2023-0994641I7 Tax treatment of losses in personal scams

Principal Issues: Whether losses incurred as a result of a personal scam are deductible for tax purposes.

Position: No.

Reasons: There are no specific provisions within the Act which address losses incurred as a result of fraud. As a result, any potential deduction in respect of a loss incurred as a result of fraud would only be available under the general rules of the Act. Where the intended use of the funds was not a legitimate investment for the purpose of earning income, the better view appears to be that such funds would be considered PUP of the taxpayer. Under subparagraph 40(2)(g)(iii) of the Act, a loss from the disposition of any PUP of the taxpayer (other than listed personal property or a debt referred to in subsection 50(2)) is nil. While this is ultimately a question of fact, it will generally be the case that money of a taxpayer that was the subject of a personal fraud is PUP by the very definition of a personal scam, such that any loss incurred in respect of that money would be nil under subparagraph 40(2)(g)(iii).

Author: Pannozzi, Steven
Section: 9, 38, 39, 40(1), 40(2)(g)(iii); 44(2); 52(4); 54 “adjusted cost base”, “listed personal property”, “personal-use property”, “proceeds of disposition”; 69(1); 111(8); 248(1) “property

Mr. Rob Meers                                                                         HEADQUARTERS
Individual Income Tax Legislative Amendments Section         Income Tax Rulings|                                                                                                 Directorate
Legislative Policy Directorate                                            Steven Pannozzi, MTAX
20 Queen Street
Place de Ville, Tower A, 6th floor                                             2023-099464
Ottawa ON K1A 0L5

Dear Mr. Meers:

Re: Losses – Personal Scams

We are writing in response to your email dated October 11, 2023 in which you requested our views on whether there is any tax recourse for losses incurred in connection with a “personal” scam, as opposed to losses incurred in connection with an “investment” scam. Two examples of personal scams are known as the “grandparent scam” or “phishing” scams.

A grandparent scam generally involves the perpetrator of the fraud targeting elderly individuals by impersonating their grandchild and asking for money. The fraudster fabricates a story and claims that they are in trouble and require financial assistance – for example, they have been in an accident, they have been kidnapped and are being held for ransom, or they are stranded abroad. The victim is then pressured into immediately transferring money to their “grandchild” in order to save them from the fabricated predicament. Similarly, in a phishing scam, the fraudster attempts to impersonate an entity such as a financial institution, a utility company, or the Canada Revenue Agency (“CRA”). The fraudster attempts to pressure their victim into providing personal or financial information or assets through the use of fear, intimidation, or other coercive tactics for the purpose of using the information or assets for their own financial gain at the victim’s expense.

Our Comments

The CRA and the courts have commented extensively on the tax treatment of losses from investment scams. While the experiences of the victims of fraud are unfortunate, there is no special treatment afforded to such taxpayers by the Income Tax Act (“the Act”). Accordingly, any relief available must be sought through the application of the general provisions of the Act dealing with losses.

As explained in paragraph 1.44 of Income Tax Folio S3-F9-C1, Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime, the nature of any losses needs to be established to determine whether the losses have the character of a business loss or a capital loss. Specifically, it will need to be determined whether the loss is a result of carrying on a business or from the disposition of an investment that is being held on capital account. If a loss is incurred on the disposition of an investment that is being held on capital account, a taxpayer may be entitled to a capital loss pursuant to paragraph 39(1)(b) of the Act to the extent that the taxpayer is unable to recover the amount of their initial investment.

However, given the personal nature of the type of scam contemplated in your query, a loss incurred by a victim as a result of such a scam would generally not result in a loss from employment, business, property, or a business investment loss. There is no source of income or income-earning activity related to the type of loss in question, and property that is lost in such scams is generally the personal funds of the victim, as opposed to, for example, business-use property or the shares or debt of a small business corporation.

The personal funds of an individual would generally be considered to be capital property, as opposed to property held on account of income. As a result, it may be possible for a taxpayer to incur a capital loss on the loss of their personal funds, subject to any applicable loss-denial provision of the Act.

The CRA has provided comments on the denial of a capital loss for victims of fraud or a scam on the basis that the lost cash was personal use property of the victim. For instance, in Technical Interpretation 2009-0317891I7 – Treatment of Loss on Asset Paid for but Not Delivered the CRA said:

“We have previously considered issues concerning the deductibility of losses by investors who had been victimized by fraud or a scam. In specific situations such as when no shares are purchased and no investment made in any property upon which to make a profit or to sustain a loss, the act of a person taking the taxpayer’s money for personal use was not an adventure in the nature of trade on behalf of the taxpayer. However, since it was the capital itself that was stolen, the resulting loss was considered to be a capital loss at the time the theft was discovered…

If no business has commenced, the money could be a personal-use property of the taxpayer as defined in section 54 and any capital loss on disposition would be deemed to be nil by virtue of subparagraph 40(2)(g)(iii) of the Act.”

Whether a particular property is personal-use property of a taxpayer is ultimately a question of fact. However, given the very nature of a personal scam, it is our view that the loss of personal funds of a victim would generally be deemed to be nil under subparagraph 40(2)(g)(iii) of the Act since it is a loss from the disposition of personal-use property of the taxpayer.

We trust our comments will be of assistance.

Yours truly,

Sandro D’Angelo, CPA, CMA
Manager
Business Income and Capital Transactions Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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