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Federal Tax - 'Source of Income'. Chad v. Canada
In Chad v. Canada (Fed CA, 2026) the Federal Court of Appeal dismissed an income tax appeal, here brought against a Tax Court confirmation of a Minister’s reassessment - this wrt a finding "that the appellant undertook that activity in pursuit of loss, not profit", and thus could not claim a loss deduction.
The case also usefully explores issues of 'sham', 'hobby', the definition of business and the concept of 'source of income' - here in light of the key Paletta Estate (Fed CA, 2022) case:[3] The Tax Court concluded that the trading transactions were not a sham and were legally effective. However, it found that the appellant’s trading activities were not a source of income, relying on two recent decisions of this Court, Canada v. Paletta (Estate), 2022 FCA 86 [Paletta Estate], leave to appeal to SCC refused, 40325 (16 March 2023), and Brown v. Canada, 2022 FCA 200 [Brown]. Those cases confirm that an activity that has no personal or hobby element nonetheless must be undertaken in pursuit of profit to constitute a source of income: Paletta Estate at paras. 35–36; Brown at paras. 24–25.
[4] While satisfied that the appellant’s trading activity was not a personal endeavour or hobby, the Tax Court concluded that the appellant undertook that activity in pursuit of loss, not profit. Therefore, it found that the appellant did not have a source of income and any loss he incurred in 2011 from the trading activity was not from a source of income. Accordingly, the Tax Court confirmed the Minister’s reassessment and dismissed the appellant’s appeal: Chad v. The King, 2024 TCC 142 (per Sommerfeldt J.). (For clarity, I add that only the 2011 reassessment was at issue before the Tax Court.)
[5] The appellant now appeals that decision to this Court. He submits that the Tax Court erred in law by following Paletta Estate which, he argues, is incompatible with the governing jurisprudence of the Supreme Court of Canada (i.e., Stewart v. Canada, 2002 SCC 46 [Stewart] and Walls v. Canada, 2002 SCC 47 [Walls]). He urges this Court to apply Stewart and clarify the source of income test. In the alternative, if Paletta Estate governs, the appellant submits that the Tax Court erred in its application of the pursuit of profit test.
[6] I disagree.
[7] The Tax Court was bound by Paletta Estate, which itself follows Stewart and Walls. Moreover, I see no reviewable error in the Tax Court’s application of the pursuit of profit test. Accordingly, I would dismiss the appeal. At paras 8-50 the court usefully considers the case facts in light of the Palleta Estate case - this is all worth review if you are involved with such a case.
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