Executive Summary: Key Legal and Evidentiary Issues

• Whether the Tax Court erred in following Paletta Estate, given the appellant's argument that it is incompatible with the Supreme Court's decisions in Stewart and Walls.
• Application of the source of income test to a clearly commercial activity that lacks any personal or hobby element but appears aimed at generating losses rather than profit.
• Distinction between an intention to pursue profit (required) and a reasonable expectation of profit (not required) under Stewart.
• Standards of appellate review: correctness for questions of law, and palpable and overriding error for questions of fact and mixed fact and law.
• Sufficiency of objective evidence (admitted facts, contemporaneous correspondence with the broker, and the $240,000 broker fee) supporting the finding that the appellant's intention was to incur a target loss of approximately $22 million for 2011.
• Tax-avoidance as the exclusive aim of an activity, and whether such an activity can constitute a source of income under the Income Tax Act.

Background and facts

In late 2011, the appellant, S. Robert Chad, began trading in foreign exchange forward contracts using a straddle-trading strategy. The strategy resulted in a loss in 2011 in excess of $22 million, but a nearly identical aggregate gain in 2012. The appellant deducted approximately $9.6 million of the loss in computing his income for the 2011 taxation year, and deducted approximately $4,900,000 of the remaining loss as a non-capital loss in 2013 and 2014. The Minister of National Revenue reassessed the appellant's 2011 taxation year to deny the loss, asserting that the trades were a sham, were not legally effective, and were not a source of income. The appellant appealed the reassessment to the Tax Court of Canada. Only the 2011 reassessment was at issue before the Tax Court.

The Tax Court decision

The Tax Court (per Sommerfeldt J., Chad v. The King, 2024 TCC 142) concluded that the trading transactions were not a sham and were legally effective. However, relying on Canada v. Paletta (Estate), 2022 FCA 86 (leave to appeal to the Supreme Court of Canada refused), and Brown v. Canada, 2022 FCA 200, the Tax Court found that the appellant's trading activities were not a source of income. While satisfied that the trading activity was not a personal endeavour or hobby, the Tax Court concluded that the appellant undertook the activity in pursuit of loss, not profit. The Tax Court reasons recorded that "the intention of [the appellant] and Mr. Hodgins, in implementing the Trades, was…to incur a loss for 2011 of approximately $22,000,000," and that the appellant himself had "described to [Mr. Hodgins] my desire for a loss." The Tax Court accordingly confirmed the Minister's reassessment and dismissed the appeal.

The appeal: arguments raised

The appellant appealed to the Federal Court of Appeal, advancing two principal arguments. First, he submitted that the Tax Court erred in law by following Paletta Estate, which he argued reformulated the source of income test in a manner "wholly incompatible with the Supreme Court's direction in Stewart and Walls" and irreconcilable with other Supreme Court jurisprudence. He contended that under Stewart, where the nature of the activity is clearly commercial and contains no personal or hobby element, no further pursuit-of-profit inquiry is necessary, and he submitted that Paletta Estate effectively resurrected the "reasonable expectation of profit" test that the Supreme Court had rejected. He urged the Court to find Paletta Estate "manifestly wrong." Second, in the alternative, the appellant submitted that if Paletta Estate governs, the Tax Court erred in its application of the pursuit of profit test, in particular by relying on only two transactions rather than his entire course of conduct and by fixating on the $240,000 fee the appellant paid to the broker assisting him with his trading activity.

The Federal Court of Appeal's analysis

The Court (Monaghan J.A., with Gleason and Goyette JJ.A. concurring) applied the appellate standards of review from Housen v. Nikolaisen, 2002 SCC 33: correctness for questions of law and palpable and overriding error for questions of fact and mixed fact and law. On the first argument, the Court rejected the appellant's submissions for three reasons. To conclude that Paletta Estate was manifestly wrong required the Court to be satisfied that it had overlooked a relevant statutory provision or a case that ought to have been followed, and the appellant identified none; Paletta Estate had in fact expressly considered Stewart and Walls and explained that those decisions too are premised on pursuit of profit as an essential feature of a source of income. Paletta Estate did not reinstate the reasonable expectation of profit test, since an intention to pursue profit and a reasonable expectation of profit are different concepts. The Supreme Court had also dismissed the application for leave to appeal Paletta Estate.

The Court held that Stewart and Walls recognize that the absence of a personal element is not, by itself, determinative. Citing Moloney v. Canada, 92 D.T.C. 6570 (FCA), the Court reiterated that the reduction of a taxpayer's own tax cannot by itself be the taxpayer's business for purposes of the Income Tax Act. As in Paletta Estate, the appellant's activity lacked a personal element but, despite appearances of commerciality, was not undertaken in pursuit of profit; like Mr. Paletta, the appellant's goal was a target loss to offset his taxable income, and an activity aimed exclusively at avoiding one's tax cannot be a source of income. The Court declined the appellant's invitation to clarify the source of income test, explaining that Brown did not change the approach but rather summarized Paletta Estate's governing principles, and that Fournier-Giguère v. Canada, 2025 FCA 112—which concerned poker playing, an activity with a personal element—did not undermine Paletta Estate or Brown because those decisions did not concern activities with a personal element.

On the second argument, the Court found none of the appellant's submissions persuasive. Legally effective transactions and the absence of a sham do not preclude a finding that activities appearing commercial are not a source of income. The Tax Court appropriately considered objective manifestations of the appellant's stated intention, including admitted facts and contemporaneous correspondence between the appellant and his broker (citing Symes v. Canada, Ludco Enterprises Ltd. v. Canada, MacDonald v. Canada, and Van der Steen v. Canada). The Tax Court's reasons devoted several pages to reviewing the appellant's trading activities and did not rely solely on two transactions. The $240,000 broker fee was not treated as determinative but as relevant to the overall assessment of the appellant's intention. The Tax Court also considered the appellant's prior knowledge of foreign exchange, his subsequent application of learning from the trading activities, and the manner in which the trading was undertaken. Its conclusion that the appellant intended to incur a loss rather than profit was a finding of fact, which could not be reweighed absent a palpable and overriding error.

Conclusion and disposition

The Federal Court of Appeal held that the Tax Court did not err in following Paletta Estate, and that the appellant had not persuaded it that the Tax Court made any reviewable error in concluding that the appellant's intention in pursuing his foreign exchange trading activities was to incur a loss, such that he had no source of income. The successful party was the respondent, His Majesty the King; the appeal was dismissed with costs. The specific monetary amount of costs ordered cannot be determined, as it is not stated in the decision.