“A great achievement, like great love, takes risk.” Though I make no comment about the love element of that proverb, I feel oddly compelled to discuss risk, achievement (really failure) and deductible tax losses.
Taxpayers are often dazed when confronted with the losses incurred by a failing business. For many risk takers, those losses can be deducted against their business income. However, before claiming such a deduction, it is crucial that taxpayers examine whether those losses were in fact incurred in the course of a bona fide business.
This was the issue facing the Tax Court of Canada in the Heppner case. Mr. Heppner, a financial advisor in a Toronto brokerage firm, was presented with what he found to be an extremely appealing opportunity. A friend had received a fax from someone (I’ll call him “Scoundrel”) claiming that the Nigerian government owed the Scoundrel $30,960,000. The Scoundrel needed assistance in obtaining payment and was willing to share 30% of the amount. The friend (I’ll call him former friend or FF now) offered 10% to Mr. Heppner. Mr. Heppner and FF then began to transfer payments to the Scoundrel to facilitate payment. Though the transfers began in small amounts, it culminated in Mr. Heppner personally borrowing and paying $340,560 to the Scoundrel to cover the “transfer fee” for the $30,960,000 payment. When additional amounts were demanded from Mr. Heppner and FF they commenced their own investigation and soon realized that the $30,960,000 was not sitting in a bank waiting to be transferred to them as they had been told. Shockingly, they had been duped in a fraud scheme.
Having been duped, Mr. Heppner decided to make the Canadian government his partner by deducting the amounts as a business loss. Mr. Heppner argued that this transaction was in fact a business loss as it was connected to his business as a financial advisor and broker. Shockingly, the tax court would have nothing to do with that. The court dismissed this argument because there was no evidence to establish any connection between the fraud scheme and a business venture with his employer. In addition, the court found that Mr. Heppner had not exercised due diligence in this transaction to make it a bona fide business venture. The evidence did not show that he investigated the transaction. Rather, it appeared that he made no evaluation of the risk involved.
So what lesson can be learned from Mr. Heppner’s endeavors? Apart from the obvious lesson of avoiding a Nigerian Advance Fee Fraud, it is a reminder, that before we attempt to deduct a business loss, we must first ensure there is a connection between the loss and a legitimate business. As for great achievement requiring great risks, perhaps Mr. Heppner should have heeded the words of General George S. Patton, who wisely advised “Take calculated risks. That is quite different from being rash.” I would also advise him to run the other way if FF tells him about a Russian supermodel who has fallen in love with him over the internet and only needs $30,000 to come to Canada to be his bride.
-- Shelley J. Spring
The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.
