CRA considers that gambling winnings normally are exempt, ponzi scheme winnings generally are taxable and shareholder defalcations normally are non-deductible

Additions or changes in the new Folio on "Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime" include:

• In a substantially expanded section on gambling, CRA shows significant deference to Leblanc, which it quotes for the proposition that gambling "by its nature is not generally regarded as a commercial activity except under very exceptional circumstances," and has dropped the statement in IT-334R2 that "it is clear…that earnings from…illegal gambling…are not exempt from tax."
• Without explicitly acknowledging Stewart, the statement in IT-334R2 that "in order for any activity or pursuit to be regarded as a source of income, there must be a reasonable expectation of profit" has been dropped – and curiously, the Folio also has dropped completely (rather than amending) the statement that if a "hobby or pastime results in receipts of revenue in excess of expenses, that fact is a strong indication that the hobby is a venture with an expectation of profit."
• A section on fraudulent investment schemes has been added, in which Johnson is cited for the proposition that "amounts paid to taxpayers that are a return on their investment should be included in…income."
• Crowdfunding receipts are taxable.

It has retained the assertion in IT-185R that losses from defalcations by partners or significant shareholders "are not normally deductible" because "in most cases, such losses…are sustained outside the normal income-earning activities of the business." This is at odds with the discrediting in the Egg Marketing case (65302) of the notion, supposedly based on the old Imperial Oil case, that deductible losses must result from "a normal and ordinary risk of the…operations."

Other retentions: a fraudster generally can reverse an income inclusion when it repays the funds; and, subject to statute-barring, in cases of hardship CRA generally will allow a taxpayer to recognize a loss in the year when its money was stolen rather than the year of discovery of this loss.

Neal Armstrong. Summaries of S3-F9-C1: Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime under s. 3, s. 18(1)(a) income-producing purpose and s. 18(1)(a) – timing.