All to often it is the elderly and disadvantaged who are taken advantage of in fraudulent investment schemes. The Canada Revenue Agency recently released some general information that applies to taxpayers who participated in what reasonably appeared to be a legitimate investment for income tax purposes.
Generally speaking, an amount paid to a taxpayer that is a return on investment, such as interest, must be included in the taxpayer’s income in the year of receipt. Where it is determined that no funds were actually invested on behalf of the taxpayer and the amounts paid to the taxpayer came from a different taxpayer’s investment, as is typically the case in a Ponzi or Ponzi-like scheme, this does not change the nature of the transaction for the taxpayer. The amount received by the taxpayer must still be included in income. In the case where investment income purportedly earned from a scheme was previously included in the taxpayer’s income, but was not actually received or withdrawn by the taxpayer, the taxpayer may claim a deduction for a bad debt.
If there is a loss on the disposition of an investment that was being held on capital account, a taxpayer may be entitled to a capital loss to the extent that the taxpayer is unable to recover the amount of their initial investment. Ordinary allowable capital losses for a tax year may be deducted only from taxable capital gains realized in the year. If the allowable capital losses exceed the taxable capital gains, the difference is a net capital loss which may be carried back three years and forward indefinitely to be deducted only against taxable capital gains.
Trustees and personal representatives may face these issues particularly if the matter does not arise until some time after the taxpayer has died.