The appellant engaged in foreign exchange straddle trading, realizing a large loss in 2011 and an offsetting gain in 2012, to defer taxes.
The Minister reassessed the appellant, denying the 2011 business loss on the basis that the trades were a sham, legally ineffective, or not a source of income.
The Tax Court found that the trades were not a sham and were legally effective under English law.
However, applying the Stewart test, the Court concluded that the trading activity lacked a predominant intention to profit, as the strategy was designed to generate a specific tax loss and was heavily hedged to avoid actual market risk.
Therefore, the activity was not a source of income, and the appeal was dismissed.
