Fortuitous Victims: Some Tax Law Consequences of Ponzi Schemes
46 Pages Posted: 21 Jan 2014
Date Written: August 28, 2013
In this paper the authors examine the tax consequences of Ponzi schemes for innocent investor-victims. They use the decisions of the Tax Court of Canada and The Federal Court of Appeal in Johnson v. The Queen as a focus of discussion. Their discussion as to the taxability and deductibility of gains and losses for victims of Ponzi schemes draws on the source doctrine of Income, contract law principles, and the sham and ineffective transactions doctrines. The paper concludes that a Ponzi scheme is a source of income for victims, and that winners ought to recognize net gains on account of income and net losses on account of capital. The paper’s discussion of the investigative obligations of taxpayers is grounded in considerations of reassessments beyond the normal reassessment period and liability for penalties in the Ponzi context. The paper concludes that a contextual approach to these two issues is required considering the fraudulent nature and inherent information imbalance of Ponzi schemes.
Keywords: Income Tax; Source of Income; Fraud; Ponzi Scheme
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