Category Archives: Illegal Income

Taxation of Pyramid Schemes – Sas Ansari

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Taxation of Pyramid Schemes

Mazo v The Queen, 2016 TCC 232

At issue was the income tax treatment of amounts received by a participant in a pyramid scheme that is not the developer or mastermind behind the scheme.


The Appellant was involved in a pyramid scheme, prohibited by the Competition Act, called Business In Motion International Corporation (for a class action against corp see Cuzzetto v. Business In Motion International Corporation et al,  2014 FC 17).  The scheme was structured to create the appearance that participants were buying goods and services when all they were doing was buying a spot at the bottom of the pyramid.

NOTE: The Minister, despite a clear finding in the FC in the class action that this was a clear case of a pyramid scheme, maintained the position that the corporation was a multi-level marketing company that was selling goods and services (para 10).  The Court stated that this position was clearly wrong and could “see no reason for the Minister to take such a position other than to artificially inflate the tax the Minister can assess” (para 10). However, the DoJ lawyer, Larissa Benham, handled the difficult position the Minister placed her in with professionalism (para 11).


The Court referred to previous decisions dealing with the tax treatment of fraudulent scheme [for a paper on this see HERE]. These cases show that income from a Ponzi scheme in the hands of a participant are income where the contractual rights are respected, but losses from a fraudulent scheme that was never a business are not non-capital losses (para 13).

Should profits from a pyramid scheme be treated the same way as Ponzi schemes?

The similarities between the two are (para 15):

  • both are illegal;
  • both rely on a continuous stream of new participants injecting new cash to sustain withdrawals of a few at the top;
  • both inevitably collapse under their own weight, leaving victims suffering losses; and
  • Both present an illusion of people making money, with few extracting more than they put in.

The key differences between the two are (para 16):

  • Participants in a Ponzi scheme believe they are making an investment, thereby generating profits, don’t realize there is no investment; BUT
  • Participants in a pyramid scheme may not realize the full nature of the scheme but are aware at some level that they are being paid using money that comes from those participants below them, such that is clear to everyone that without new people at the bottom there are no profits at the top.

The court held that “it would generally be more appropriate to characterize the income received by a participant in a Ponzi scheme whose contractual rights have been honoured as property income and the income received by a participant in a pyramid scheme whose contractual rights have been honoured as business income” (para 17).

In this case, the participants were being defrauded from the start by walking into a scheme that was doomed to failure but certain to put money in promoters’ pockets (para 18).  If participants’ contractual rights were honoured – if they got what they bargained for – they are taxable on those amounts (para 18).

The Appellant was found not to have bargained for a pyramid scheme (para 19), but to join a sales organization that would result in commissions for recruiting sales people (para 20). As such, the payments, net expenses, were business income in the Appellant’s hands.

The Court “reluctantly” agreed with the MInister’s position in how to calculate profits, but stated that if another set of facts were to come before the courts, the method may well not be accepted. Rather, the income should be the amounts the participant actually extracted from the scheme (para 28).

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Canadian Imperial Bank of Commerce v The Queen, 2013 FCA 122

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Legality, Morality, and Taxation

Canadian Imperial Bank of Commerce v The Queen, 2013 FCA 122

[see a great article by Mr Thomas McDonnell, QC, here]

It has long been recognizes that tax law does not care about the niceties that trouble other areas of law and life.  All that matters for tax purposes is that some taxable event has occurred within the confines of the legislation (or convention).  This is a rule rooted in fairness. There is no reason to tax a person who morally and legally increases his economic power and allow the person who does so illegally and immorally avoid paying taxes – a share of the cost of civilization.  This has been an important tax rule and an important law and order rule – organized crime usually falls victim to tax law not criminal law.

In the decision above, the FCA re-affirmed this position by saying:

[1]                    In quantifying a taxpayer’s tax liability under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), is it ever necessary to evaluate the morality of the taxpayer’s conduct? As a matter of general principle, the answer should be no. The Income Tax Act is intended to raise revenue for the use of the federal government. It also contains provisions intended to facilitate the distribution of social benefits according to standards established by Parliament, or to encourage or discourage certain industries or commercial practices in the public interest as perceived by Parliament from time to time. But nothing in the Income Tax Act expressly permits or requires the Minister of National Revenue, or the Courts, to apply the Income Tax Act differently depending upon the morality of the taxpayer’s conduct.

[2]                    Indeed, it has long been accepted in Canada that a taxpayer who conducts an illegal business, or a business conducted unlawfully, is taxable on the profits of that business on the same principles as any other business, except to the extent that a different result is required by a specific provision of the Income Tax Act. Similarly, the Courts have consistently rejected the notion that the Income Tax Act should be interpreted or applied more generously for a taxpayer whose conduct meets a sufficiently high moral standard.

[3]                    In this case, the Crown takes the position that in determining whether a particular statutory provision (paragraph 18(1)(a) of the Income Tax Act) applies to deny the deduction of a particular expenditure in computing business income for income tax purposes, the Minister (and therefore the Courts) must first determine whether the expense was incurred because of conduct of the taxpayer that was egregious or repulsive. That is so, according to the Crown, because if the answer is yes, then paragraph 18(1)(a) must apply to deny the deduction. The Crown’s position is based on a certain obiter dictum in a decision of the Supreme Court of Canada. For the reasons that follow, I have concluded that the Crown has misinterpreted that obiter dictum and reached a conclusion that is wrong in law.

Sas Ansari, JD LLM PhD (exp)

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