Category Archives: Losses

Trading Within an RRSP is NOT a Business

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Trading Within an RRSP is NOT a Business

Prochuk v The Queen, 2014 TCC 17

The taxpayer here sought to have losses incurred as a result of being defrauded characterized as a non-capital loss.  This case dealt with the question of when activities amount to a business or an adventure in the nature of trade.  This case in interesting in that activities within an RRSP were sought to support the taxpayer’s characterization of his activities outside of the RRSP.  The TCC held that “trading” inside an RRSP cannot be used as evidence of being a trader in respect of activities outside of an RRSP.


The taxpayer has education, training, and work experience in the financial trading and investing field.  He supported himself through the use of trades, within his RRSP, for many years and managed to increase the value of his RRSP 8 fold during this period.  He was involved as a victim in a number of fraudulent tax planning strategies, and made an investment into a foreign exchange business in the BVI that turned out to be a fraud.

He sought to deduct the losses of the fraudulent foreign exchange business as business losses, but the CRA reassessed on the basis that the losses were on capital account.


The Court, in determining whether the property at question was capital property or inventory, considered the decision in HMQ v Vancouver Art Metal Works Limited, [1993] 2 FC 179 (FCA), where the relevant factors of a trader were identified as:

  • frequency of transaction – traders have higher frequency
  • duration of holding – traders hold for shorter durations
  • intention to acquire for resale at a profit – traders want to sell to gain rather than make income from the property
  • nature and quantity of the securities
  • time spent on activity – traders spend time on trading

The TCC, however, stated that in considering the factors above, the activities within an RRSP cannot be considered in determining whether activities outside of the RRSP constituted a business.  This is because the RRSP is a unique regime that provides contributors with tax incentive: trustee hold assets, can only hold “qualified investments”, contribution deductible from income, growth within RRSP is tax deferred, withdrawals taxed pursuant to secs. 56(1)(t) and 146.4(5) of the ITA.  A person in the business of trading: has to report income yearly, profit is determined pursuant to  sec. 9 of the ITA.  Therefore, the ITA treats a trader inside an RRSP differently than a trader outside of the RRSP – supported by the TCC decision in Deep v HMQ, 2006 TCC 315.

The TCC also determined that the taxpayer’s activities did not amount to “an adventure in the nature of trade”.  The court referred to the decision in Canada Safeway Ltd v HMQ, 2008 FCA 24, where the criteria for determining whether a person was engaged in an adventure in the nature of trade were set out.  Here the taxpayer was a passive investor holding the investment on a long term basis, and he hoped to obtain passive yields during the holding period and a capital gain on the eventual sale of the property – thus not involved in an adventure in the nature of trade.

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Fraud and Deductions – Garber

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Fraud and Deductions

Garber v The Queen, 2014 TCC 1

This lengthy decision deals with a reassessment 2 decades old.  The taxpayers were purchasers of limited partnership (LP) units.  The General Partner and the shareholder of the GP, however, was a fraudster who set out to induce persons to enter into LPs so as to defraud them of money.

The TCC had to determine a number of issues, the main issue being whether there was a source of income (property or business) for the defrauded taxpayers such that the ‘losses’ incurred by the LPs could be deducted by them.  Without going into the details of this case, the TCC determined that (1) the matter was a fraud from beginning to end, making it impossible for a business to exist, and (2) the victims’ contractual rights were not respected, countering any argument that there was a source of property (the contract) income.  On the basis of these findings, the court determined that there was no source of income, and therefore the expenses were not deductible.

The existence of a source of income for ITA purposes was discussed in the comments on Johnson v The Queen.  For a more in-depth analysis see the following article:  “Fortuitous Victims: Some Tax Law Consequences of Ponzi Schemes“.

What makes this case interesting is that the alleged business was that of a partnership formed between the person committing the fraud (here the General Partner) and the victims.  Here, the only activity associated with the partnership was the fraud itself.  More to the point, there was not even a valid partnership.  A partnership is a business carried out in common with a view to profit (see for example section 2 of the Ontario Partnership Act).  The TCC here held that there “was no business carried out in common, no view to profit, and therefore no valid partnership” – this was conceded by the parties (para 309).

The taxpayers argued that there was a business that coexisted alongside the fraud.  The TCC contrasted the case at bar with that in Agnew v. The Queen, 2002 CanLII 1030 (TCC) – in Agnew the facts were almost identical, but the court had found that there was evidence of sufficient commercial activity that was carried out such that, but for the fraud, the venture would have succeeded.  The court in Agnew emphasized “the existence of an operational site where the activities took place, the appellants’ provision of funds secured by their own assets, and the fact that no financing was to be offered by the partnership or corporations”, and contrasted these with the facts at bar (para 317).  See also the decisions in Hayter v. Canada, 2010 TCC 255Kleinfelder v. The Minister of National Revenue, 91 DTC 913, and Johnston v. Canada, [1998] T.C.J. No. 63.

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

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