The tax treatment of amounts paid out of failed
Ponzi schemes is once again in the news. In Roszko v. The Queen (2014 TCC 59), the
Tax Court of Canada allowed the taxpayer's appeal and held that
amounts paid out of a fraudulent scheme were not taxable as
Roszko follows two recent decision on this issue. In Johnson v. The Queen (2012 FCA 253), the
Federal Court of Appeal held that amounts paid out of a Ponzi
scheme in excess of the duped taxpayer's original investment
were taxable as income. And in Orman v. Marnat (2012 ONSC 549), the Ontario
Superior Court of Justice held that amounts received out of a Ponzi
scheme were not investment income (see also
this article on the court's consideration of whether it
could rectify certain corporate documents of two companies that had
invested in the fraud).
In Roszko, the taxpayer was induced to invest in TransCap
Corporation, which was allegedly trading commodities, on the basis
that the investment would return 18% to 22% annually. In 2006, the
taxpayer made an initial investment of $100,000, which was
structured as a loan. In 2006 and 2007, the taxpayer
loaned a total of $800,000 to TransCap. From 2006 to 2009, TransCap
paid to the taxpayer a total of $408,000 as follows: $22,500 in
2006, $81,000 in 2007, $156,000 in 2008, and $148,500 in 2009.
In December 2009, the taxpayer became suspicious of the
activities of TransCap, which lead to an investigation by the
Alberta Securities Commission, which eventually determined that
TransCap had perpetrated a fraud on investors.
The issue before the Tax Court was whether the $156,000 received
by the taxpayer in 2008 was interest income under paragraph
12(1)(c) of the Income Tax Act.
The Tax Court cited the Federal Court of Appeal's decision
in Johnson for the proposition that there can indeed be a source of
income in a Ponzi scheme. However, the Tax Court held that the
facts in the Johnson case – wherein the Federal
Court of Appeal held that the $1.3 million received by the taxpayer
out of the Ponzi scheme was taxable – were different from the
facts of the present case. Specifically, in Roszko, the
taxpayer's agreement with TransCap stipulated how the funds
were to be invested, the taxpayer was lead to believe the funds
would be so invested, the funds were not invested in that manner
(i.e., the taxpayer's contractual rights were not respected),
it was agreed that TransCap perpetrated a fraud, and the fraud was
described in a decision of the Alberta Securities Commission.
The Tax Court held that the facts of Roszko were more like those
in the case of Hammill v. The Queen, in which the Federal
Court of Appeal held that a fraudulent scheme from beginning to end
cannot give rise to a source of income from the victim's point
of view and hence cannot be considered as a business under any
The Tax Court noted that, in Roszko, the Crown had argued that
the income was property income in the form of interest. However,
the Tax Court held the amount received by the taxpayer was not
income from property, but rather a return of capital to the extent
of the original amounts invested. The Tax Court noted that excess
returns might be considered income. The Tax Court allowed the
This is a victory for the taxpayer for the 2008 tax year, but
the unanswered question that looms in the background is how the
taxpayer's overall loss ($392,000) on the Ponzi scheme
investment will be treated for tax purposes.
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