In Daniel Sze “Receipts from Fraudulent Schemes: When Are They Taxable?” Canadian Tax Focus 16:3 (August 2026), the author gives an overview of cases that have considered the taxation of amounts a taxpayer receives from a fraudulent “investment”. He notes that the CRA prefers to kick a fraud victim when he or she is down: it seems to believe that any amount (presumably other than an amount explicitly characterized as a return of capital) received from a scheme is taxable: see Income Tax Folio S3-F9-C1, at paragraph 1.42 and CRA technical interpretation 2018-0761111E5 dated July 30, 2018. The author criticizes the CRA positions for not addressing adequately the more nuanced case law.
I discussed Roszko v R, 2014 TCC 59, here, where the Court held that funds received back from a scheme were not income. I previously discussed a case in which the Ontario Superior Court refused to rectify Ponzi scheme legal documents, but did issue a declaration to the effect that amounts paid to “investors” did not constitute income. The Court stated that it did not intend to bind the CRA by issuing the declaration. I briefly discussed a bankruptcy case that involved a Ponzi scheme. Funds from a Ponzi scheme might be income, but losses from a scheme are not deductible because there is no source of income. The CRA agreed that a taxpayer could deduct a bad debt under paragraph 20(1)(p) for ‘interest’ not received but previously included in income “when charges are laid”. See my post here, which provides some important context for the CRA position.
