CRA indicates that Ponzi scheme investors can generally write off their reinvested interest income in the year the perpetrators are charged

Individuals had “invested” in what turned out to be a Ponzi scheme under which for many years they reported annual income inclusions for interest which they were treated as having reinvested in the scheme. They sought to have their returns for those years adjusted in order to obtain a refund of the taxes they paid on such interest income.

The Directorate indicated that because various of the taxation years were before the 10-year period referred to in s. 152(4.2), they could not be so reassessed – and, in any event, the interest had been required to be recognized in the years in which the individuals received or were entitled to receive it.

The Directorate went on to indicate that potential relief could be provided though a subsequent bad debt deduction, likely, in the year in which the promoters were charged. It stated:

[T]he CRA generally accepts that the "time" when a taxpayer can conclude that the taxpayer’s debt has become uncollectible occurs in the year in which the Crown makes charges against the perpetrator of the fraud (the "Year of Charges").

Thus, where a taxpayer has included investment income in the computation of the taxpayer’s income for the Year of Charges or for years prior to the Year of Charges and that income becomes a debt that has not has never been recovered by the taxpayer or a third party for the taxpayer’s benefit, the CRA is generally prepared to accept that the taxpayer may claim a bad debt deduction in respect of that debt under paragraph 20(1)(p) in the Year of the Charges.

Neal Armstrong. Summaries of 27 March 2018 Internal T.I. 2017-0691941I7 F under s. 152(4.2), s. 20(1)(p)(i) and General Concepts – Effective Date.