Harry C Palnick, DR Hirsh Rosenfeld v. Minister of National Revenue, [1985] 1 CTC 2011, 85 DTC 109

Cardin, TCJ [TRANSLATION]:—The appeals of Dr Hirsh Rosenfeld and Mr Harry C Palnick were heard on common evidence in Montreal on June 8, 1984. For the 1976 taxation year, the Minister of National Revenue added $108,321.97 to the income reported by Dr Rosenfeld and $83,450 to the income of Mr Palnick as two-thirds and one-third respectively of the profit from the sale of a property located in Châteauguay, Quebec that belonged to the two appellants as co-proprietors.

Pursuant to subparagraph 20(l)(n)(ii) of the Income Tax Act, RSC 1952, c 148, reserves of $78,716, $62,973 and $15,743 were allowed to Dr Rosenfeld for 1976, 1977 and 1978 respectively; reserves of $47,628, $38,102 and $29,102 were allowed to Mr Harry Palnick for the same taxation years.

The appellants reported the profit from the sale of this property as a capital gain on their 1976 tax returns and set the value of the property on December 31, 1971 at $1,400 per arpent for the purposes of computing their taxable capital gain.

These figures are not in dispute and the only issue is whether the profit arising from the sale of the said profit is a capital or an income receipt.

Facts

Dr Rosenfeld came to Canada in 1924 from Lithuania where he was born in 1907. He studied at McGill and then began the study of medicine in Paris which he completed in Strasbourg in 1936. After writing the required examinations at Notre-Dame Hospital in 1937, he began to practise general medicine in the province of Quebec. He is still in practice at the age of seventy-seven. In 1947 he founded a private hospital in Montreal under the name of Doctors’ Hospital Incorporated, which like all private hospitals in Quebec was discontinued in 1973. In addition to his practice, Dr Rosenfeld runs a medical clinic in Outremont, Quebec.

There is no doubt that Dr Rosenfeld is entirely devoted to the practice of his profession and that he is a man of great personal merit. He had a brother named Julius who was in business in Montreal, Quebec and had a farm at Châteauguay, Quebec which Dr Rosenfeld liked to visit occasionally on Sundays. He also had a first cousin, Mr Jacob Philips, who had emigrated from Europe in 1940 and, with financial backing from Dr Rosenfeld, bought a farm, also in Châteauguay, not far from Julius Rosenfeld’s property.

On October 29, 1953, Dr Rosenfeld, his nephew Gdlayah Rosenfeld (Julius’ son) and Harry Palnick, also related to Dr Rosenfeld by marriage, purchased a property in Châteauguay as co-proprietors that was approximately twenty-five arpents in area, known as part of lot Pt 199, for $10,500, of which $2,000 was paid in cash.

On January 24, 1954, the co-proprietors of the parcel of lot Pt 199 sold the house and two arpents of land for $7,500 and on April 15, 1954 the balance of the purchase price for the property was paid in full.

On July 9, 1966, Dr Rosenfeld and Harry Palnick (who owned another property not far from Pt 199) purchased as co-proprietors a second parcel of Pt 199, also approximately twenty-five arpents in area and located behind the section purchased in 1953.

On July 17, 1976, Dr Rosenfeld purchased his nephew Gdalyah Rosenfeld’s one-third interest in the first parcel of Pt 199 for $1. This was in consideration of a $38,000 debt owing to Dr Rosenfeld.

On July 26, 1976, Dr Rosenfeld and Mr Palnick sold both parcels of Pt 199 to Michel Langelier Inc and Morin & Associates Inc for $6,000 per arpent, whence the $108,321.97 profit earned by Dr Rosenfeld and the $83,450 profit earned by Mr Palnick.

Obviously, the fact that Dr Rosenfeld was an excellent doctor did not prevent him from being a knowledgeable businessman. In addition to the business carried on by Dr Rosenfeld in relation to his medical practice (hospital and clinic) and his business dealings with his father-in-law, which are not at issue here, he also participated in several real estate ventures. In 1959, with his cousin, Jacob Philips, and Harry Palnick, Dr Rosenfeld incorporated Philips Farms Inc for the purpose of disposing of the many properties that Jacob Philips had acquired in 1940 and which also formed part of Pt 199. Dr Rosenfeld held 20 per cent of the shares of Philips Farms Inc, and Mr Palnick held 10 per cent. In 1954, Orchard Homes Ltd was created. Its purpose was to build and sell houses on the parcel of Pt 199 that belonged to Jacob Philips. Dr Rosenfeld, Harry Palnick and Jacob Philips each held 25 per cent of the shares of this company.

In 1950, Dr Rosenfeld was a minority shareholder in a company known as Canus Leasehold Corporation whose purpose was to speculate on undeveloped land in California.

In 1961 Dr Rosenfeld held 50 per cent of the shares of Rivershire Investment Company together with a Mr Moses Borenstein who also held shares in Canus Leasehold Corporation. In 1968 Dr Rosenfeld held 100 per cent of the Rivershire shares. Dr Rosenfeld testified that the Rivershire shares came into his possession as a result of a giving in payment and also that his holdings in most of these corporations derived from loans that he had given to relatives and busi- nessmen who had not repaid him, some of which had resulted in financial loss to him.

However, Rivershire Investment, wholly owned by Dr Rosenfeld in 1973, 1974 and 1975, held undeveloped lands in Dollard-des-Ormeaux which were subsequently sold for $192,000.

Dr Rosenfeld (Harry Palnick was unable to testify) testified that when he bought the first parcel of Pt 199 he intended to retire there. It was alleged that the second parcel of Pt 199 had been purchased with Harry Palnick so that the latter could use this land, if necessary, in connection with his own land which he was working, not far from Pt 199.

The purchasers’ statements concerning their intentions at the time the two properties in question were acquired must be considered in the light of all the facts and circumstances. Dr Rosenfeld himself acknowledged that he was financially well off in 1953 and had no need of Harry Palnick or Gdalyah Rosenfeld to purchase a property that was supposedly intended for his own retirement. The three co-proprietors’ 1953 investment in the purchase of the first parcel of Pt 199 was minimal, namely $10,500, of which $2,000 was in cash, representing an investment of $670 per person. Several months later, the house on parcel Pt 199 and the two arpents of land were sold, and the balance of the purchase price was paid shortly thereafter.

In July 1966 Dr Rosenfeld and Harry Palnick purchased the second parcel of Pt 199 for $16,500. Accordingly, in 1966 the appellants had two properties back- to-back, each approximately 700,000 sq feet in area and both fronting on the road. The evidence shows that Châteauguay had a shopping centre located one kilometre from the properties in question.

In short, the appellants were involved in numerous transactions for the purchase and sale of properties and held two large properties which had not been divided or subdivided, nor improved or developed in any way and which had not been the object of any planning. Other than some insignificant revenue occasionally generated by the operation of Harry Palnick’s farm, no reasonable income was realized on this property and nothing was done to make it pay in the years when the appellants held the properties. However, the appellant co-proprietors regularly paid the property taxes, as appears in Exhibit 1-1.

If Dr Rosenfeld had really had the intention he said he had at the time the first parcel of Pt 199 was purchased, in the normal course of events he would have planned to develop the land for his retirement, especially given the fact that another parcel of Pt 199 belonging to his brother (the one whom Dr Rosenfeld enjoyed visiting so much) had had to be sold to a third party. Similarly, if Harry Palnick purchased the second parcel of Pt 199 with Dr Rosenfeld in order to expand his farming operation, why did he not think to make it cultivable between 1966 and 1976?

The two appellants’ behaviour with regard to the said property is in no way consistent with the intention they claim to have had at the time they purchased the property. In my opinion, the evidence is clear that from 1953 on the appellants foresaw that these lands would be included in the development then taking place in Châteauguay. The evidence has led me to the conviction that the appellants’ only intention when they purchased these two parts of Pt 199 was to invest a minimum amount of capital therein and to keep the property undeveloped for as long as it took to realize a significant profit on its sale.

In my opinion, the appellants never intended to use this property as a retirement home or an extension of another working farm, and their principal purpose in buying it was to sell it at a profit when the time was right.

In these circumstances, the fact that the appellants received offers to purchase the farms and turned them down is no sign that the appellants intended to develop them for their own purposes. The appellants knew that one day the property would attract a far higher price than what they had been offered. Likewise, the fact that they held the first parcel of Pt 199 for twenty-three years and the second parcel for ten years in no way alters the appellants’ original intention in purchasing these properties. The appellants were patient and could afford to wait until the development boom in Châteauguay came closer to their property so that they could resell it at a time when it would bring in the maximum profit.

The appellants have not demonstrated that the purchase and sale of the two parcels of Pt 199 were transactions of a capital nature. I find therefore that the profit realized by each appellant from the 1976 sale of the Châteauguay property of which they were co-proprietors was income from business. The Minister did not err in adding $108,321.97 and $83,450 respectively to the incomes of Dr Rosenfeld and Harry Palnick in the 1976 taxation year.

The appeals are dismissed.

Appeals dismissed.