Décarie v. R., [1999] 2 CTC 2054

Lamarre Proulx T.C.J:

This is an appeal under the informal procedure with respect to the 1991] and 1992 taxation years.

The issues are whether in 1991 the appellant made a charitable gift within the meaning of s. 118.1 of the Income Tax Act (“the Act”); if he made such a gift, whether the market value of the works of art donated was the value declared by the appellant; and whether the penalties were correctly imposed pursuant to s. 163(2) of the Act.

The facts on which the Minister of National Revenue (“the Minister”) relied in making his reassessments are set out in paragraphs 2 and 4 of the Reply to the Notice of Appeal (“the Reply”) as follows:

[TRANSLATION]

2. In calculating the total non-refundable tax credits for the 1991 and 1992 taxation years the appellant claimed the following amounts as charitable gifts:

	1991		1992
Balance from preceding year		0	$2,007
Gifts in the year	$15,000		0
	$15,000		$2,007
Claimed	$12,993		$2,007
Carried over to following year	$2,007		0

4 In making these reassessments the Minister of National Revenue assumed inter alia the following facts:

a. in his tax return for the 199] taxation year the appellant claimed $15,000 as a credit for charitable gifts, inter alia, alleging that he made a gift in this amount of pictures to the Théâtre Entre Chien et Loup;

b. in reality the appellant did not make a gift of this property, within the meaning of the Income Tax Act, for the 1991 taxation year;

C. in particular, the appellant never had the intention of simply making a gift of this property to the Théâtre Entre Chien et Loup;

d. the appellant purchased a tax deduction:

e. the appellant was seeking solely to obtain unjustified tax advantages, since the transactions were conditional on receiving a receipt for an amount greater than the amount he had to expend to obtain it;

f. the appellant is consequently not entitled to any tax credit for charitable gifts in respect of this property for the 1991 and 1992 taxation years;

g. furthermore, the appellant did not establish that the property in question corresponded to the description he gave of it and the value declared for each item was not determined by an independent expert, and is in any case not the fair market value of the property in question;

h. the receipt obtained by the appellant is not one that meets the requirements of s. 3501 of the Income Tax Regulations;

1. in filing his tax return for the 1991 taxation year the appellant made a misrepresentation of fact through negligence, carelessness or deliberate omission;

j. the appellant, knowingly or in circumstances amounting to gross negligence, made or participated in, assented to or acquiesced in the making of a false statement or omission in his tax returns for the 1991 and 1992 taxation years, such that the tax which would have been payable by the appellant according to the information provided in the returns was $3,345.30 and $513.26 lower in 1991 and 1992, respectively, than the tax actually payable for those years;

k. the penalty imposed on the appellant under s. 163(2) of the Income Tax Act as a result amounts to 50 percent of the difference in the tax, or $1,672.65 for the 1991 taxation year and $256.63 for the 1992 taxation year.

The reason given in the Notice of Appeal is as follows: [TRANSLATION] / am contesting the decision because I am an honest citizen and there was no ulterior motive for what I did. I wish to provide explanations regarding this matter.

The appellant and Denis Lemieux, an investigator at Revenue Canada, testified. Mr. Lemieux testified at the request of counsel for the respondent.

The appellant is a physician who works as a consultant in a firm of medical consultants. In the years at issue he had a colleague, with whom he is still associated: Dr. Jacques Toupin, who according to the appellant was a knowledgeable collector. It was apparently Dr. Toupin who explained to the appellant how he could obtain a tax credit by making gifts. The appellant said he paid $5,000, in two $2,500 cheques made out to Dr. Toupin. The appellant did not file copies of these cheques. He never sent copies of them to the Minister despite the request made to him in this regard on May 4, 1995, as indicated in Exhibit I-4. (This exhibit consists of two letters written to the appellant by a representative of the Minister, on May 4 and 31, 1995.) That request was repeated in a subpoena (Exhibit I-3) which was sent to the appellant before this hearing. The one specific request made to the appellant in the subpoena was to bring with him [TRANSLATION] ‘"proof of purchase and payment for the pictures in question (invoice(s), cheque(s) and statement(s) of account)”.

The appellant said it was Dr. Toupin who valued the pictures. Although Dr. Toupin is still his colleague at work, the appellant did not ask him to come and confirm his valuation.

The appellant’s tax returns (Exhibit 1-1) were prepared by his brother, who is an accountant. They indicate that in 1991 and 1992, tax credits were claimed for charitable gifts in the amounts of $12,992.85 and $2,007.15, respectively. In answer to a question by counsel for the respondent, the appellant confirmed that the returns did not include Schedule III regarding the calculation of the capital gain allegedly made on disposition of the paintings.

Exhibit 1-2 is the receipt from the theatre referred to in subparagraph 4(a) of the Reply. It states that the amount is $15,000 and that it is for a gift of pictures.

The letter of May 4, 1995 (Exhibit I-4), referred to supra in paragraph 6 of these reasons, requested the following information:

[TRANSLATION]

A:	proof of purchase and payment for works (original receipt(s) and can-
	celled payment cheque(s), etc.);
B:	certificate(s) of valuation of the works;
C:	proof of possession of the works for a long period of time;
	e.g.: insurance policy, including valuation required by insurer photo
	graphes) of your residence, showing the work(s) and indicating the date
	on which it(they) was(were) taken;
D:	provide in writing a summary of the events relating to your interest in
	offering a gift to a charitable organization of the work(s) in question. In
	short, we want to know how you obtained these works and what
	prompted you to do this.

The documents and information required concern the gift(s) you offered to:

Year(s)	Organization(s)	Amount
199]	Theatre Entre Chien et Loup	15,000

The appellant did not answer this letter. He was therefore assessed in accordance with the draft assessment set out in the letter of May 31, 1995, which is also part of Exhibit 1-4.

The appellant filed an objection to the reassessments (Exhibit I-6). The reasons given were the following:

[TRANSLATION]

I object to this reassessment for the following reasons:

-the time given for answering the letters dated May 4 and 31, 1995 was insufficient; our letter sent by fax on June 21, 1995 was not considered;

-the four paintings were purchased in November 1990 for the same amount at which they were given to the charitable organization “Fondation Théâtre Entre Chien et Loup” in August 1991;

-the four paintings were bought from:

Dr. Jacques Toupin

1200 Boulevard Le Corbusier

Laval, Que. H2S 2K1

Tel.: (514) 688-4451

-the four paintings listed on the enclosed sheet were valued by Dr. Toupin, who is a specialist in art works;

-since I believe in charity, 1 was familiar with the charitable organization and I wanted to save some tax, I purchased these works and donated them in order to obtain a substantial deduction on my tax return.

As we have just seen, the Notice of Objection stated that the four paintings were purchased for the same price at which they were donated. This statement is not correct, since according to the appellant’s testimony at the hearing the amount he gave Dr. Toupin was $5,000. The list of four paintings was appended to the Notice of Objection. Apart from that list, none of the documents requested by the Minister’s representative in his letter of May 4, 1995 was supplied.

The appellant also failed to produce any of these documents at the hearing. He said he had never seen the pictures, he was not familiar with the theatre in question and he was not the one who chose the charitable organization. He did not know the provenance of the pictures and did not know what had become of them. He did not write the theatre to find out. He repeated that it was Dr. Toupin who handled the whole thing.

Denis Lemieux, the Minister’s representative, explained that he had done an investigation in the instant case. He met with the people in charge of the theatre foundation, and they told him that an auction of the allegedly donated pictures had been on September 22, 1991. He was shown donation letters from various people. One was prepared for the appellant’s signature (Exhibit I-11), but the appellant had not signed it. It is dated June 26, 1991 and states:

[TRANSLATION]

I would hereby like to offer your Foundation some works by various artists as a donation.

The total value of these works amounts to $15,000: I would appreciate your issuing a receipt in my name for a charitable gift in 1991.

Thanking you in advance,

Yours truly,

The appellant said he had never seen this letter. It should be noted that only the amount of the gift is mentioned and that it refers to some works, without specifying which ones.

Exhibit I-8 is the program for the sale of the pictures at auction. It indicates that the four pictures, a list of which was filed with the Notice of Objection, valued by Dr. Toupin or some other person at $15,000, were sold for a total of $2,455, that is, 16 percent of their value.

Argument and conclusions

Counsel for the respondent argued, first, that this was not a gift, and second, that if it was a gift the market value was not $15,000.

She referred to the following decisions: Guy Dutil v. The Queen, [1991] T.C.J. No. 654 (Q.L.); Réjean Gagnon v. The Queen, [1991] T.C.J. No. 655 (Q.L.); Gilles Bouchard v. The Queen, [1992] T.C.J. No. 752 (Q.L.); Albert Friedberg v. The Queen, 89 D.T.C. 5115 (F.C.) and The Queen v. Albert Friedberg, 92 D.T.C. 6031 (F.C.A.); The Queen v. Burns, 88 D.T.C. 6101 (F.C.), affirmed by 90 DTC 6335 (F.C.A.); Jeffrey R. Ball and Beverley Ball v. The Queen, [1993] 2 C.T.C. 2475; Michel Arvisais v. The Queen, 93 D.T.C. 501; Gaétan Paradis v. The Queen, [1996] T.C.J. No. 1638 (Q.L.); and Venne v. The Queen, 84 D.T.C. 6427.

In The Queen v. Friedberg, supra, Linden J.A. speaking for the Court explained that the Act does not define what a gift is and that the general principles of law with regard to gifts must be applied. I quote, at p. 2 of the English version:

The Income Tax Act does not define the word “gift”, so that the general principles of law with regard to gifts are utilized by the Courts in these cases. As Mr. Justice Stone explained in The Queen v. McBurney, 85 D.T.C. 5433, at p. 5435:

The word gift is not defined in the statute. I can find nothing in the context to suggest that it is used in a technical rather than its ordinary sense.

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.

In Friedberg, supra, there was no evidence of a prior transfer of ownership to the alleged donor for one of the two gifts. The Court concluded that one cannot give what one does not have, and I quote, at p. 6 of the English version:

The only legal conclusion that one can draw from the documents concerning the Abemayor Collection is that the taxpayer made a gift of the money to the ROM, with which it acquired the collection. He did not hold the title to the textiles, nor did he ever acquire the title, and one cannot give what one does not have.

In Quebec as elsewhere, ownership of the property is an essential condition for a gift. A person cannot give what he or she does not own. Article 1806 of the Civil Code reads as follows:

1806. Gift is a contract by which a person, the donor, transfers ownership of property by gratuitous title to another person, the donee; a dismemberment of the right of ownership, or any other right held by the person, may also be transferred by gift.

Gifts may be inter vivos or mortis causa.

I can see nothing in the facts submitted at the hearing to indicate that the appellant acquired ownership of the four pictures, the list of which was attached to the Notice of Objection. The appellant did not know when he handed over the $5,000 (I am assuming here that he in fact spent the $5,000, since no documentary evidence was provided on this point, and there was no oral evidence other than his own) that he was purchasing four pictures. The appellant never saw the pictures and even at the hearing could not describe them. The cheques were not made out to a gallery. Another essential condition of a gift is that there be a donee. The evidence established that it was not the appellant who chose the charitable organization. He had never seen the letter which was prepared for his signature, the letter referred to in paragraphs 15 and 16 of these Reasons.

In a nutshell, it is my opinion that the appellant did not even complete the first stage, establishing that there was a gift. For the sake of the record, however, we should look at the tax legislation. The definition of total charitable gifts in s. 118.1(1) of the Act reads as follows:

“total charitable gifts’ — “total charitable gifts” of an individual for a taxation year means the total of all amounts each of which is the fair market value of a gift (other than a gift the fair market value of which is included in the total Crown gifts or the total cultural gifts of the individual for the year, or would have been so included for a preceding taxation year if this section had applied to that preceding year) made by the individual in the year or in any of the 5 immediately preceding taxation years (other than in a year for which a deduction under subsection 110(2) was claimed in computing the individual’s taxable income) to

(a) a registered charity,

to the extent that those amounts were

(h) not deducted in computing the individual’s taxable income for a taxation year ending before 1988, and

(1) not included in determining an amount that was deducted under this section in computing the individual’s tax payable under this Part for a preceding taxation year;

As may be seen from reading this definition, the fair market value of the property given is an essential element of the tax credit for a gift. In the instant case this value is quite uncertain, judging from the prices obtained at the auction.

Section 118.1(2) of the Act reads as follows:

(2) Proof of gift. A gift shall not be included in the total charitable gifts, total Crown gifts or total cultural gifts of an individual unless the making of the gift is proven by filing with the Minister a receipt therefor that contains prescribed information.

The receipt must contain the prescribed information. This information is set out in s. 3501(1) of the Income Tax Regulations (“the Regulations”). The Regulations read as follows:

3501. Contents of receipts — (1) Every official receipt issued by a registered organization shall contain a statement that it is an official receipt for income tax purposes and shall show clearly in such a manner that it cannot readily be altered,

(a) the name and address in Canada of the organization as recorded with the Minister;

(b) the registration number assigned by the Minister to the organization;

(c) the serial number of the receipt;

(d) the place or locality where the receipt was issued;

(e) where the donation is a cash donation, the day on which or the year during which the donation was received;

(e. 1) where the donation is a gift of property other than cash

(i) the day on which the donation was received,

(ii) a brief description of the property, and

(iii) the name and address of the appraiser of the property if an appraisal is done;

(f) the day on which the receipt was issued where that day differs from the day referred to in paragraph (e) or (e.1);

(g) the name and address of the donor including, in the case of an individual, his first name and initial;

(h) the amount that is

(i) the amount of a cash donation, or

(ii) where the donation is a gift of property other than cash, the amount that is the fair market value of the property at the time that the gift was made; and

(i) the signature, as provided in subsection (2) or (3), of a responsible individual who has been authorized by the organization to acknowledge donations.

The evidence was that the receipt filed did not meet the requirements of paras, (b), (e.1) and (h) of s. 3501(1) above.

In conclusion, the appellant did not acquire ownership of the pictures. He could not donate them. He therefore did not make a gift of $15,000. The proceeds of the sale of the four pictures at auction for $2,455 also cannot be regarded as a gift. This is true for the same reason as why the $15,000 which was supposedly their market value cannot be regarded as a gift. The appellant was not the owner of the pictures. As to the $5,000 payment, first, there was no evidence of such a payment, and second, it was not made to the charitable organization. The appellant did not make a gift of cash to a charitable organization.

As regards the imposition of the penalty, s. 163(2) of the Act reads as follows:

Every person who, knowingly, or under circumstances amounting to gross negligence in the carrying out of any duty or obligation imposed by or under this Act, has made or has participated in, assented to or acquiesced in the making of, a false statement or omission in a return, form, certificate, statement or answer (in this section referred to as a “return”) filed or made in respect of a taxation year as required by or under this Act or a regulation, is liable to a penalty of the greater of $100 and 50% of the total of

I do not doubt that the appellant is ordinarily an honest man. In the circumstances of the instant case, however I believe that he knowingly made a false statement in his returns or acted with gross negligence in respect of his obligation to report his income correctly. On this point, I refer to Judge Dussault’s remarks in Dutil v. The Queen, supra, at 14:

I cannot believe that a reasonable and even slightly well-informed person could accept such a proposal concocted by third parties, suggesting at the outset that the value and the amount of the receipt will be obviously falsified. I do not think a reasonably intelligent and prudent person could seriously claim to have made an honest gain through a charitable donation. While this may be a standard method of planning to some, it seems to me to be legally insupportable and completely unacceptable.

The taxpayer’s conduct overall, as disclosed by the evidence, leads me to conclude that there may well be serious questions as to his good faith and credibility throughout this matter. I feel that, if he did not knowingly take risks with full knowledge of the facts, he at least closed his eyes to circumstances which should both have alerted him and made him act with greater caution, to say the least. As I see it, the fact that the appellant conducted no more thorough examination before or after the transaction amounts in the circumstances to more than simple negligence. It constitutes gross negligence. I therefore consider that the penalty assessed was correct.

The appeal is accordingly dismissed.

Appeal dismissed.