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 (“Velocity”) to enter into straddle trades 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 to the year end, closed out whichever of the “long” or “short” contracts were in a loss position.
The Crown argued that the fee had been paid by Chad for the agreement of the brokerage firm to generate the $22 million loss and not for its trading activities, and the trading activity was a sham and the trades legally ineffective. In rejecting the “sham” submission, Sommerfeldt J stated (at para. 82) that he “did not find anything to suggest that the … Documents did not accurately set out the legal rights and obligations that Mr. Chad and Velocity had intended to create.” Regarding the legal effectiveness of the trades, he noted that although it was unclear which jurisdiction’s laws governed the agreements, all of these jurisdictions were common-law jurisdictions and concluded (at para. 107) that “[b]ased on the evidence and [his] understanding of the fundamental common‑law principles of contract law … the FX Contracts were legally effective, in accordance with their terms.”