The taxpayer innocently advanced $800,000 to a corporation ("TransCap") which was engaged in a Ponzi scheme. He received $408,000 in total, styled as interest under promissory notes and loan terms which it had issued to him, including $156,000 in the year in issue, before the scheme collapsed.
C Miller J found that the $156,000 (which originally had been reported as interest) was not income. In distinguishing Johnson, he noted (at para. 13) that the funds were not invested as stipulated so that the "$156,000 payment ... was not derived as contracted," and (at para. 19) made "a distinction between earning income based on a fraudulent act or illegal activity versus a finding that the contract itself is a fraud," stating that in the latter situation there is no source of income.