Moore
July 2017 Newsletter

No capital loss upon losing former client base

In the Martin case (2015 FCA 204), the taxpayer was a financial advisor and broker for several years. He was quite successful and established a large and loyal client base. However, his employment with his employer brokerage firm was terminated when the firm was taken over. The taxpayer was unable to become an independent financial advisor or to establish his own firm. As a result, his former clients did not continue business with him and instead stayed with his former firm.

Afterwards, the taxpayer’s financial position worsened to the point that he subsequently had to claim insolvency and lost many of his personal assets.

For income tax purposes, the taxpayer made the interesting claim for a capital loss on the “disposition” of his client base. His position was that the client base was a valuable asset, which was “taken” from him by his former employer. He computed the loss, using an assumed cost base equal to the estimated present value of his lost future revenues, and nil proceeds of disposition. In addition, he increased the amount of the loss, claiming that his disposition costs included the value of his assets that were seized by creditors upon his insolvency. His total claimed loss was a whopping $14.8 million.

The CRA disallowed the entire loss. On appeal, the Tax Court confirmed the CRA position and also denied the loss. The Tax Court Judge held that the taxpayer did not own the client base, and therefore it was not his property to dispose of. In any event, since the taxpayer did not pay for the client base, it had a cost to him of zero, and it was not appropriate to estimate the cost using an estimated value.

The taxpayer appealed further to the Federal Court of Appeal. The three judges who heard the appeal upheld the Tax Court decision, and disallowed the taxpayer’s loss.

Last modified on July 12, 2017 12:00 am