William Madronich, John S Madronich, Edward R Madronich v. Minister of National Revenue, [1982] CTC 2031, 82 DTC 1053

The Chairman:—The appeals of William Madronich, John S Madronich and Edward R Madronich were, by consent, heard on common evidence.

The issue in these appeals is whether the share of the profit realized by each of the appellants in 1973, from the disposition of a parcel of farmland composed of lot 16, concession 2 in the Township of Saltfleet, Ontario (the “property”) in the 1973 taxation year, was a capital gain or income from a business.

At the outset of the hearing, counsel advised that if the Board found the transaction to be in the nature of capital, the parties had agreed that the value of the property on Valuation Day, December 3, 1971, was for the computation of capital gain, $178,375.

Summary of Facts

The appellants are brothers of Yugoslav descent, raised by their parents since 1947 on a fruit farm in Beamsville, Ontario, some 22 miles from Hamilton. In the pertinent period, William Madronich, a dentist, John Madronich Jr, an ophthalmologist and Edward R Madronich, a solicitor, all lived in Hamilton, Ontario.

The appellants’ mother had a long history of mental illness which, according to the testimony of Dr Emil Zamora, a psychiatrist who treated her, reached a critical stage requiring hospitalization for acute paranoid psychosis in February 1967. She was discharged from the hospital in April 1967.

Owing to their mother’s physical as well as mental condition and the fact that the relationship between the appellants’ father and mother was bad, Dr Zamora suggested to William and John Madronich that their parents should move closer to their sons who resided in Hamilton.

Sufficient evidence was adduced from the appellants and the appellants’ father for me to accept that the Madronichs were a closely knit family who met for Sunday dinner regularly and that the sons visited the parents once or twice a week. I also accept that the mother’s condition has caused the sons considerable worry and problems for some years.

Edward Madronich, who married in 1964, was the last of the sons to leave the parental home which, it was stated, triggered a gradual worsening of the mother’s condition which eventually led to her hospitalization in February of 1967.

In 1964, five months after his marriage, Edward had purchased a house or a farm on Greysite Road but it is alleged that serious septic tank problems made it necessary for him to move.

On April 10, 1965 Edward made an offer to purchase the property from the owner, Mr Neilson, for $30,500 so as to build a home on the property and to farm the 16-acre fruit farm (Exhibit A-2). Mr Neilson however wanted to keep the residence and 3 acres of land which required severance approval from the Committee of Adjustment of Saltfleet Township before the purchase could be finalized. Severance approval was delayed and obtained only in November 1966 and the closing date of the purchase was February 1967.

In the meantime Edward had purchased a vacant 80' *X 160' lot in a prestigious residential section on Mountain Brow Blvd in May of 1966 and commenced the construction of his home which was completed in that year.

Having discussed with his brothers and father the state of the mother’s health, it was suggested that the parents should move to the property, 10 miles from Hamilton, where they would be closer to the sons and on which the father could continue his fruit farming operations. In order that the sons might share equally in their responsibilities to their parents, Edward drafted a deed dated September 14, 1967 whereby each of the three brothers would acquire a / interest in the property, each paying an amount of $4,000 and assuming / of the carrying costs on the property (Exhibit A-1).

Although the father in his testimony stated that he was willing to move from his farm in Beamsville to the Saltfleet farm, there is some contradiction in the evidence as to whether the mother was willing to leave Beamsville. Two of the sons were quite categorical that the mother would not move to the property whereas one son felt that she was willing to go.

The parents in fact did not move to the property but the father, for two or three years, farmed with the help of a nephew the Saltfleet farm (the “property”) as well as his Beamsville farm. Because of his age, the father ceased farming the property and the land was rented to a neighbour, Mr Bobar, who also ceased farming the land in 1972.

In 1973, as a result of an offer to purchase in the amount of $340,000, the appellants sold the property and the nature of the profit realized on the sale by each of the appellants is the issue.

Counsel for the respondent does not dispute that the appellants’ intention at the time of acquiring a [1] / interest in the property on September 14, 1967 was to have the appellants’ parents follow Dr Zamora’s advice and move to the Saltfleet farm so that they might be closer to their sons. It is counsel’s submission that in the circumstances where Edward Madronich, whose legal work was principally in real estate conveyances and where, with his two brothers, several real estate transactions had been entered into under a corporate entity, it is unconceivable that no thought would have been given by any of the appellants to an alternative use of the land in the event that the parents did not move to the Saltfleet property.

The possible existence of a secondary intention at the time of acquisition of the property by the three appellants in September of 1967 becomes the issue. The respondent pointed out that Edward’s intention, at the time of signing the agreement of purchase and sale on April 10, 1965, was to build a home on the property. Because severance approval was not obtained until November of 1966 and Edward had by then purchased another property for residential purposes, he did not carry out his original intention.

Although he was no longer under any legal obligation to do so, he nevertheless closed the transaction on the Saltfleet property in February of 1967, which was at about the period his mother was admitted in hospital. The respondent noted that the purchase price of the property was $30,000 with a vendor take back of $24,000, leaving $6,000 as having been paid by Edward (Exhibit A-2).

In the affidavit under the Land Transfer Tax attached to the deed dated September 14, 1967, by which each of the appellants acquired an undivided family group, for the specific purpose of helping their parents who then were under unusual hardship. The appellants’ father, who actually farmed the Saltfleet property for a time, confirmed this under oath. The parents however decided to remain on the Beamsville farm and after holding the Saltfleet property for seven years, the appellants sold it.

There is nothing in the evidence which supports the proposition that the resale of the property in 1973 was a motivating factor in the minds of the appellants at the time the property was acquired in 1967. To arrive at that conclusion, it would be necessary to ignore completely the uncontradicted evidence of the father and the appellants, all of whom were credible witnesses, and base the decision on the fact that the appellants had experience in real estate and could have known that the value of the property was increasing. In my opinion, before it can be held that a secondary intention existed, it is necessary that the resale of the property be much more clearly seen to have been a motivating factor in the purchase of the property. The evidence in these appeals does not warrant coming to such a conclusion.

The appeals are allowed and the matter referred back to the Minister for reassessment on the basis that the profit realized by each of the appellants from the disposition of the subject property was capital in nature and that the parties have agreed that for the calculation of the capital gains, the value of the property on Valuation Day was $178,375.

Appeals allowed.