Losses From Scams Are Not Deductible
Are losses from personal scams like phishing and grandparent scams deductible for tax purposes? The Canada Revenue Agency (CRA) has clarified that the answer is generally “No”.[1] This is because the Income Tax Act (Canada) does not contain specific provisions addressing losses from fraud. Additionally, where property lost in scams is the personal funds of the victim, there is no “source” of income or income-earning activity related to the loss.
Personal funds lost in scams are considered personal-use property (PUP), which is capital property for tax purposes. Under subparagraph 40(2)(g)(iii) of the Income Tax Act, losses from the disposition of PUP—including from a scam—are deemed to be nil. This means any loss incurred in respect of personal funds lost in a scam would be considered nil.
Examples of Scams
The CRA provided these examples of personal scams:
- Grandparent Scam: Fraudsters target elderly individuals by impersonating a grandchild in distress (e.g., after an accident or while stranded abroad) to extract money.
- Phishing Scam: Fraudsters impersonate entities like financial institutions or the CRA, using fear, intimidation, or other coercive tactics to obtain personal or financial information.
Scams vs. Fraudulent Investment Schemes
Losses resulting from carrying on a business or from the disposition of an investment held on capital account may give rise to a business loss or a capital loss, depending on the circumstances. However, the CRA’s new commentary is consistent with previous guidance on losses from fraudulent investment schemes.[2] The courts have also indicated that victims of fraudulent investments like Ponzi schemes may be unable to claim tax relief for resulting losses if there was no business or if the scheme was fraudulent from the start. This was the tax result, for example, where a taxpayer purchased gems for eventual resale and paid a substantial sum to a person who promised to facilitate the sale, but never did so,[3] and where investments were made in fraudulent partnerships that did not carry on any actual business.[4]
Implications for Taxpayers
Taxpayers should be aware that losses from personal scams are not deductible because they are considered losses from the disposition of PUP, which are deemed to be nil under the Income Tax Act. Expenses or losses incurred in fraudulent investments may also not be deductible. This highlights the importance of fraud awareness and prevention.
Conclusion
The CRA's guidance makes it clear that losses from personal scams are not deductible for tax purposes. Taxpayers and their advisors should understand the implications of this position and take steps to protect against fraud. Similarly, loved ones can protect vulnerable family members from fraud by educating, communicating, and staying connected.
