Individuals had “invested” in what turned out to be a Ponzi scheme under which for many years they reported annual income inclusions for interest which they were treated as having reinvested in the scheme. They sought to have their returns for those years adjusted in order to obtain a refund of the taxes they paid on such interest income.
The Directorate indicated that the interest had been required to be recognized in the years in which the individuals received or were entitled to receive it. It noted in passing that:
In the case of fraudulent Ponzi schemes, taxpayers may ask a court to cancel the loan agreement between the parties ab initio.
Because of the ab initio cancellation of the contract, it would be possible to conclude that the taxpayer concerned never received and was never entitled to receive interest income from the said contract. It would then be possible for the Minister to reassess for each taxation year affected by the cancellation of the contract provided that the time limits under paragraph 152(3.1)(b) or subsection 152(4.2) are satisfied.