Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether interest income received and reported in income in a particular tax year can be reversed.
Position: No, however, paragraph 20(1)(p) of the Act may apply.
Reasons: See below.
Author: McCullagh, Melanie
Section: 9, 12(1)(i), 20(1)(p)
September 12, 2018
Re: Tax treatment of investment income
We are writing in response to your correspondence of May 1, 2018, concerning interest income reported in respect of a fraudulent investment scheme. Specifically, you wish to know whether an amount previously reported as interest income for income tax purposes may be subsequently removed from income.
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R7, Advance Income Tax Rulings and Technical Interpretations. This and all other publications noted herein are available on the Canada Revenue Agency (CRA) website at canada.ca/cra-forms-publications.
Income Tax Folio S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime, sets out the CRA’s position in respect of amounts received from what was determined in a subsequent tax year to be a fraudulent investment scheme.
Paragraph 1.42 of Income Tax Folio S3-F9-C1 explains that 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. For example, if Mr. A receives $100 in interest in 2015, he must include that amount in income for 2015 even if he subsequently learns in 2017 that he has lost most or all of his total investment.
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.
There is no provision in the Act that would allow interest income previously received by a taxpayer (and included in income) to be removed from the taxpayer’s income. However, 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 in accordance with paragraph 20(1)(p) of the Act in the year the debt is established to be bad. It should be noted that any subsequent recovery of a previously deducted bad debt will be taxable, up to the amount of the previous bad debt deducted.
More information is provided in paragraph 1.43 of Income Tax Folio S3-F9-C1 and Interpretation Bulletin IT 442R, Bad Debts and Reserves for Doubtful Debts.
We trust these comments will be of assistance.
Pamela Burnley, CPA, CA
Business Income and Capital Transactions
Business and Employment Division
Income Tax Rulings Directorate
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