Johnson Decision – Leave to Appeal to SCC denied

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The SCC denied leave to appeal in the case of Donna M. Johnson v. Her Majesty the Queen.

Thus, the FCA decision stands as guidance for now in Ponzi Scheme cases.

Summary [from SCC site]

Case summaries are prepared by the Office of the Registrar of the Supreme Court of Canada (Law Branch) for information purposes only.

Taxation – Income Tax Assessment – Legislation – Interpretation – Can a fraudulent scheme be a source of income to an innocent participant of the scheme – To what extent must taxpayers be burdened with the responsibility of seeking independent advice when preparing their income tax returns in order for the Minister to be bound by the normal reassessment period – How should the legislative provision be applied where there is a reasonable filing position to report income in a certain manner and the taxpayer reports income in that manner but not based on the reasonable filing position – Should the Court reassert the important reasons and principles for appellate courts not to interfere with trial decisions – Under what circumstances, if any, is a court ever permitted to ignore or reject an admission given pursuant to a request to admit – Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the “Act”), ss. 3(a) and 152 (4)(a)(i).

The applicant received payments which she believed to be her share of after-tax profit derived from option trading transactions carried out by a trust managed by Andrew Lech.  Unknown to Mrs. Johnson, the money she received was obtained fraudulently from the victims of a Ponzi scheme Mr. Lech was operating with others.  Mrs. Johnson did not include the amounts in her income for the relevant years, and was reassessed by the Minister of National Revenue in respect of the total amount she received from Mr. Lech less the amounts she had paid him, or $614,000 and $702,000 respectively for the 2002 and 2003 taxation years.

Mrs. Johnson appealed the assessments, arguing that the payments were not taxable because i) the Ponzi scheme could not be a source of income; and ii) the reassessments were invalid as being made outside the “normal reassessment period” as defined by the Act.  The Tax Court of Canada allowed the appeals, holding that the payments did not constitute income.  In obiter it found that only the reassessment for the 2003 would have been valid.  The Federal Court of Appeal allowed the appeal, holding that the payments were taxable as income from a source, in this case property income, and that the reassessments were valid.