Case information

Taxation — Income tax — Source of income — Penalty — Gross negligence — Taxpayer participating in forward foreign exchange trading activities and claiming trading losses in amount sufficient to erase quasi-totality of other income — Taxpayer appealing reassessment — Tax Court finding commercial trading activities giving rise to business source of income despite absence of intention to make profits — Court of Appeal holding taxpayer not engaged in commercial activity where activity was conducted without a view to profit and taxpayer therefore not having source of income — Court of Appeal upholding gross negligence penalties — Whether an activity solely motivated by tax can be a clearly commercial activity that is a source of income — What is the requisite standard of care in filing tax returns where taxpayer is solely motivated by tax? — Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), s. 9, ss. 163(2).

Case summaries are prepared by the Office of the Registrar of the Supreme Court of Canada (Law Branch). Please note that summaries are not provided to the Judges of the Court. They are placed on the Court file and website for information purposes only.

During his 2000 through 2007 taxation years, Mr. Paletta (“taxpayer”) generated income from a variety of sources approximating $38 million in the aggregate. Almost all of that income ($37 million) was offset by losses that he generated in the course of forward foreign exchange trading activities. In 2014, well after the expiration of the normal reassessment period, the Minister of National Revenue issued reassessments denying the trading losses claimed by the taxpayer for the 2000 through 2006 taxation years and assessed the 2007 taxation year. The Minister applied gross negligence penalties for all years in which trading losses were claimed. The taxpayer appealed to the Tax Court of Canada. The Tax Court allowed the taxpayer’s appeal. It held that the trading activities gave rise to a source of income in the form of a business despite having found that the trades were not made for profit. The Federal Court of Appeal allowed the Crown’s appeal and set aside the Tax Court’s conclusion that the taxpayer’s forward foreign exchange trading activities gave rise to a source of income. As the evidence in this case revealed that, despite the appearances of commerciality, the activity was not in fact conducted with a view to profit, a business or property source of income could not be found to exist. The Federal Court of Appeal also upheld the Minister’s decision to reopen the taxation years in issue and to apply the penalty assessed on the basis that the taxpayer was grossly negligent in representing his losses as business losses even though they were not.