Simmonds v. R., [1997] 2 CTC 2293

Bowman T.C.J.:

These appeals are from assessments for the 1990 and 1992 taxation years. They involve the deductibility of losses sustained by Mr. Simmonds as the result of the fraud and theft perpetrated upon him by an accountant and investment advisor.

Mr. Simmonds is involved in the construction business, particularly home renovation. He is not sophisticated in financial matters. In 1989, he inherited a sum of money on the death of his parents. He was informed by a friend of long standing, a Mr. Joost Wolsak, that a certified general accountant, Mr. Fred Hofman, was knowledgeable in investing money, and on the recommendation of Mr. Wolsak, he attended at Mr. Hofman’s office. In the result, he gave Mr. Hofman $52,152, being a substantial part of the amount he had inherited. Mr. Hofman gave him every reason to believe that he was a knowledgeable and competent investment advisor. He also stated that by investing on his behalf in U.S. treasury bills and other foreign debt instruments he could realize a profit of 15-16% per year. Mr. Hofman was to keep a small percentage of the profit as a fee. It was also represented to the appellant that he would be entitled to be repaid the amount standing to his credit at any time upon a couple of days notice.

Commencing on May 5, 1989 until January 31, 1991 Mr. Hofman sent Mr. Simmonds monthly “Trading Statements” showing the balance of his account, and the percentage growth which ran between about 15 and 17% annually. It looked like an excellent investment and in fact Mr. Simmonds gave Mr. Hofman a further $20,000 in December 1989 to invest for him. In 1990, he withdrew $14,000 and in 1991 he withdrew a further $3,000. In June of 1990 his account balance was shown to be $82,971.59 and at the end of December 1990 it was said to be $73,829.18 plus a cash reserve of $500.

In April of 1991, Mr. Wolsak told Mr. Simmonds that he was becoming suspicious as Mr. Hofman was not returning his calls. Mr. Simmonds found Mr. Hofman’s office locked up, and no one answered the phone. He wrote demanding the return of the funds in his account but received no response.

Mr. Hofman had absconded with Mr. Simmonds’ money and with millions of dollars of other investors’ money. No T-bills or other securities were purchased. The monthly trading sheets were bogus and the transactions they described non-existent. Old investors were paid off out of funds received from new investors. It was a classic example of a Ponzi scheme.

The RCMP was informed and it conducted an investigation resulting in a warrant for Mr. Hofman’s arrest and charges being laid against him alleging fraud and theft in amounts exceeding $9,600,000. Mr. Hofman was well respected in the Dutch community and was active in the Dutch Reformed Church, one of his victims. Sergeant Jerry Malysh of the RCMP testified that there were upwards of 90 persons whom Mr. Hofman defrauded and it appears from the information that the amounts ran from about $20,000 to upwards of $2,900,000.

Mr. Hofman has never been found.

Mr. Hofman prepared the appellant’s 1989 tax return. None of the profits shown on the trading statements for 1989 were declared. Apart from the fact that such profits were of course not earned, Mr. Hofman told the appellant that they were not taxable in Canada.

By the spring of 1991, Mr. Simmonds had discovered the theft and he claimed a portion of what he believed was his loss of about $72,000 against his 1990 income. It was allowed initially. For 1991 he did his own return and neglected to claim anything. For 1992 his new accountant advised him to claim a portion of the loss for 1991 and 1992. The Department of National Revenue disallowed the claim and also reassessed to disallow the amount previously allowed for 1990.

The basis of the disallowance of the claims and the sole basis pleaded in the original reply was that there was “no reasonable expectation of profit”. In the amended reply the Crown now alleges in the alternative that the loss was a capital loss.

Before I deal with these two points there are two technical matters that should be addressed. The first is the quantum of the loss. It is not, as contended by the appellant, $72,334.46, the balance shown as standing to his credit on the last statement dated January 31, 1991. This figure is an artificial one, concocted by Mr. Hofman as part of his fraudulent scheme. The appellant’s true loss is the amount he placed with Mr. Hofman less what he withdrew. This works out to $55,152 as follows:

$52,152 + $20,000 - $14,000 - $3,000 = $55,152.

This is his true economic loss.

The second issue is the timing. Since I have concluded that the loss is on capital account, the year of loss is not particularly important since the appellant had no capital gains in any of the years 1989, 1990, 1991 or 1992 and the net capital losses can be carried forward or back to the extent permitted by the Income Tax Act.

However, I think the most reasonable view is that the loss occurred in 1991. It was in that year that it appears Mr. Hofman absconded with the money and it was also in that year that Mr. Hofman discovered the defalcation. The loss should be taken into account “for the year in which the appellant, as a “businessman” recognized that the loss occurred”. (Associated Investors of Canada Ltd. v. Minister of National Revenue, [1967] C.T.C. 138, 67 D.T.C. 5096 at page 147 (D.T.C. 5101).)

I turn now to the “no reasonable expectation of profit” argument. It is wholly without merit. The moneys were placed with Mr. Hofman in the reasonable belief that he was a respected member of the Dutch community, a pillar of the church, a professional accountant who had practised for years and a person who had handled the investment affairs of scores of people, including Mr. Simmonds’ trusted friend Mr. Wolsak. The expectation of profits was reasonable and it could not have been foreseen that Mr. Hofman was a con artist, a hoaxter and a crook. The basis of the assessment has been totally demolished.

There is, however, merit in the alternative position that the loss is on capital account. Mr. Simmonds was not a trader in T-bills and had the transactions taken place as alleged the T-bills that were bought and sold were capital assets in his hands. The excess of the sale or redemption price over the purchase price would be income not from a speculative business but as interest realized in the way an ordinary investor realizes interest.

I shall not repeat the thorough analysis of the question of the nature of income from investing in T-bills that was made by Dussault J. in Gestion Guy Ménard Inc. v. Minister of National Revenue, [1993] 2 C.T.C. 2793, 93 D.T.C. 1058. To the same effect, see Satinder v. The Queen, (1995), 135 N.R. 281, 95 D.T.C. 5340 (F.C.A.).

Had Mr. Hofman invested in T-bills on behalf of the appellant as he pretended to and had the T-bills been lost, the loss would have been a capital loss. The fact that Mr. Hofman did not invest in anything but merely fraudulently appropriated the money does not turn what would otherwise be a capital loss into a trading loss.

I feel great sympathy by the appellant and for the scores of other innocent and trusting people who suffered at the hands of this cruel and evil man Mr. Hofman, but I think it was clear, at least in Mr. Simmonds’ case, that the loss was on capital account.

The appeal is dismissed.

Appeal dismissed.