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 255,  Kleinfelder 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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