentioned above, Mr. Demers obtained receipts from the Fondation Artrix in an investigation in June 1992. At the time of that visit, he saw only one painting on the premises of the Fondation Artrix. The appraisals were not dated and the name of the donor was not indicated.

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

All the appraisals of these pictures referred to the Guide Vallée and mentioned the Galerie 1’Oeuvre, the owner of which was John Sanchez. During a visit to that gallery, Mr. Juneau noted that four pictures by Field- ing Downes were on sale, that the largest of these pictures measured 14 inches by 18 inches and that the stated price for it was $325. The posted price for this watercolour was slightly lower than the price mentioned in the Guide Vallée. Mr. Sanchez told him that the price indicated in the Guide Vallée must be reduced by 20 percent to arrive at the [TRANSLATION] “right price”. Mr. Juneau did not go to other galleries to check that the prices of pictures established as indicated by Mr. Sanchez were accurate. He did not introduce himself as a Revenue Canada officer during that visit.

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

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

Mr. Juneau returned to the Galerie 1’Oeuvre a little later and this time identified himself as a Revenue Canada investigator. Mr. Sanchez provided him with sales invoices, but none of those invoices concerned the pictures by the artist Fielding Downes. Mr. Juneau concluded that, since he had not received invoices from either Mr. Morin or Mr. Sanchez for the Fielding Downes pictures, there had been no sales. Mr. Juneau acknowledged that he had not conducted a thorough investigation into the sales by Mr. Morin and Mr. Sanchez. He also acknowledged that he had not tried to determine whether the prices of paintings in other galleries compared to those appearing in the Guide Vallée. No other Revenue Canada investigator conducted a more thorough review than his into pictures by the artist Fielding Downes. He mentioned that according to Fielding Downes’ will, much of Mr. Downes’ property was bequeathed to Suzanne Moisan.

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

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

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

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

The testimony of Jean-Yves Gagnon, a police officer of the Sûreté du Québec since 1969, provided additional information on the establishment and operations of the ADOC group, of which the appellant was a member. Mr. Gagnon also knew the appellant very well as they had worked together for 14 years.

In the summer of 1990, Jean-Yves Gagnon, Mr. Levert and Robert Wright met to discuss the purchase of a collection of Fielding Downes pictures worth $250,000. Mr. Gagnon mentioned that Mr. Levert had acquired the collection from an estate in the fall of 1990. Mr. Levert told them that if they set up a group in the police community, he could offer them a price representing 25 percent of the value of the works of art that they could give to a charity. The number of members of this group proposed by Mr. Levert could be 25 and each of the members could thus hold a $10,000 share of these works of art. These 25 members as a group could thus own works worth $250,000. The price each member would have to pay would be $2,500. In the fall of 1990, Mr. Gagnon and Mr. Wright set up the group in question. They were its senior managers. Jean-Guy Châteauvert could replace either of them in an emergency. ADOC opened a bank account and Mr. Gagnon, Mr. Wright and Mr. Châteauvert were authorized to conduct transactions in it. Nineteen persons from the Sûreté du Québec became members of the group. Mr. Levert told them that since there were not 25 members, he would keep certain pictures and [TRANSLATION] “find other takers for them”.

Jean-Yves Gagnon also mentioned that, for the 19 persons to become owners of shares of the works of art in the portfolio, each of them would have to pay $400 in December 1990, after which they would pay $100 a month until receiving the tax refund (arising from the tax deduction for charitable gifts); the total of $2,500 per person would then be paid off. The group wanted to purchase the pictures in 1990 to ensure that the tax deduction for gifts could apply to the 1990 taxation year. Some cheques were made out to the Galerie des Maîtres Anciens and others to La Tourelle, Maison d’encans. To the best of Mr. Gagnon’s knowledge, each member of the group paid $2,500, and he and Mr. Wright did the accounting for the group. ADOC’s members received no proof that ADOC had purchased the pictures. Each member of the group would receive a receipt from the charity more than a year after the transaction.

Jean-Yves Gagnon stated that he and Mr. Wright made the desired payments to Mr. Levert by writing cheques to the order of the Galerie des Maîtres Anciens as funds were received from the group’s members. Mr. Gagnon testified that Mr. Levert and Mr. Wright decided on the charities to which the pictures would be given. The group was interested in making gifts to charities that would auction off the pictures; this enabled them to realize gains. Mr. Levert was to ensure that the pictures were given to charities such as Univers du Rail Inc., the Fondation Amérindienne Tecumseh and the Fondation Artrix. Mr. Gagnon gave the group’s members the names of the organizations to which the works of art had been given.

Jean-Yves Gagnon also stated that Mr. Levert told the managers of the ADOC group that he used the Guide Vallée to determine the value of the 100 pictures by Fielding Downes. Without being categorical, he added that the appraisals were performed not by Mr. Levert, but by Guy Gagnon, André Lessard and Jules Harvey. Mr. Levert gave the appraisals to Jean-Yves Gagnon and Robert Wright, who transmitted them to the group’s members. Although required to do so, Jean-Yves Gagnon was unable to produce the invoice for the purchase of pictures by the ADOC group from the Galerie des Maîtres Anciens. Mr. Gagnon also indicated that he went to the Galerie des Maîtres Anciens to see the 100 pictures acquired by the ADOC group but was unable to identify the four pictures he himself had given among those he saw there. The ADOC group held no formal meetings, so it did not meet to divide the works of art from the portfolio in question among the members.

Guy Gagnon also testified as an expert witness.

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

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

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

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

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

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

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

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

The following points from the testimony of expert witness Charles Rin- fret are relevant:

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

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

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

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

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

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

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

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

Mr. Morin stated that Suzanne Moisan authorized him to sell the pictures belonging to the estate of the artist Fielding Downes. She left some 50 pictures with him on consignment; he stored them at the Galerie 1’Oeuvre, which was owned by Mr. Sanchez. According to the agreement reached between Ms. Moisan, Mr. Sanchez and Mr. Morin, the proceeds from the sale of these pictures were to be divided as follows: Mr. Morin and Mr. Sanchez would receive 20 percent each and 60 percent would go to the estate. Mr. Morin mentioned that the prices he proposed were those listed in the Guide Vallée and, in his view, represented the fair market value of the pictures. He added that he had established their fair market value based on information obtained from people in the art community, although he could not remember their names.

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

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

Jean-Guy Château vert, a police officer of the Sûreté du Québec, talked about why the group was formed and the role he played within ADOC. He confirmed Jean-Yves Gagnon’s testimony on this point. He also stated that he had never examined the works of art in the artist Fielding Downes’ portfolio. Mr. Châteauvert did not select the charity to which he made gifts, nor did he see the four pictures he purchased and gave to the Fondation Amérindienne Tecumseh.

The testimony of Dominique Blais, a member of the ADOC group, confirmed that, like the group’s other members, he made a gift of four pictures by Fielding Downes to the Fondation Amérindienne Tecumseh. He obtained a receipt together with certificates of appraisal based on the Guide Vallée, and he paid for the pictures with postdated cheques. He joined the group because it was a way to make gifts to charities. He said he had asked his accountant and the Department about the legality of this procedure.

Mr. Sanchez, who was a self-employed framer and owner of the Galerie 1’Oeuvre at the time in question, confirmed that his relations with Mr. Mo- rin were limited to providing premises where Mr. Morin could exhibit the pictures by Fielding Downes. He acknowledged that he sold pictures from the Fielding Downes portfolio in 1989 and 1990, but most of the clients contacted Mr. Morin to conduct the transactions. His commission on these sales was approximately 20 percent of the sale price. He mentioned that he and Mr. Morin had decided together on the prices at which the Fielding Downes pictures were to be sold. When Mr. Morin decided to stop selling the Fielding Downes pictures, he returned them to Suzanne Moisan.

Pierre Scalabrini, a police officer of the Sûreté du Québec assigned to the economic crimes squad, made gifts in 1990 and 1991. He decided to do so based on explanations received from Robert Wright. He said that Mr. Wright did not mention the problems certain police officers were having with Revenue Canada concerning these gifts. Mr. Scalabrini first asked for information on Mr. Levert from the economic crimes squad in Québec, which told him that it had no file on Mr. Levert. He then went to Revenue Canada, which told him, after he had explained the nature of the process, that charitable gifts were legal. Lastly, he contacted Revenu Québec and received confirmation that the process was valid.

Mr. Scalabrini and his wife joined the ADOC group in 1990, paying $2,500 to become members. Mr. Scalabrini made a gift to the Société protectrice des animaux in 1990. He confirmed that each of the group’s members had a share of the pictures in the Fielding Downes portfolio. He did not know which pictures he had acquired for $2,500, and in respect of which he had obtained a receipt for $10,000. He assumed that Mr. Levert was giving the works of art to the charity in question.

Appellant’s arguments

In his pleadings, the appellant argued that he had made gifts of works of art during the taxation years in question. He argued, inter alia, that tax receipts had been issued to him by charities. The charities had official registration numbers and were authorized to issue receipts for the purposes of the Income Tax Act.

The appellant also argued in his pleadings that the value of the works of art in question as appraised by his experts reflected their fair market value.

The appellant objected in his pleadings to the fact that a penalty was assessed against him in respect of 1991 under subsection 163(2) of the Income Tax Act. He argued that in no way did he knowingly, or under circumstances supporting a finding of gross negligence, make a false statement or omission in his tax return or in any other document referred to in that subsection.

In the appellant’s oral argument, one of his 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 appellant obtained a tax advantage because he 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. Buyers and sellers of paintings 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 appellant’s behalf that he had purchased consumer goods at the wholesale price, practically at cost price, and that he had used the market price in making gifts.

Counsel for the appellants argued that the paintings were first identified by Mr. Levert, who sold them to the appellant. Ownership of property was then transferred for a price in money. A gift agreement was then entered into. In the case of the appellant, the agreement was between two parties: the donor, that is, the 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 appellant’s 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 donor was able to incidentally derive a monetary benefit from the transactions is of no consequence, since the donee 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.) (T.C.C.), and F rancoeur v. R. (1992), [1993] 2 C.T.C. 2440 (T.C.C.). Counsel for the appellant 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 appellant’s 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 appellant thus realized a capital gain on his 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 appellant benefited from that fact.

In the case of the appellant, 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. Mr. Levert profited from this even though he sold at a price that included a lower profit margin.

According to counsel for the appellant, 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 appellant, there was a dual intention behind the gifts, but as regards the donor and the 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 appellant understood what he was doing. He knew that he was buying paintings at a price below their fair market value, since Mr. Levert had explained this to them. The appellant had checked the prices in the Guide Vallée. He knew where his paintings came from and realized that he was getting a bargain. He could not have thought that it was illegal to participate in the transactios at issue here.

One of the appellant’s 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 appellant took the precaution of ensuring that the receipts issued to him were not issued for an amount higher than the fair market value of the works of art in question. He obtained appraisals of the paintings that confirmed the basic principle of the transactions he was 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 appellant 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 appellant argued that the gallery market is the most usual market and the one that must be considered to represent the fair market value. 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 appellant argued that the Minister of National Revenue’s conduct had given him every reason to believe that he was justified in making gifts if he made sure that the value of the property was accurate for the purposes of the receipt. According to him, the basic issue of the case concerns the appraisals.

With regard to the issue of the penalty for the 1991 taxation year, the appellant 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 appellant does 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 appellant did not purchase paintings. According to the appellant, it was shown beyond any doubt that the property given was purchased and that gifts were made of that property. No one purchased charitable receipts, and the appellants did not obtain any consideration or anything else from the registered organizations.

Counsel for the appellant argued that the appellant had exercised prudence before conducting the transactions involving the gifts of art work. He had even contacted Revenue Canada twice to inquire into the legality of the transactions. The appellant derived no tax benefit from the gifts since he had incurred cumulative investment losses. In conclusion, on the penalty issue, the appellant did not behave like someone who has been grossly negligent or has attempted to evade taxes. His conduct was no different from that of thousands of other taxpayers who make use of all kinds of tax shelters.

Respondent’s arguments

Counsel for the respondent began by arguing that the appellant had not made genuine gifts during the two 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 appellant 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 appellant’s only intention was to reduce his taxes by means of receipts for charitable gifts and that there was no philanthropic intention associated with his intention to reduce his 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. the pictures in question were chosen not by the appellant but by Mr. Levert or those in charge at the ADOC group, as the case may be, and the appellant never had the pictures in his possession;

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

3. the appellant would not have entered into the transaction relating to the gifts in question were it not for the receipts.

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 given to Univers du Rail Inc., the respondent relied, inter alia, on the following evidence:

I. The appellant did not deliver the paintings to the Fondation Amérindienne Tecumseh or Univers du Rail Inc., and those organizations never had physical possession of them.

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

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

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

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

Concerning the property the appellant allegedly gave to the Fondation Amérindienne Tecumseh in 1991, the respondent argued that the evidence shows that the ADOC group did not have possession of the portfolio of Fielding Downes drawings. According to the respondent, the vague description of the drawings confirms that there was no [TRANSLATION] “individualization of the drawings”.

Counsel for the respondent also 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 essentially the following comments:

1. The receipt from Univers du Rail Inc. dated November 1, 1990, which the appellant submitted to Revenue Canada, was not prepared in its entirety by Univers du Rail Inc. What was added on the final line ($10,500 crossed out, and $10,150 with the initials DB) was written not by Mr. Carignan but by Denise Body, Mr. Levert’s wife, and Mr. Levert acknowledged this. Neither the name and address of the appraiser (who was Marc Levert) nor the day the gift was received is indicated.

2. The receipt dated November 25, 1991 from the Fondation Amérindienne Tecumseh indicates that there is a certificate but does not give the appraiser’s name or address. No certificate from the Fondation Amérindienne Tecumseh corresponding to this receipt was produced. The day the gift was received is not indicated on the receipt.

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, both the direct comparison approach and the purchase price paid by the owner of the property were considered in determining the value of 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. Rinfret). In his testimony on May 22, 1997, Mr. Kelsey said that Encans Pinney’s does not allow sellers to bid on their own paintings, which is illegal.

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

With regard to Mr. Levert, it was noted that following a lengthy trial, he pleaded guilty to charges of wilfully evading the payment of income tax in 1986 and 1987 by enabling a number of taxpayers, including the appellants, to deduct gifts of overvalued works of art in their tax returns. Mr. Levert was also convicted of failing to report income from his transactions with “donors” in 1985, 1986 and 1987. The respondent further noted that Mr. Levert was not objective: [TRANSLATION] “According to Mr. Levert, the amount to be paid by his clients was fixed in advance at 25 percent of the property’s value as listed in the Guide Vallée or of its gallery value.” Mr. Levert contrasted the gallery market with the auction market. He assumed that any artist’s paintings can be sold in a gallery. He also considered that the prices suggested in the Guide Vallée are real prices for gallery sales and need not be checked. According to the respondent, [TRANSLATION] “in doing so, he suggested completely artificial values that bore no relationship to the real market”. As Mr. Rinfret stated, 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’s argument that Mr. Levert was not an independent expert was based on the fact that Mr. Levert was a party to all the transactions involving, in particular, the appellant and the property he gave in 1990 as the person who sold the property, appraised it for the purpose of drawing up receipts and provided the receipts.

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.”

After noting that the 1991 taxation year was the only one in which a penalty was assessed, one of the respondent’s counsel presented, in support, inter alia, of the assessment of the penalty, the facts set out in the following paragraphs which I reproduce virtually verbatim.

Although the deduction for gifts was disallowed for the 1990 taxation year, the appellant told Diane Morin on November 28, 1991, while he was at the objection stage for the 1990 taxation year, that he was going to make another gift in 1991. The appellant said that Ms. Morin then suggested he consult an honest person at a gallery to have his pictures appraised. The appellant clearly did not follow this advice.

For the 1991 taxation year, the appellant took no precautions and did not check with an independent expert either when he purchased his share of the portfolio of Lionel Fielding Downes drawings (on December 28, 1990) or when a receipt was made out in his name by the Fondation Amérindienne Tecumseh (on November 25, 1991). He joined the ADOC group but asked no questions about the alleged $10,000 value of his share.

Nor did he know which drawings his share corresponded to: no invoice was drawn up to attest the purchase of his share and no division was carried out.

The appellant let those in charge of the ADOC group choose the charity in question, namely the Fondation Amérindienne Tecumseh.

It was not until 1993, when the Minister of National Revenue asked the appellant for proof of purchase and payment documents and appraisals (letter from Ms. Lapointe dated August 17, 1993), that the appellant obtained appraisals from Robert Wright (between August 17, 1993, and September 15, 1993). He then sent the Minister of National Revenue two photocopies of the two appraisals by Mr. Harvey dated April 22, 1992 (for four works), together with a photocopy of Mr. Lessard’s appraisal of one drawing and Guy Gagnon’s general appraisal of December 15, 1991.

In addition, it was not until after he obtained his receipt that he checked the Guide Vallée at the Galerie des Maîtres Anciens. No prices appear in the 1989 Guide Vallée for drawings by Fielding Downes, and it was not until 1993 that the appellant obtained a photocopy of the letter dated March 14, 1991, by Mr. Morin giving prices for [TRANSLATION] “works on paper”.

Analysis

Based on the arguments set out by the appellant and the respondent in their pleadings, it is clear that there are three main issues in this case:

1. whether the appellant 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 appellant in his tax return 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 appellant for the 1991 taxation year under subsection 163(2) of the Act.

The first issue to resolve is whether, in the circumstances, the appellant made gifts of the property in question to Univers du Rail Inc. and the Fondation Amérindienne Tecumseh.

As was clearly established in Lagueux & Frères, supra, the first thing that must be done is to determine the nature of the transactions entered into by the appellants with Univers du Rail Inc. and the Fondation Amérindienne Tecumseh in light of the Civil Code of Lower Canada. It is thus necessary to refer to articles 755 and 776 of the 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, 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 the appellant and the organization that was to receive the gifts in question. In the case at bar, the evidence is clear that the appellant received no consideration whatsoever from the organization to which the property was to be given. In my opinion, it does not matter that the appellant’s principal motivation 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 property described thereon has been received by the organization in question. It is therefore my view that the appellant had the necessary intent to give the works of art to the organizations in question.

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

After carefully reviewing the evidence, I have concluded that the works of art at issue in these appeals were identified clearly enough and legally came into the possession of the charities in question through persons authorized by them. The weight of the evidence shows that Mr. Levert played a dual role as regards the property given by the appellant in 1990. He worked both for the appellant, who, as the donor, agreed to transfer the property in question to the charity chosen by Mr. Levert, and for the donee, which entrusted Mr. Levert with possession thereof. These findings of fact are based in particular on the testimony of Mr. Carignan, whom I found to be an entirely credible witness, as regards the property given to Univers du Rail Inc. The procedure adopted in respect of the property given to the Fondation Amérindienne Tecumseh in 1991 was essentially the same. The property given by the appellant in 1991, the drawings by Fielding Downes, was purchased from Mr. Levert through the ADOC group. However, it was not Mr. Levert who chose the charity to which the property was given. This choice was made by the people in charge of the ADOC group: Robert Wright and Jean-Yves Gagnon. I have concluded that the identification of the property in question was sufficient.

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

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. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand. [Emphasis added. I

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

In his tax return for 1990, the appellant indicated that three paintings he gave to Univers du Rail Inc. were worth $10,150 for the purposes of the deduction for charitable gifts.

The value of one of the paintings, by Claude Carette, was appraised at $2,400 by Mr. Levert. The painting was described by Mr. Levert as a 16- inch by 24-inch oil painting depicting a landscape. According to the 1989 Guide Vallée, the suggested price for an oil painting with these dimensions was $2,050, not $2,400. The cost of framing apparently accounted for the difference. The following edition of the Guide Vallée suggested a price of $1,250. Mr. Levert suggested that there had been a mistake. He acknowledged that paintings by Claude Carette are regularly found at auctions. Other oil paintings on the same subject with the same dimensions sell for no more than $350 at auctions.

In light of the evidence respecting the price at which this artist’s paintings were sold at auctions and the information on framing, I conclude that the value of this painting at the time of the gift could be set at $500.

The next matter is the value of the painting by Gilles Gingras. Mr. Levert described it as a 20-inch by 24-inch oil painting. He relied on the 1989 edition of the Guide Vallée, which suggested a price of $3,500, and said that he added approximately $225 for a frame.

Mr. Levert acknowledged that many paintings on the same subject and with similar dimensions to the painting in question are sold at auctions. He referred to numerous auction sales of paintings by this artist during the period from 1987 to 1991 in which the prices ranged between $325 and $1,100. All things considered, in light of the evidence, I would appraise this painting at $1,000 at the relevant time.

The third painting given by the appellant in 1990 was a 20.5-inch by 24.5-inch watercolour on paper by Fielding Downes entitled “La Haute Ville Québec”. Mr. Levert’s appraisal, which he said was based on the 1989 edition of the Guide Vallée, indicated a value of $3,750. Mr. Levert also stated that he contacted Jacques Morin, who told him the price of this watercolour in 1990. The price suggested by Mr. Morin in 1991 for a 20- inch by 24-inch work on paper was $3,500. The prices obtained by Mr. Sanchez and Mr. Morin from sales of watercolours were between $90 and $467. In light in particular of the testimony of the expert witness Charles Rinfret, I would appraise this watercolour at $400.

In his tax return for the 1991 taxation year, the appellant indicated a value of $10,000 for paintings given to the Fondation Amérindienne Tecumseh.

All the appraisals found at the Fondation Amérindienne Tecumseh and the Fondation Artrix relating to the members of the ADOC group were prepared by the Galerie des Maîtres Anciens.

The two appraisals found at the Fondation Amérindienne Tecumseh gave a value of $2,500 for each work. This is the value that appears in the 1989 edition of the Guide Vallée. I also considered the appraisals prepared by Guy Gagnon and Jules Harvey and the testimony of Charles Rinfret.

In light of the evidence, I appraise the Fielding Downes drawings the appellant gave to the Fondation Amérindienne Tecumseh at $2,500.

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. This was mentioned in the assumptions of fact set out by the Minister of National Revenue but did not appear, in either of these appeals, in Part B of the Minister of National Revenue’s pleadings, which set out the issues to be decided.

I will make only a few comments on this issue.

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 penalty assessed by the Minister of National Revenue for the 1991 taxation year.

The evidence shows that the appellant took a number of precautions and measures before making the charitable gifts in question. These precautions and measures are relevant to an overall review of the taxpayer’s conduct concerning not only the 1990 taxation year, in respect of which the Minister of National Revenue did not assess a penalty, but also the 1991 taxation year.

In light of all the circumstances, I find that the appellant did not act in a grossly negligent manner with respect to his tax obligations under subsec- tion 163(2) of the Act. On this point, the Minister of National Revenue did not discharge his burden of proof.

I therefore conclude that the assessment of the penalty by the Minister of National Revenue was unjustified.

For these reasons, the appeals from the assessments for the 1990 and 1991 taxation years are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellants are entitled to the deduction for gifts provided for in section 118.1 of the Income Tax Act, taking into account the value of the gifts as established in these reasons. The capital gains exemption must be taken into account where applicable. The assessment for the 1991 taxation year is vacated as regards the penalty.

Costs will be awarded later following a common hearing in these appeals and the appeals of Amédée Duguay (94-1081 (IT)G), Diane L. Duguay (94-1084(IT)G), Alain Côté (92-2773(IT)G) and Louise Marcoux (93- 3160(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.