Former advisor tries to pull one over on CRA

In one of the strangest tax cases in years, an advisor went to court arguing that he should be entitled to claim an income loss of $14,000, and capital loss of $14.8 million, due to the loss of clients. The case (Martin v. the Queen, 2014 TCC 200) involved Louis-Fred Martin, who had a “lengthy and successful career” as a financial advisor. From 1986 through June 2010, he worked for a variety of brokerage firms, building up a loyal client base that followed him when he switched firms. In June 2010, he stopped working for his then-employer, Peak, and was unable to find employment with another firm. He was also unable to obtain the regulatory approval to be an independent financial advisor, or establish his own firm. Consequently, his clients continued to do business with Peak, which Martin described “as a theft by Peak of his clientele.”

Income and capital losses

Martin contended he should be able to deduct the loss of anticipated revenues from his clients after he left Peak. He estimated his clients would’ve generated net income of $2,000 per month. Consequently, he claimed $14,000 in 2010, to reflect the lost revenue for seven months from June to December 2010.

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Martin also took the position that the loss of his clientele to Peak, and his continuing inability to work as a financial advisor, was a loss of valuable property, so a capital loss should be available to him for tax purposes.

He estimated he would have been able to generate $2,000 per month in revenues, had he remained with Peak. Assuming a 3% annual rate of return, he calculated he would have needed capital of $800,000 to generate $24,000 in annual revenues, which were now lost. As a result, Martin initially claimed an $800,000 capital loss, since he received nothing from Peak for his clients.

But, after filing his tax return, Martin sought to increase his capital loss by $14 million due to the seizure of personal properties that resulted from his financial difficulties. He came to this figure by assigning a $2-million value to the seized properties, which included his home, country property and various collections and belongings, such as his vehicles. Then, he multiplied this value by seven, “relying upon the proverbial exhortation to thieves [Proverbs, 6:30-31] to pay back sevenfold what they stole.”

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The decision

Unsurprisingly, the court dismissed Martin’s claims, stating “the concepts of income loss and capital loss in the [Income Tax] Act do not exist to reimburse … a person for their loss … from a breach of contract or a theft.” When explaining why the $14,000 income loss in 2010 was disallowed, the court said it was “not a fiscal loss recognized for the purposes of the Income Tax Act.” It added, “As the Act does not tax revenue before it is earned, even if it is reasonably anticipated, the Act does not recognize anticipated but unearned income as an offsetting loss.”

Several reasons were cited for dismissing Martin’s $14.8-million capital loss. With respect to the $800,000 loss for the client list, the court said, “A taxpayer’s capital loss generally reflects an economic investment loss actually realized by the taxpayer upon disposing of property owned by the taxpayer. In this case, it is not at all clear that the client list was property owned by Martin and which he could sell.” The court also observed, “The adjusted cost base of a capital property disposed of generally reflects the costs or after-tax amounts actually paid by a taxpayer for the property and to improve it. … [Martin] did not ever buy a list of clients.” Finally, the court noted that, although disposition costs may be claimed under the Act, “expenses must actually have been made or incurred for the purpose of making the disposition.” Since $14 million was only Martin’s “estimate of his other losses resulting from the loss of his clientele and the revenue it could generate,” the court said, “CRA was correct to not recognize any of the requested [$14 million] of disposition costs as an increase to Martin’s claimed capital loss in 2010.”

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by Jamie Golombek, CPA, CA, CFP, CLU, TEP, managing director, Tax & Estate Planning with CIBC Wealth Advisory Services in Toronto. Jamie.Golombek@cibc.com

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.