Chad – Tax Court of Canada finds that the presumption that commercial activity is in pursuit of profit and, thus, a source, was rebutted where there was no real interest in generating profit

In order to generate a targeted loss of $22 million for use in his 2011 taxation year, Chad agreed to pay a fee of $240,000 to a UK foreign exchange (FX) trading firm (Velocity) to enter into straddle trades (quite similar to those in Paletta) in which he would enter into contracts both for the purchase and sale of US dollars, such that he was close to fully hedged and then, near to the year end, closed out whichever of the “long” or “short” contracts were in a loss position. These trading activities, when completed in 2012, resulted in a net profit to Chad of $6,200.

In finding that these trading activities did not constitute a source of income to Chad, so that the 2011 losses (and the fee) were non-deductible in computing his income, Sommerfeldt J indicated that Paletta had found that “Stewart did not do ‘away with the pursuit of profit as a prerequisite for the existence of a business’” and concluded:

While the “assumption underlying the test in Stewart is that a commercial activity is undertaken for profit,” [Stackhouse, at para. 103] … the documentary evidence calls that assumption into question … .

The documentary evidence … does not give any indication that Mr. Chad … intended, in conducting the FX Activities, to achieve a profit/loss amount great enough to offset the $240,000 fee, which was a significant expense … . Thus … the intention of Mr. Chad … in implementing the Trades, was not to earn a profit … .

Ironically, the Crown argued that the fee had been paid by Chad for the agreement of Velocity to generate the $22 million loss and not for its trading activities. If this argument had succeeded, it would imply that the fee was not an expense of the trading activities which, without that “expense,” generated a profit, i.e., that there indeed was a source of (actual) income.

Neal Armstrong. Summaries of Chad v. The King, 2024 TCC 142 under s. 3(1) – business, and General Concepts - Sham.