Have you been duped into investing in a Ponzi or other fraudulent investment scheme?
These fraudulent schemes promise investors large returns for what often appears to be a simple loan.
In reality, the fraudster is using your money to pay back previous investors and will ultimately try and dupe another investor in order to repay you.
Eventually these schemes fall apart and unfortunately the investors are usually left with little — if anything — remaining from their initial investment.
If you have been unknowingly involved in a Ponzi scheme you may be asking yourself how the CRA will view any income you may have received from the scheme and how you can report your losses.
CRA’s response is that “the treatment of the losses will depend on the facts of each particular case and the responsibility rests with the taxpayer to provide sufficient documentation in order to support their claim that an investment existed for tax purposes” (See CRA Document No. 2014-0531171M6 “Fraudulent Investment Schemes” dated July 3, 2014).
This CRA guidance provides some insight into how the CRA may view the tax returns of victims of Ponzi schemes.
Specifically the guidance suggests that you may be able to rely on certain tax breaks such as deductions for bad debts, business losses, capital losses and the possibility of adjusting prior tax returns in certain cases.
Overall, the CRA states:
“These rules apply to taxpayers who had what reasonably appeared to be a legitimate investment for income tax purposes.
“This is not intended to apply to taxpayers who knowingly participated in a scheme for tax avoidance purposes. In cases where a taxpayer did not report the investment income, it would be a question of fact, based on the information provided to the Canada Revenue Agency (“CRA”) as to whether they ‘knowingly participated’ in a scheme.”
While this guidance may prove helpful, it is not determinative and will require interpretation based on subsequent case law and analysis of the particular facts of any individual case.
One thing that we do know is that CRA will have a very different outlook if there is evidence that you knew investment was a Ponzi scheme prior to investing and you knowingly took the risk.
If you have fallen victim to a Ponzi or other fraudulent investment scheme and have run into problems with the CRA as a result, I recommend consulting with a tax lawyer who can assist you in responding to the CRA.
Greg Pratch is a lawyer and partner with Pushor Mitchell LLP. He practices in the area of litigation with a particular emphasis in personal injury matters and tax disputes.