Published: August 31, 2026
Last Updated: August 31, 2026
Contents
Overview – When Fraudulent Investment Returns Become a Canadian Tax Problem
The Tax Framework: Income From a Source, Interest, or Return of Capital?
The CRA’s Position, Investment Losses, and the Tax Timing Problem
Practical Implications for Victims of Ponzi and Fraudulent Investment Schemes
Strategic Takeaways: A Framework for Determining Whether the Receipts Are Taxable
Pro Tax Tips: Build the Evidence Before Challenging the CRA
FAQ: Canadian Tax Treatment of Fraudulent Investment Schemes
Overview – When Fraudulent Investment Returns Become a Canadian Tax Problem
Fraudulent investment schemes often promise unusually high returns with little apparent risk. For a period of time, the promoter may make regular payments to investors and describe those payments as interest, profits, commissions, or investment returns. The appearance of profitability encourages existing investors to contribute more capital and attracts new investors. When the scheme eventually collapses, investors may discover that no genuine investment activity occurred and that the “returns” they received were funded with their own capital or money contributed by other victims.
The collapse of the investment does not necessarily resolve the investor’s Canadian income-tax position. A taxpayer may have reported and paid tax on purported investment income years before discovering the fraud. The CRA may also conduct a tax audit and issue a tax reassessment treating payments from the scheme as taxable income. At the same time, the taxpayer may have lost most or all of the original investment and may face significant limitations on when and how that loss can be deducted.
Canadian tax law does not provide a simple rule that every payment from a Ponzi scheme is taxable, nor does the fraudulent nature of the arrangement automatically convert every payment into a non-taxable repayment of capital. The central question is whether the taxpayer actually had a legally recognized source of income and, if so, what the taxpayer received from that source.
The Federal Court of Appeal decisions in Hammill v Canada, 2005 FCA 252, and Canada v Johnson, 2012 FCA 253, establish important but distinguishable principles. The Tax Court decisions in Roszko v The Queen, 2014 TCC 59, and Mazo v The Queen, 2016 TCC 232, demonstrate how those principles apply where the fraudster either failed to perform the essential contractual bargain or, conversely, actually delivered the compensation the taxpayer had agreed to receive.
The result can turn on details that initially appear secondary: what the investment agreement actually required, whether the promoter was contractually required to undertake a particular investment strategy, whether that activity ever occurred, whether the taxpayer had an enforceable right to the payments, whether the taxpayer actually received or controlled the purported earnings, and whether total receipts exceeded the taxpayer’s invested capital.
“Fraud is the factual background, but it is not itself the tax characterization. The critical tax question is whether the investor had an income-producing legal right that actually generated a return, or whether the promoter simply recycled invested capital and called it income.” David J. Rotfleisch, Certified Specialist in Taxation Law (Law Society of Ontario).
For taxpayers, accountants, and Canadian tax lawyers dealing with fraudulent investment schemes, the distinction between taxable income and return of capital can therefore become the central issue in a CRA tax audit, Notice of Objection, or Tax Court appeal.
The Tax Framework: Income From a Source, Interest, or Return of Capital?
The statutory analysis can be organized around three distinct stages. First, the taxpayer must identify a legally recognized source of income. Paragraph 3(a) of the Income Tax Act requires the inclusion of income from sources inside or outside Canada, including business and property, while subsection 9(1) provides that income from a business or property is the taxpayer’s profit from that source. These provisions frame the threshold question in fraudulent-investment cases: whether the taxpayer had a genuine income-producing business or property source in the first place.
Second, if a source exists, the particular receipts and related expenses must be characterized. Paragraph 12(1)(c) specifically includes amounts received or receivable as interest, making it relevant where a promoter describes a payment as an investment or interest return. The label alone, however, does not determine whether the amount is legally interest or instead represents a repayment of capital. On the deduction side, paragraph 18(1)(a) generally denies an expense unless it was incurred for the purpose of gaining or producing income from a business or property. That limitation was central to the analysis in Hammill, where the alleged business itself was fraudulent from beginning to end.
Third, any later unrecovered investment must be analyzed separately from the earlier receipts. Paragraph 20(1)(p) may apply to certain debts that become bad after having previously been included in income; subsection 50(1) may deem a qualifying bad debt or share to have been disposed of for nil proceeds where its statutory conditions and election requirement are satisfied; and paragraph 39(1)(c) determines whether a qualifying capital loss from specified shares or debts constitutes a business investment loss. These provisions address the later loss, not the initial question of whether an earlier payment was taxable income or a return of capital.
This distinction is especially important in fraudulent-investment cases. A payment of money is not necessarily income merely because someone labels it a “return.” Repayment of money previously advanced by the taxpayer ordinarily restores the taxpayer’s capital rather than creating profit. By contrast, interest or another genuine return generated from an investment may constitute income from property.
Where an amount is truly interest, paragraph 12(1)(c) specifically requires the inclusion of amounts received or receivable as, on account of, in lieu of, or in satisfaction of interest, subject to the other rules in the Act. The characterization of a payment as “interest,” however, remains a legal question. A fraudulent promoter cannot necessarily create taxable interest merely by printing that description on a cheque, statement, or T5 slip.
That point was central in Roszko v The Queen, 2014 TCC 59. The Tax Court considered whether payments described as interest actually represented compensation for TransCap’s use of Mr. Roszko’s money. Because the money had not been used as the parties’ contract required and the purported investment activity never occurred, the Court concluded that the payments were not interest but repayments of capital.
The opposite problem arose in Canada v Johnson, 2012 FCA 253. The taxpayer’s contractual rights themselves constituted property. She agreed to give money to the promoter and receive specified payments exceeding the amounts invested. Crucially, the agreement did not require the promoter to generate that return through any particular investment activity. Because she received what she had contracted to receive, the Federal Court of Appeal found income from property even though the promoter secretly funded her returns with money obtained through a Ponzi scheme.
Illegality therefore does not by itself answer the source question. An unlawful activity can produce taxable income. What matters in an innocent investor’s case is the relationship between the taxpayer, the alleged source, and the receipt.
The evidence must also distinguish between money actually paid, amounts that the taxpayer could freely withdraw or control, enforceable amounts receivable, and purely fictitious profits appearing on fraudulent statements. Those categories may have different tax consequences. Mazo v The Queen, 2016 TCC 232, for example, accepted revenue recognition when funds were credited to the taxpayer’s BIMIC account because the evidence showed that she regarded the funds as hers and could withdraw, transfer, lend, or reinvest them. The Court expressly cautioned, however, that different evidence concerning another participant’s ability to access an account could produce a different result.
When Does a Fraudulent Arrangement Still Produce Income? Reconciling Hammill, Johnson, Roszko and Mazo
The four principal cases below are most useful when treated as points on a spectrum rather than as a chronological progression.
At one end is Hammill v Canada, 2005 FCA 252. Mr. Hammill purchased precious gems and later paid approximately $1.65 million in purported performance bonds, insurance, shipping charges, commissions, and other expenses in an effort to arrange supposed sales at substantial profits. The evidence ultimately established that the operation was fraudulent from beginning to end. The CRA allowed a loss relating to his stolen gem inventory but refused the purported selling-expense deductions.
The Federal Court of Appeal upheld that result. The important principle was that a fraudulent scheme from beginning to end cannot give rise to an income source from the victim’s perspective. There was no genuine underlying business to which the purported selling expenses could relate. Hammill technically concerned deductible expenses under paragraph 18(1)(a), rather than the taxation of receipts, but its “no source” reasoning has become important in later fraudulent-investment cases.
Canada v Johnson, 2012 FCA 253 demonstrates why Hammill cannot be converted into a broad proposition that a victim of fraud can never earn taxable income.
Donna Johnson repeatedly gave money to Andrew Lech and simultaneously received postdated cheques providing for repayment plus a return. She believed that Lech was using the money in option trading through a family trust. In fact, he was operating a Ponzi scheme. Nevertheless, in 2002 and 2003 Johnson received net amounts exceeding her investments by approximately $614,000 and $702,000 respectively.
The Tax Court initially concluded that the Ponzi scheme could not constitute a source of income. The Federal Court of Appeal reversed that conclusion. It focused on the actual agreement. Johnson had agreed to provide money in exchange for repayment with a return on specified dates. There was insufficient evidence that Lech was contractually required to generate the money by option trading or by any other particular method.
Johnson therefore possessed contractual rights, a form of property, and those contractual rights were honoured. She received the return for which she had bargained. The fact that Lech secretly obtained the money from other victims did not change the tax character of Johnson’s own contractual receipts. The FCA also emphasized that income tax operates on an annual basis. The inevitable collapse of a Ponzi scheme does not prevent particular participants from realizing taxable income during particular years.
Nevertheless, the result in Roszko v The Queen, 2014 TCC 59 was different because the contractual bargain was materially different. In that case, Mr. Roszko advanced $800,000 to TransCap through documented loan arrangements. Unlike the comparatively simple agreement in Johnson, the TransCap documentation stipulated how the loaned money was to be used, including specified “Qualified Transactions” and escrow arrangements. Mr. Roszko received $156,000 in 2008 and initially reported the amount as interest. It was later established that TransCap was operating a Ponzi scheme and was making investor payments from subscription money rather than from the promised investment activity.
The Tax Court treated the contractual distinction as critical. Mr. Roszko did not merely bargain for repayment plus a return regardless of how TransCap generated it. His agreement required his money to be used in a particular manner. TransCap did not perform that obligation. The Court consequently held that the $156,000 could not properly be regarded as compensation for TransCap’s use of his money and was not interest. Because Mr. Roszko had invested $800,000 and had not recovered that amount, the $156,000 was treated as a return of capital.
Roszko should therefore be understood as a fact-specific application of, rather than an exception to, Johnson. Johnson is a Federal Court of Appeal decision and is binding authority on the Tax Court, whereas Roszko is a Tax Court decision that distinguished Johnson on materially different contractual facts. In Johnson, the taxpayer received the return she bargained for under the contract. In Roszko, by contrast, the promised income-producing activity formed part of the contractual arrangement and was never carried out. Roszko should therefore not be read as establishing a general rule that payments from Ponzi schemes are non-taxable; its significance lies in showing that the tax result can differ where the underlying contractual obligations themselves were not performed.
Mazo v The Queen, 2016 TCC 232 adds another dimension. BIMIC operated an illegal pyramid scheme in which participants paid to enter a pyramid and attempted to move upward by recruiting new participants. Ms. Mazo successfully recruited participants and received payments. The Court applied Johnson and concluded that she had received what she bargained for: she believed she was participating in a sales organization that compensated her for recruiting new salespeople, she performed that activity, and she received compensation for it. Her net receipts were therefore business income.
Mazo is materially different from the passive-investor cases because Ms. Mazo was an active participant in an illegal pyramid-type arrangement. She recruited new participants, participated in the operation of the scheme, and received payments connected to those activities. The Tax Court therefore characterized her net receipts as business income. Mazo should not be read as suggesting that every victim of a fraudulent investment scheme is carrying on a business. Its practical significance is narrower: it demonstrates that the tax characterization may shift from property income to business income where the taxpayer is actively engaged in income-earning activities, rather than merely investing capital and receiving purported returns.
Taken together, these cases suggest a practical analytical framework, but not a mechanical two-condition test. The questions include what the taxpayer legally agreed to, whether the promised investment activity formed part of that bargain, whether those obligations were performed, whether the taxpayer acquired an enforceable right capable of producing income, whether the taxpayer actually received or controlled the purported return, and how the receipts compare with the taxpayer’s invested capital.
The amount received compared with original capital is particularly important in Roszko, but it should not be treated as a standalone “net investment” rule. Receiving less than one’s capital strengthens a return-of-capital characterization where the alleged income-producing contract was itself not performed. It does not by itself establish that every first dollar returned from every fraudulent scheme must be treated as capital.
The CRA’s Position, Investment Losses, and the Tax Timing Problem
The CRA generally takes a broad approach to payments from fraudulent investment schemes. Income Tax Folio S3-F9-C1 states at paragraph 1.42 that amounts paid to taxpayers as a return on their investment should be included in income and cites Johnson in support of that position. The CRA also does not consider the later discovery of the fraud, or the fact that a payment was funded with money contributed by other investors rather than genuine investment profits, sufficient on its own to reverse the earlier income treatment.
However, the CRA’s administrative guidance does not override the judicial decisions we mentioned earlier. When the CRA treats payments from a fraudulent scheme as income, taxpayers and their advisers should first determine whether the facts more closely resemble Johnson, in which the taxpayer received the contractual return she had bargained for, or Roszko, in which the supposed income-producing arrangement itself was not carried out.
If an amount was properly included in income, a separate issue arises when the taxpayer later cannot collect amounts owing. Paragraph 20(1)(p) is not a general deduction for Ponzi-scheme losses or unrecovered investment principal. In this context, it generally requires a debt owing to the taxpayer that became bad in the year and that had previously been included in the taxpayer’s income. CRA’s Folio, at paragraph 1.43, applies this rule to purported investment earnings previously reported as income but never actually received or withdrawn. Amounts actually received, and the taxpayer’s unrecovered original principal, require separate treatment.
Where the unrecovered principal represents an actual debt, subsection 50(1) may allow the taxpayer to recognize a capital loss. The taxpayer generally must establish that the debt was owing at year-end, became bad in that taxation year, and make the required election in the return. Fraud alone does not create a bad debt: the taxpayer must first establish an actual debt or other qualifying property within subsection 50(1).
A capital loss under subsection 50(1) is also not automatically an allowable business investment loss, or ABIL. Paragraph 39(1)(c) requires a qualifying capital loss involving specified property, such as certain shares of a small business corporation or qualifying debt of a Canadian-controlled private corporation that satisfies the statutory conditions. CRA’s Income Tax Folio S4-F8-C1 likewise confirms that there must first be a valid capital loss before a business investment loss can arise. Fraud, by itself, does not create an ABIL.
These distinctions also create a timing problem. Investment returns may be taxable as ordinary income in an earlier year, while the loss of the remaining principal may not become recognizable until a later year and may be capital in nature. A taxpayer can therefore suffer an overall economic loss while still owing tax and arrears interest on income recognized in earlier years.
“The most damaging tax feature of a fraudulent investment is often the timing mismatch. CRA may tax a purported return in an early year, while the taxpayer may not be able to establish the loss until years later, and that later loss may not have the same tax character as the earlier income.” David J. Rotfleisch, Certified Specialist in Taxation Law (Law Society of Ontario).
Later recoveries add one final layer to the analysis. If a receiver, trustee, or other recovery process eventually returns money to the taxpayer, the tax consequences may depend on how the earlier loss was treated. For example, CRA’s Folio provides that the recovery of a previously deducted bad debt may result in an income inclusion, while the recovery of property for which a capital loss was previously claimed may have different consequences.
The tax treatment of a fraudulent investment therefore cannot be determined simply by comparing total lifetime contributions with total withdrawals. The taxpayer must separately determine whether each receipt was income or capital, how any subsequent loss should be characterized, when that loss became recognizable for tax purposes, and how any later recovery should be treated.
Practical Implications for Victims of Ponzi and Fraudulent Investment Schemes
For victims of a Ponzi or other fraudulent investment scheme, the ultimate economic loss does not determine the tax result. Canadian tax law examines the legal character of the relevant source and each receipt. The following examples are simplified illustrations only. The actual tax treatment will depend on the governing contract, the taxpayer’s payment history, whether amounts were actually received or under the taxpayer’s control, and the broader source-of-income analysis.
Consider Investor A, who contributes $500,000 under an agreement requiring the promoter to repay the principal together with a fixed return of $75,000. The agreement does not require the promoter to use any particular investment strategy to generate that return. Investor A receives the promised $75,000. Although the promoter later turns out to have funded the payment with money from other investors, these facts resemble Johnson. The investor acquired a contractual right to repayment plus a return and received the return contemplated by that agreement. Subject to the complete factual record, the $75,000 may therefore constitute taxable income notwithstanding the underlying fraud.
Investor B also contributes $500,000, but the agreement expressly requires the money to be used in specified investments from which the promised return is to arise. The promoter never undertakes the required activity and instead returns only $100,000 of Investor B’s original funds while describing the payment as “interest.” Those facts are closer to Roszko. Because the agreed income-producing activity never occurred and Investor B remained substantially out of pocket, there may be a stronger basis for characterizing the $100,000 as a return of capital rather than taxable interest.
The fact that Investor B received less than the original $500,000 is relevant, but it is not independently determinative. Roszko should not be read as establishing a rule that every payment received before an investor recovers the full amount invested is automatically a return of capital. The characterization still depends on the legal source of the payment, the terms of the agreement, whether the contractual obligations were performed, and what the taxpayer actually received or controlled.
These simplified examples therefore illustrate why taxpayers should not begin with labels such as “Ponzi payment,” “interest,” or even “investment loss.” Nor should they begin and end with a calculation of whether total withdrawals were less than total contributions. The analysis must first identify the alleged source of income and the contractual bargain, and then determine the legal and economic character of each receipt.
The later investment loss must be analyzed separately. Even where an earlier receipt was properly taxable, the subsequent collapse of the investment does not automatically reverse that income inclusion. The taxpayer must separately determine whether the unrecovered amount qualifies as a bad debt, capital loss, business investment loss, or another recognized loss, and in which taxation year that loss may be claimed. The practical consequence is that contractual characterization, payment history, and timing can materially affect the taxpayer’s ultimate tax exposure.
Strategic Takeaways: A Framework for Determining Whether the Receipts Are Taxable
A fraudulent-investment tax file should be analyzed through three separate questions. Keeping those questions distinct is important because a taxpayer may have a legally recognized source of income without every payment being taxable income, and an eventual investment loss does not automatically change the characterization of amounts received in earlier taxation years.
First, determine whether there is a legally recognized source of income. The starting point is to identify the alleged business or property source from which CRA says the taxpayer earned income. Hammill demonstrates that a fraudulent arrangement that was a fraud from beginning to end may fail to constitute an income source from the victim’s perspective. By contrast, Johnson confirms that a fraudulent scheme can nevertheless involve a recognized property source where the taxpayer possesses enforceable contractual rights capable of producing a return.
Second, determine the character of each receipt. If a source exists, the next question is whether a particular amount constitutes interest, other property income, business income, or a return of capital. This requires examining the contractual bargain, whether the relevant obligations were actually performed, how and when the taxpayer received or controlled the funds, and what the payment legally represented. Johnson, as a Federal Court of Appeal decision, remains the leading authority where the taxpayer received the contractual return that was bargained for.
Roszko, a Tax Court decision, distinguished Johnson on materially different contractual facts and should not be read as establishing a general rule that payments from Ponzi schemes are non-taxable. Mazo further illustrates that active income-earning participation, such as recruiting other participants, may support business-income treatment rather than the property-income analysis applicable to a passive investor.
Third, analyze any unrecovered investment separately. Only after determining the source and character of the earlier receipts should the taxpayer consider whether the later loss gives rise to a bad debt, capital loss, business investment loss, business loss, or another deductible loss. The applicable provision, character of the loss, and taxation year in which it may be recognized must be determined independently. An overall economic loss therefore does not, by itself, convert earlier taxable income into a return of capital.
This framework should also guide the taxpayer’s procedural response to CRA. During a CRA tax audit, a taxpayer who receives a proposal letter should respond to CRA’s proposed characterization payment by payment, identify the alleged source of income, distinguish amounts actually received from amounts merely credited, and preserve alternative positions concerning any later investment loss.
If CRA has already issued a tax reassessment, the taxpayer should protect the applicable deadline for filing a Notice of Objection rather than assume that continuing discussions with CRA will preserve objection rights. If the objection is unsuccessful, the dispute may ultimately proceed through the CRA tax appeal process to the Tax Court of Canada.
Pro Tax Tips: Build the Evidence Before Challenging the CRA
A taxpayer who discovers that an investment was fraudulent should preserve the evidence before attempting to characterize the tax consequences. Important records include investment contracts, promissory notes, offering materials, bank transfers, cancelled cheques, T5 slips, account statements, emails and text messages with the promoter, receiver or trustee documents, securities-commission materials, police reports, and any restitution or recovery records.
The taxpayer should also prepare a transaction-by-transaction schedule separating capital contributed, amounts actually received, amounts merely credited to an account, reinvested amounts, and later recoveries. The documentary record may be critical in determining whether the facts more closely resemble Johnson or Roszko.
If a CRA tax auditor proposes to treat the receipts as investment income, the taxpayer should challenge the characterization payment by payment, rather than treating the investment as one aggregate transaction. The response should identify the business or property source alleged by CRA, distinguish cash actually received from amounts merely credited or inaccessible, and explain the contractual basis for treating each disputed amount as income or capital.
If CRA issues a tax reassessment, the taxpayer should protect the applicable Notice of Objection deadline even if discussions with CRA continue. CRA confirms that objection periods vary by taxpayer type; corporations generally have 90 days, while individuals generally receive the later of 90 days from the notice or one year after the filing deadline.
The Voluntary Disclosures Program may also apply when the taxpayer discovers that earlier investment income or other tax information was incorrectly or incompletely reported before the CRA begins a tax audit or investigation concerning that information. Under the rules effective October 1, 2025, some disclosures prompted by CRA communications may still qualify for relief, but an application must generally precede an audit or investigation relating to the disclosed issue. The VDP is therefore a compliance-correction mechanism, not a substitute for objecting to an existing CRA tax reassessment.
“A taxpayer should not approach a Ponzi-scheme tax audit with a spreadsheet alone. The contract, the promised use of funds, the actual flow of money, and the legal basis for each payment are often what determines whether Johnson or Roszko is the closer case.” David J. Rotfleisch, Certified Specialist in Taxation Law (Law Society of Ontario).
Older taxation years require a separate limitation-period analysis. Under subsection 152(3.1), the normal reassessment period is generally three years for most taxpayers, including individuals and Canadian-controlled private corporations, and four years for corporations other than CCPCs and for mutual fund trusts. If CRA reassesses beyond that period, taxpayers should determine whether CRA is relying on paragraph 152(4)(a), including an alleged misrepresentation attributable to neglect, carelessness or wilful default, fraud, or a valid waiver. Whether CRA is legally entitled to reopen an older year is distinct from whether the disputed Ponzi-scheme receipts were income or capital.
An experienced tax litigation lawyer for CRA disputes should preserve alternative positions concerning characterization, bad debts, investment losses, penalties, arrears interest, and limitation periods rather than allowing the dispute to turn solely on the description attached to a payment.
FAQ: Canadian Tax Treatment of Fraudulent Investment Schemes
Are payments I received from a Ponzi scheme automatically taxable in Canada?
No automatic rule applies merely because the payment came from a Ponzi scheme. Johnson establishes that a fraudulent scheme can produce taxable income for a participant whose contractual rights were honoured. Roszko demonstrates that, on materially different contractual facts, payments may instead represent repayments of capital.
If I received less money than I originally invested, can the payments be treated as a return of capital?
Possibly. That was the result in Roszko, where the taxpayer had invested $800,000, received only part of the investment back, and the promised income-producing activity required by the agreement never occurred. Receiving less than invested capital is important evidence, but it is not an automatic tax rule applicable to every fraudulent scheme.
Does it matter that the fraudster called the payments “interest” or “investment returns”?
The label is relevant evidence but not conclusive. Paragraph 12(1)(c) taxes genuine interest. The court can examine whether a purported interest payment actually represents compensation for the use of money or simply repayment of invested capital.
What if I received a T5 slip for income that I believe was actually repayment of my own capital?
A T5 slip does not conclusively determine the tax characterization. The investment agreement, payment history, actual use of the funds, and relevant case law should be reviewed to determine whether the payment was income or a return of capital. The taxpayer may also need a procedural strategy: a return-adjustment request may be appropriate in some circumstances, while an existing CRA tax reassessment may require a Notice of Objection or Tax Court appeal. Taxpayer relief may separately be available for qualifying penalties or interest.
What does it mean for my contractual rights to have been “respected” under Johnson?
In Johnson, the taxpayer bargained to give the promoter money and receive repayment plus a specified return. The agreement did not require the promoter to generate that return through a particular investment method. Because she received the promised payments, the FCA held that she received what she bargained for.
What if the fraudster never made the investments promised in my agreement?
The wording of the agreement becomes critical. If undertaking the promised investment activity was itself a contractual obligation, Roszko may support the argument that the arrangement did not generate the purported income. If the investment method was merely a representation and the contract simply promised repayment plus a return, Johnson may still apply.
Are fictitious profits shown on an investment statement taxable even if I never withdrew them?
Not necessarily. Whether an amount was received, receivable, or sufficiently under the taxpayer’s control depends on the circumstances. Mazo treated accessible account credits as revenue on its evidence, while CRA’s Folio contemplates a paragraph 20(1)(p) bad-debt deduction for certain purported earnings previously included in income but never actually received or withdrawn.
Can I amend earlier tax returns after discovering that my investment was a Ponzi scheme?
Possibly, but discovering the fraud does not automatically permit previously received and properly taxable income to be removed. CRA Technical Interpretation 2018-0761111E5 takes that position expressly. Whether an adjustment is appropriate depends first on whether the original payment was correctly characterized as income.
Can I claim a tax loss for the money I ultimately lost in the fraudulent investment?
Potentially. CRA recognizes that fraudulent investments can produce business or capital losses, depending on the facts. A debt that becomes bad may also engage subsection 50(1). The existence, character, timing, and amount of the loss must each be established separately from the tax treatment of earlier receipts.
Will my loss be a business loss, capital loss, or business investment loss?
The answer depends on the legal nature of the investment and the circumstances giving rise to the loss. A loss connected to an actual business may receive business-loss treatment, while an investment held on capital account will generally engage the capital-loss rules. A business investment loss is narrower: paragraph 39(1)(c) generally requires a qualifying capital loss involving shares of, or debt owing by, a small business corporation and satisfaction of the statutory conditions. Fraud alone does not create an allowable business investment loss.
What should I do if CRA conducts a tax audit or issues a tax reassessment for Ponzi-scheme investment income?
Preserve all documents, reconstruct the complete payment history, identify the alleged source of income, and compare the contractual facts with Johnson, Roszko, Hammill, and Mazo. If CRA has issued a tax reassessment, obtain advice from an experienced Canadian tax lawyer quickly so that the applicable Notice of Objection deadline is protected.
DISCLAIMER: This article provides broad information. It is only accurate as of the posting date. It has not been updated and may be out-of-date. It does not give legal advice and should not be relied on as tax advice. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
About the Author
