In order to generate a targeted loss of $22 million for use in his 2011 taxation year, Chad agreed to pay a fee of $240,000 to a UK foreign exchange (FX) trading firm to enter into straddle trades (quite similar to those in Paletta) in which he would enter into contracts both for the purchase and sale of US dollars, such that he was close to fully hedged and then, near the year end, closed out whichever of the “long” or “short” contracts were in a loss position (and then promptly re-established similar positions to the closed-out ones so that he remained hedged). After he completed closing out his positions in 2012, these trading activities resulted in a net profit to him of $6,200.
In finding that these trading activities did not constitute a source of income to Chad, so that the 2011 losses (and the fee) were non-deductible in computing his income, Sommerfeldt J indicated (at par. 119) that Paletta had found that “Stewart did not do ‘away with the pursuit of profit as a prerequisite for the existence of a business’” and determined (at para. 143) that although, since Chad’s trading activities did not have a personal element, there was no need for him to “show that his predominant intention was to make a profit,” it nonetheless was necessary for him to produce objective evidence to show that “he was pursuing a profit” in those activities. Sommerfeldt J concluded (at paras. 167, 169):
While the “assumption underlying the test in Stewart is that a commercial activity is undertaken for profit,” [Stackhouse, at para. 103] … the documentary evidence calls that assumption into question … .
The documentary evidence … does not give any indication that Mr. Chad or Mr. Hodgins [the brokerage contact] intended, in conducting the FX Activities, to achieve a profit/loss amount great enough to offset the $240,000 fee, which was a significant expense … . Thus … the intention of Mr. Chad and Mr. Hodgins, in implementing the Trades, was not to earn a profit … .
Although Chad indicated that, in making the trades, he hoped to acquire learning that he could use in his businesses and, in fact, his company subsequently engaged in FX trading, Sommerfeldt J stated (at para. 139) that “the ex post facto statement of a pursuit of learning is not objective evidence that Mr. Chad entered into the Trades to pursue a profit.”