The taxpayer realized gains of $1.3 million from periodically placing funds with a rogue ("Lech") who, it was later discovered, had not invested the funds in options trading but instead used them in a ponzi scheme. After finding that these gains were not income from a source, Woods J. went on to find (at TCC para. 44) that the distributions to the taxpayer also should not be considered under the surrogatum principle to have been received in lieu of income pursuant to a legal right because the amounts instead had been received pursuant to a fraud.
Although the Court of Appeal reversed the trial decision, Sharlow J.A. did not comment on the findings at trial relating to the surrogatum principle. The Court of Appeal's reasoning was based principally on a finding that the funds were income from a source, as the taxpayer had contracted to receive and in fact did receive a return on investment.