FEDERAL INCOME TAX - Business and property income - Whether a business - Reasonable expectation of profit

Law360 Canada (September 16, 2022, 6:13 AM EDT) -- Appeal by the Crown from a Tax Court decision allowing the respondent’s appeal from tax assessments. During the 2000 to 2007 taxation years, the respondent Paletta generated income of 38 million dollars from a variety of sources. Most of that income (37 million) was offset by losses that he generated during forward foreign exchange trading (forward FX trading) activities. Paletta entered into pairs of contracts with certain brokerage firms to simultaneously buy and sell the same amount of foreign currency at different but closely proximate dates in the future. As the value of currency fluctuated over time, one of the contracts would move into a gain position and the other would move into a loss position. Before the end of the taxation year, Paletta would realize the loss leg, thereby crystallizing the loss for tax purposes. The gain leg would be crystallized at the beginning of the next taxation year. Using this strategy, Paletta straddled the offsetting contracts by realizing a loss in the first year and the corresponding gain in the subsequent year. The Minister denied the trading losses claimed by Paletta for the 2000 through 2006 taxation years and assessed the 2007 taxation year, only to deny the loss carry-over of prior years’ losses from these activities, while leaving the reported gain for that year untouched. Gross negligence penalties were applied for all years in which trading losses were claimed. Paletta argued that the forward FX trading was conducted for profit and that the losses were business losses. The Tax Court held that these 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 but for tax avoidance. Despite having found that Paletta did not trade for profit or for commercial reasons, the Tax Court found that the fact that Paletta’s trading activities could always yield negligible gains and losses together with the fact that these activities were by their nature commercial and had no personal element, left it no choice but to hold that a source of income existed....
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