Chad v. The King

Chad v. The King
Court (s) Database
Tax Court of Canada Judgments
Date
2024-10-31
Neutral citation
2024 TCC 142
File numbers
2017-1458(IT)G
Judges and Taxing Officers
Don R. Sommerfeldt
Subjects
Income Tax Act
Decision Content
Docket: 2017-1458(IT)G
BETWEEN:
S. ROBERT CHAD,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
Appeal heard on June 20‑23, 2022, June 27‑30, 2022, July 4‑7, 2022, at Vancouver, British Columbia; on August 16‑19, 2022, at Ottawa, Ontario; on August 22‑25, 2022, at Toronto, Ontario; on January 20, 2023, virtually by Zoom; on January 23‑26, 2023, at Vancouver, British Columbia; on April 18‑19, 2023, virtually by Zoom; on May 15‑18, 2023, at Calgary, Alberta; and on August 21‑24, 2023, at Vancouver, British Columbia.
Before: The Honourable Justice Don R. Sommerfeldt
Representatives:
Counsel for the Appellant:
Justin Kutyan
Dov Whitman
Kelly Ng
Shara Sullivan
Counsel for the Respondent:
Charles Camirand
Shubir (Shane) Aikat
Grant Nash
Larissa Benham
Gerard Westland
JUDGMENT
Having considered the evidence and the submissions presented by the parties, and in accordance with the attached Reasons for Judgment (the “Reasons”),
IT IS ADJUDGED THAT:
1. The Appeal is dismissed, with costs, subject to paragraphs 186 and 187 of the attached Reasons and paragraph 2 of this Judgment.
2. Costs in respect of the Respondent’s recusal motion, which was heard on December 7, 2022, are awarded to the Appellant.
3. The parties shall have 30 days from the date of this Judgment to reach an agreement on costs and to so advise the Court, failing which each party shall have a further 30 days to file written submissions in respect of the costs awarded to that party, and each party shall have an additional 30 days thereafter (i.e., 90 days from the date of this Judgment) to file a written response to the other party’s initial submissions. Any submissions in support of a party’s claim for costs shall be limited to seven pages in length, and any party’s response to the other party’s claim for costs shall be limited to five pages in length. If, within the applicable time limits, the parties do not advise the Court that they have reached an agreement and no submissions are received from the parties, costs shall be awarded to the respective parties in accordance with the Tariff.
Signed at Ottawa, Canada, this 25th day of October 2024.
“Don R. Sommerfeldt”
Sommerfeldt J.
Citation: 2024 TCC 142
Date: 20241031
Docket: 2017-1458(IT)G
BETWEEN:
S. ROBERT CHAD,
Appellant,
and
HIS MAJESTY THE KING,
Respondent.
AMENDED REASONS FOR JUDGMENT
Sommerfeldt J.
I. INTRODUCTION
[1] In late 2011, Robert Chad, with the assistance of a broker (Timothy Hodgins), commenced to trade in foreign‑exchange (“FX”) forward contracts, using a straddle‑trading strategy that resulted in significant losses (the “Losses”) being realized in 2011, and significant gains being realized in 2012. Mr. Chad deducted some of the Losses in computing his income for 2011. Subsequently, the Minister of National Revenue (the “Minister”), as represented by the Canada Revenue Agency (the “CRA”), reassessed the tax payable by Mr. Chad for that year. Mr. Chad objected to that reassessment (the “Reassessment”), and eventually appealed to this Court.
II. BACKGROUND [2] Mr. Chad is a successful businessman who lives in Calgary. While Mr. Chad has diverse business interests, the principal focus of his business endeavors in 2011 and 2012 was oil and natural gas. His primary oil‑and‑gas entity was Signalta Resources Limited (“Signalta”), which had been started by his father in 1976. While completing a graduate degree at MIT, and due to his father’s terminal illness in 1985, Mr. Chad was thrust into the leadership of Signalta earlier than he had anticipated.
[3] Mr. Chad learned about the straddle‑trading tax‑deferral strategy from the law firm of Olson Lemons, who, in June 2022 (when Mr. Chad testified), had been his legal counsel for more than 30 years. While Mr. Chad confirmed that Olson Lemons had introduced him to the prospect of FX trading and had referred him to Mr. Hodgins, Mr. Chad declined, on the ground of solicitor‑client privilege, to disclose the name of the lawyer who had introduced that strategy to him. However, Mr. Chad did acknowledge that, in September 2011, he had communications with Bruce Lemons and Debbie Bryden, both of whom were lawyers with Olson Lemons.[1] As well, in a Response to Request to Admit, Mr. Chad’s counsel admitted that Mr. Chad “was introduced to Tim Hodgins by Tom Olson and/or Bruce Lemons.”[2]
[4] Mr. Hodgins was a self‑employed FX broker, who had a revenue‑splitting contractual arrangement with Velocity Trade International Limited (“Velocity”),[3] which was an FX brokerage company in London (UK).[4]
[5] Mr. Hodgins and his father, Arthur John Hodgins, owned all the shares of HFX Markets Ltd. (“HFX”),[5] which carried on a Canadian brokerage business. HFX had a contractual arrangement with Velocity, pursuant to which they “split revenues.” As well, HFX had a share earnout, entitling it to acquire up to 5% of the issued shares of Velocity.[6] It is not clear whether Mr. Hodgins and HFX each had a separate contractual arrangement with Velocity, or whether the contractual arrangements referred to in this paragraph and the preceding paragraph were one and the same.
[6] Mr. Chad testified that, in undertaking his FX trading activities (the “FX Activities”), his purposes were to speculate, to profit, to gain market access, to hedge (so as to control his FX exposure), to learn, to develop tools, strategies and concepts that he could use in his FX and other business concerns, to engage in tax planning, and to defer income from 2011 to 2012.[7] In the above‑mentioned Response to Request to Admit, counsel for Mr. Chad admitted that “[o]ne of the purposes for arranging and undertaking the Foreign Exchange Transactions was to reduce, avoid or defer the appellant’s tax payable under the Income Tax Act.”[8]
[7] In the Response to Request to Admit, counsel for Mr. Chad also admitted the following facts (as well as others):
11. The appellant contacted Tim Hodgins prior to the commencement of the Foreign Exchange Transactions.
15. Prior to the Foreign Exchange Transactions, the appellant provided to Mr. Hodgins a target loss amount for 2011.
18. The initially agreed upon target loss was $20M.
20. The target loss was later changed to $22 M [sic].[9]
[8] During cross‑examination, Mr. Chad said the following about his initial meeting with Mr. Hodgins, on October 6, 2011:
… I … described to Tim my desire for a loss, … or a deferral, to create the deferral. I would’ve described to him at that point that my target is $20 million.[10]
[9] Although the target loss for 2011 was initially set at $20,000,000, subsequently, in mid‑December 2011, as a result of further discussions about Mr. Chad’s potential tax liability, the target loss was, as noted above, increased to $22,000,000.[11]
[10] The amount of the fee initially charged by Velocity to Mr. Chad for brokering the Trades was $200,000.[12] On November 24, 2022, Mr. Chad arranged for $300,000 to be wired to Velocity.[13] The wired amount included an additional $100,000, which was paid by Mr. Chad to Velocity to cover the required margin amount.[14] It appears that, initially, Velocity held the $200,000 fee, as well as the $100,000 margin amount, in the account that Velocity maintained for Mr. Chad.
[11] When the target loss was increased to $22,000,000 in mid‑December 2011, the amount of Velocity’s fee was increased from $200,000 to $240,000. The additional $40,000 was taken from the margin amount, which then fell to $60,000. Thereafter, the amount of the margin account (i.e., $60,000) remained constant throughout the remainder of the time period that is relevant for this Appeal.
[12] The $240,000 fee was allocated between 2011 and 2012. In December 2011, $166,666.67 of that amount was paid by Mr. Chad to Velocity, as the fee for 2011.[15] The remaining $73,333.33 was paid on February 27, 2012, as a fee for 2012.[16]
[13] Mr. Chad began to trade with Velocity on November 30, 2011, in the over‑the‑counter (“OTC”) market, and not on an institutional exchange. Between November 30, 2011 and March 26, 2012, Mr. Chad entered into 34 FX forward contracts (the “FX Contracts”), in respect of the trades (the “Trades”) described in Schedule A. Velocity was the counterparty in each of Mr. Chad’s Trades. Mr. Chad traded only in US currency, and always entered into forward contracts in pairs,[17] one long (agreeing to buy a particular amount of US dollars on a future date), and the other short (agreeing to sell the same amount of US dollars on a slightly different future date).[18] Twenty‑two of the Trades occurred in 2011, and twelve of the Trades occurred in 2012.
[14] Each of the Trades, when made, was paired with another, largely offsetting, Trade. For instance, in Mr. Chad’s first Trade, which was transacted on November 30, 2011,[19] he agreed to sell USD 200,000,000 on September 12, 2012, for a price of CAD 204,799,200.[20] In his second Trade, also transacted on November 30, 2011, he agreed to buy USD 200,000,000 on September 19, 2012, for a price of CAD 204,818,600.[21] Since the notional amounts in the two Trades (i.e., USD 200,000,000) were the same, and since the value dates (i.e., September 12, 2012 and September 19, 2012) were only a week apart, the two Trades largely (but not precisely) offset one another.
[15] While the long leg and the short leg in each pair of Mr. Chad’s Trades almost offset one another, a complete set-off did not occur, given that there was always a slight difference between the value date of the long leg and the value date of the short leg. Consequently, there was a positive or negative difference, at any particular time, between the value of the long leg and the value of the short leg.
[16] In his direct examination, Mr. Chad explained his understanding of the tax‑deferral plan and straddle‑trading strategy, in this manner:
So the tax deferral plan was the potential, identify a target for deferral where certain loss, potentially, could be created and realized in the current year, in ’11. That would allow shelter of income in ’11. But the flip side of that, and the necessity of the trading is the gain would be recognized in ’12. So there’s no getting away from that. The deferral -- or, sorry, the losses created in ’11 has to be repaid in ’12. And that is -- so you are earning interest, essentially, on deferring or delaying your tax liability.[22]
[17] When cross‑examined, Mr. Chad reiterated the above concept, and also mentioned the “virtually offsetting” nature of his Trades:
Q. Okay, but the deferral would be first a target loss in 2011?
A. The mechanism is to potentially create a target loss, or to target a loss, to take in ’11, and then the result of that would be a gain that would be taken in ’12, that is virtually offsetting the loss.[23]
[18] Mr. Chad did not hold any of his FX Contracts to maturity (which would have required him to take (in the case of a purchase), or to deliver (in the case of a sale)), the contracted‑for amount of US dollars, in exchange for the contracted‑for amount of Canadian dollars. Rather, he arranged for each FX Contract to be closed out before its value date. The closing‑out of a particular FX Contract, with a particular position, was implemented by Mr. Chad and Velocity entering into a new FX Contract, with an equal and offsetting position (i.e., the notional amount and the value date of the new FX Contract were the same as those of the particular FX Contract).[24] The closing‑out of the particular FX Contract took effect when the new FX Contract was made.
[19] As December 2011 progressed, Mr. Hodgins determined which legs were in a loss position and which were in a gain position. From time to time in December, he recommended new Trades, which would close out certain of the loss legs of previous Trades, and Mr. Chad instructed that those new Trades be made. By the end of December, all of the loss legs had been closed out, thus crystallizing the Losses. The aggregate of the Losses that were crystallized in 2011 was $22,017,400.[25]
[20] In the first quarter of 2012, Mr. Chad entered into additional Trades, so as to close out the gain legs, which resulted in aggregate crystallized gains in 2012 in the amount of $22,023,600.[26] The amount by which the crystallized gains exceeded the crystallized losses was $6,200.[27]
[21] When asked, during his direct examination, to discuss the results of the Trades, Mr. Chad said that his “profit” was “pretty mediocre, small” and that the “profit wasn’t huge.”[28] In evaluating the result of his tax plan, he stated, “yes, we itemized the target and we were very close to that target.”[29]
[22] In the above-mentioned Response to Request to Admit, counsel for Mr. Chad also admitted the following facts (as well as others):
30. In his 2011 income tax return, the appellant:
a. claimed a business loss of $22,184,109 in respect of the Foreign Exchange Transactions; and
b. deducted no less than $9,610,068 of that claimed business loss against income from other sources for the 2011 tax year.
33. The appellant claimed a non‑capital loss carryover (the “non‑capital loss carryover”) for the portion of the business loss of $22,184,109 that was not used to reduce the appellant’s income for the 2011 tax year.
34. The amount of the non‑capital loss carryover claimed by the appellant was approximately $13,800,000.
35. The appellant used approximately $4,900,000 of the non‑capital loss carryover as a deduction against taxable income for his 2013 taxation year and 2014 taxation year.[30]
III. ISSUES
[23] The issues in this Appeal are:
(a)Were the Trades shams?
(b)Were the Trades legally effective?
(c)Did the Trades constitute a source of income, particularly for the purposes of paragraph 3(a) of the Income Tax Act (the “ITA”)[31]?
(d)Were the Trades executed before their value dates?
(e)Did Mr. Chad use the proper accounting method to report the Trades?
(f)Was the fee paid by Mr. Chad to Velocity in 2011 properly deductible?
(g)Does the general anti‑avoidance rule (“GAAR”) apply?
IV. EXPERT EVIDENCE [24] During the trial of this Appeal, seven expert witnesses were called, four by Mr. Chad, and three by the Crown.
A. Simon Bird
[25] Simon Bird, a resident of the United Kingdom, who, in 2022, had worked in the financial services sector for 35 years, was qualified as an expert in FX instruments, as well as FX markets and trading.[32]
[26] When retained by counsel for Mr. Chad, Mr. Bird was asked by them to provide expertise “in industry norms with respect to forwards that were traded in the over-the-counter (“OTC”) FX market in London, UK for the period from 2011 to 2012”.[33] During his testimony, Mr. Bird provided an overview of the OTC FX market in the UK. Several portions of his report are summarized in the next few paragraphs.
[27] As indicated by Mr. Bird, an FX forward is an FX product that allows two parties “to exchange a pair of underlying currencies at a set exchange rate on a pre‑determined date in the future”. An FX swap is generally “a combination of two FX forwards … [whose] price … is based on the difference between two countries’ interest rates.” Based on Mr. Bird’s understanding of the Trades, he opined that “[a]ll the trading and positions” that are the subject of this Appeal were “ultimately FX swaps”, and that he “did not see any FX forwards that were not part of an FX swap.”[34]
[28] Mr. Bird explained that an FX broker, when dealing with a client, may act in the capacity of either an agent or a principal. A broker acting as an agent deals with its client as an intermediary and passes the client’s order to another counterparty. A broker acting as a principal retains the trade on its own account, and is itself the counterparty to the trade. Based on Mr. Bird’s reading of the account-opening document governing the relationship between Velocity and Mr. Chad,[35] Velocity (as distinct from Mr. Hodgins) acted as a principal, i.e., Velocity was the counterparty to Mr. Chad’s Trades.[36]
[29] Mr. Bird stated that, if a client fails to meet its broker’s demand for payment of money owed by the client to the broker, the broker typically has the right to charge interest.[37] However, the broker has the discretion not to enforce a claim for interest, and may choose not to insist on the payment of interest, so as to maintain a good client relationship.[38]
[30] Mr. Bird described some of the characteristics of an FX swap in these terms:
64. An FX swap is a contract to exchange two FX contracts on two different dates in the future (i.e. it is made up of two FX forward contacts). There is an initial exchange of two currencies on a near date and at the same time an agreement to exchange the same two currencies in the reverse direction on a date sometime in the future, the far date. It is a contract in which one party borrows one currency from and simultaneously lends another to the second party.
65. The FX swap can be viewed as risk‑free collateralised borrowing/lending. The repayment far leg is viewed as collateral. For example, CAD may be bought in the near leg and USD sold and in the reverse leg CAD will be sold and the USD bought. Essentially, an FX swap is the combination of a spot FX (or FX forward) plus a further dated FX forward, agreed at the same time. An FX swap is generally less risky than a single FX forward and will therefore be cheaper to trade, requiring less margin. This is because its price will vary (and thus its potential for a profit or a loss) based on the interest rate differential of the 2 underlying currencies. It is essentially an interest rate position rather than [a] foreign exchange position and therefore has a lower intrinsic risk than an FX spot or an FX forward.
66. To put that important point another way, an FX swap requires a larger nominal value than an FX spot or an FX forward position to achieve a similar risk profile.
67. An FX swap contract effectively results in no net exposure to the prevailing spot FX rate, since although the first leg opens up spot FX risk, the second leg of the swap immediately closes it down. So, the only exposure is to the interest rate differential between the two currencies.[39]
[31] Mr. Bird provided the following comments in respect of a technique used by traders to close FX swaps before their respective expiry dates, the volatility of FX swaps, and the risks associated with FX swaps:
75. Invariably, FX swaps, when used as instruments to speculate on future interest rate movements, can be unwound by trading another FX swap with the same terms but in an opposite direction before the expiry date.[40]
76. The volatility of an FX swap is generally lower than the volatility of its underlying currencies. This is because:
a) Interest rates are intrinsically less volatile than the corresponding currency; and
b) As discussed above, an FX swap is the differential between 2 countries’ interest rates. If these countries have similar economies, are geographically close by and have similar levels of interest rate[s], then it is very likely there will be a high correlation between these interest rates and thus, the FX swap will have a low volatility because it is unlikely there will be a large movement in one interest rate independent of the other.
77. Additionally, if the time between the expiry dates of the 2 FX forwards that make up the FX swap is short (i.e. less than a week) then there will be less impact on the implied borrowing and lending rates than [there] would be if the time period was say, for a year. For example:
• If we have a nominal amount of USD 100,000,000 on deposit earning an interest rate of 1.2%
• Over 1 year we will receive USD 1,200,000
• Over 1 week we will receive 1/52 of that, i.e., USD 23,077
• If USD rates increase by 50 bpts[41] to 1.7% then
• Over 1 year we will receive USD 1,700,000, an uplift of 0.5% of the nominal
• Over 1 week we will receive USD 32,692, an uplift of 0.0096% of the nominal or almost 1bpt
78. The above example illustrates 2 points:
a) When dealing in FX swaps for time periods of around 1 week the potential profit or loss is relatively small in comparison to the nominal value of the FX swap.
b) Even when dealing in FX swaps for time periods around 1 week, there is still potential for a profit or loss to be made. In other words, there is risk associated with the structure.
79. Mr. Chad traded USD/CAD FX swaps by buying and selling FX forwards with typically less than 1 week between them.[42] [Footnote omitted.]
[32] Concerning any liability that arose when some of the Trades were closed out in December 2011, Mr. Bird stated:
156. Any monies that were owed by Mr. Chad to Velocity in 2011 with the closing out of FX swaps for losses were covered by the unrealised profits from open positions in the remaining FX swaps and the cash in the account, which when added up, created the positive Excess Margin (Net Equity). …
204. … realised losses can be left in the client’s account without the client having need to settle these if there are sufficient unrealised profits and/or collateral held in the account.
205. In 2011, when FX forward legs of the FX swap positions were rolled[43] by Mr. Chad[,] losses were realised[,] but there was no need for him to settle these amounts. This is because the open FW swaps, when valued at the prevailing market prices (i.e. they were marked‑to‑market) had unrealised profits. In other words, these unrealised profits in 2012 collateralised the realised losses from 2011.[44]
B. Uwe Wystup
[33] Professor Uwe Wystup, a resident of Germany, who holds a Ph.D. in mathematical finance, is a consultant in (among other things) financial engineering, FX and equity derivatives operations, and quantitative asset management. He is also a professor of financial option price modeling and FX derivatives at the University of Antwerp. He was qualified as an expert in the field of FX markets and trading.[45]
[34] Professor Wystup had been asked by counsel for Mr. Chad to address the issue of whether the Trades (which Professor Wystup described as foreign‑exchange forward contracts) were consistent with market conditions prevailing in 2011 and 2012 (which Professor Wystup called the “Relevant Period”).[46] In response to that inquiry, Professor Wystup, in his report, stated:
16. Based upon the facts and assumptions discussed in this Report, as well as my professional experience and expertise, it is my opinion that the Trades were consistent with market conditions prevailing during the Relevant Period.
17. Indeed, as explained below, the parameters of the Trades:
(a) are reflective of what would have been available on the OTC (over the counter) market during the Relevant Period; and
(b) are such that they carried the possibility of profit as well as the risk of loss for Mr. Chad.[47]
C. Sydney Broer
[35] Sydney Broer, a resident of Toronto, holds a bachelor of commerce degree and a master of business administration degree. He worked in the Canadian banking and credit union industry, as a trader, market maker and portfolio manager, from the mid‑1980s to 2013, when he became a consultant to several financial institutions. On August 19, 2022, Mr. Broer was qualified as an expert in the field of FX markets and trades,[48] with that expertise having been acquired in a Canadian commercial banking context.[49]
[36] Mr. Broer had been asked by counsel for Mr. Chad to consider whether the Trades carried a potential for profit and a risk of loss to Mr. Chad.[50] In response to that question, he opined that “the Trades carried a potential for profit and risk of loss to Mr. Chad.”[51]
[37] Mr. Broer stated that the FX forward market had been extremely volatile from September 2007 to June 2010, with some continued volatility up to September 2011. He also stated that, after a credit crisis in August 2011 in the Canadian provincial and corporate bond market, the volatility in the FX forward market had declined markedly by the end of 2011.[52]
[38] Given the delivery dates that had been chosen for the Trades, Mr. Broer inferred that the Trades had been set up to be influenced by meetings of the Federal Open Market Committee (“FOMC”), which were scheduled, well in advance, for March 13, 2012 and September 13, 2012, and at which the US Federal Reserve had been scheduled to announce its updated interest rate policy. As well, the Bank of Canada had interest rate decision meetings scheduled for March 8, 2012, April 17, 2012 and September 5, 2012. The markets could be expected to move daily before each of those meetings, which would factor into FX trading strategies and decisions.[53]
[39] Using data from Bloomberg Finance L.P. (“Bloomberg”) for the closing prices of FX forwards and the spot CAD/USD FX rate, Mr. Broer calculated the daily mark‑to‑market value of the Trades. He set out that data and his methodology in Appendix B to his report.[54]
[40] During his testimony, Mr. Broer noted that, when investors begin to trade in FX forwards, they cannot foresee the future, and thus, due to market volatility, they do not know in advance whether the market will be relatively stable during the respective terms of their trades, or whether there might be significant fluctuations in value, which could potentially result in substantial profits or large losses.[55] Consequently, with a view to ascertaining what might have happened if some unusual event or condition were to have occurred during the terms of Mr. Chad’s Trades, Mr. Broer used the same methodology as mentioned in the preceding paragraph to calculate “what the daily mark‑to‑market values of Mr. Chad’s portfolio would have been if the Trades were held during [the financial crisis of] 2008‑2009 as opposed to 2011‑2012.”[56] The Bloomberg data and the methodology that Mr. Broer used for those calculations were set out in Appendix B to his report.
[41] During cross‑examination on August 22, 2022, Mr. Broer explained that, in performing this hypothetical analysis, he had kept Mr. Chad’s configuration of trades, the same prices, the same trade dates and the same sequence of trades, but, in order to catch the market fluctuations that were occurring in 2008 and 2009, he had applied those fluctuations to his calculations.[57] He went on to explain that he had calculated what would have happened to Mr. Chad’s portfolio if the implied FX forward rate were to have moved in 2011‑2012 by the same amount as it had moved in 2008‑2009.[58] Mr. Broer also explained that he had repeated that exercise, but this time using data from November 29, 2019 to March 25, 2020 (i.e., the lead‑up to the Covid 19 pandemic), and had set out that data and methodology in Appendix B to his report.[59]
[42] During the cross‑examination of Mr. Broer, counsel for the Crown advised the Court that they and one of their expert witnesses had attempted to replicate Mr. Broer’s calculations, but had encountered difficulty, as it seemed that Mr. Broer’s report did not set out all of the elements of the methodology that he had used. Therefore, counsel for the Crown asked Mr. Broer, with the use of a laptop, to walk through his methodology, calculations and data.[60] After about a 40‑minute recess, during which Mr. Broer attempted to reconstruct his calculations, counsel for Mr. Chad advised the Court that Mr. Broer had not been able to do so, as the data in the report was in static form, specifically a printed PDF document.[61] Consequently, Mr. Broer was invited to spend some time that evening, reviewing his calculations, and then to return in the morning with workable data and an explanation of his methodology.[62]
[43] When the trial resumed the next morning (i.e., August 23, 2022), Mr. Broer advised the Court that he had discovered that, while he had backup data for many of his calculations, he did not have backup data for 2008‑2009 and 2019‑2020, which he needed in order to redo his hypothetical calculations. That data was available only through Bloomberg (to which he no longer had access), and it was too expensive for him to subscribe anew. Accordingly, the Court granted additional time to Mr. Broer to find an economical way to access the Bloomberg data and to redo his calculations.[63]
[44] It took Mr. Broer a couple of days to obtain the Bloomberg data and redo the calculations. When he returned to the courtroom on August 25, 2022 and his cross‑examination was resumed, he said that he was not able to “give the exact calculations” of the “values that are listed on page 179 [of his report], or those generally shown on Figures 2 and 3” of that report. He also said that the reason for not being able to re‑create those values was that, when he had performed his initial calculations, “there was an overlay of data[,] that [he] had brought the data in from one of [his] worksheets into the main calculation, and the data got corrupted and, as a result, the numbers that [he] saw afterwards were not correct.”[64]
[45] Consequently, Mr. Broer acknowledged that, although his formula and calculations were correct, the values shown in his initial report were incorrect and unreliable, because his calculations had used data that was corrupted, distorted and wrong.[65] Therefore, Mr. Broer had brought a revised report with him. However, in a voir dire concerning the admissibility of the revised report, it became apparent that it too contained errors and was unreliable. Furthermore, the digital copy of the spreadsheets provided to the Crown did not contain the syntax (i.e., the equations) for the cells. Consequently, as we were nearing a hiatus in the trial schedule, I provided Mr. Broer with an opportunity to make further revisions and corrections to his report.
[46] A few weeks later, Mr. Broer provided the Crown with a revised two‑volume report,[66] which became the subject of cross‑examination, when the trial resumed on January 20, 2023. During the cross‑examination, it became apparent that:
(a)To create the spreadsheets that he used in his analysis, Mr. Broer had copied and pasted information from a Bloomberg data download file.[67]
(b)Some of the numbers that Mr. Broer copied from the Bloomberg file were pasted into the spreadsheets in reverse chronological order.[68]
(c)When interpolating, to ascertain an unknown number between two known numbers, sometimes the interpolated number used by Mr. Broer was outside the bounds set by the two known numbers.[69]
(d)On at least one occasion, Mr. Broer, when performing a calculation, “referenced the wrong cell.”[70]
(e)In paragraph 2 of Appendix B to his revised report, Mr. Broer stated that, in conducting his analysis, he had “assumed a linear interpolation to identify the price between [the] specific time dates that are published by Bloomberg….” In paragraph 3 of the same appendix, he stated, “When there is a known important event taking place within those dates, such as an FOMC meeting, the linear interpolation is reduced to shorter periods between dates.”[71] However, during cross‑examination, Mr. Broer acknowledged that he did not actually do what he had said (in paragraph 3 of the appendix) that he had done (i.e., he had not reduced the linear interpolation to shorter periods), “because it [was] too onerous to do….”[72]
(f)When interpolating between two data points, Mr. Broer often selected one data point from a particular date and the other data point from the subsequent date, rather than selecting the pair of data points from the same date. Mr. Broer insisted that this was to account for weekends, even though some of the pairs of data points were in the middle of the week.[73]
(g)To create figures 1, 2 and 3 of his revised report, Mr. Broer first created three Excel files, which were described as spreadsheets, and which were referred to as Versions 1, 2 and 3 during the trial.[74] When Mr. Broer copied information from Bloomberg and pasted it in the second spreadsheet (i.e., Version 2),[75] in most of the columns (other than columns I and J) in the spreadsheet, the data for September 15, 2006 was entered on row 11. However, in columns I and J, the data for September 15, 2006 was entered on row 12. This misalignment of the data in columns I and J continued all the way to row 872, where the data for January 4, 2010 was shown in all columns (including columns I and J), even though row 871 had shown data for December 31, 2009 in columns I and J, but data for January 1, 2010 in all other columns. Mr. Broer could not explain the misalignment of data in rows 12 through 871, nor the correction in row 872. He conceded that the misalignment of data may explain the one-day shift discussed in the preceding subparagraph, although he maintained (without any explanation) that the misalignment would not have changed anything, and he doubted that it would have affected the spreadsheet (again without giving any reason for that assertion).[76] When cross‑examined, Mr. Broer said that the misalignment of data was not done purposely.[77]
(h)Mr. Broer frequently attempted to avoid answering questions posed by counsel for the Crown.[78]
(i)Mr. Broer was reluctant to acknowledge obvious errors in his reports and his calculations.
[47] By reason of the lengthy list of concerns set out in the preceding paragraph, I do not have confidence in Mr. Broer’s calculations. Accordingly, I have not given any weight to the opinions that he expressed.
D. Michael Blair
[48] Michael Blair, a resident of London, England, earned a master of arts degree in law from Clare College Cambridge, a master of arts degree in political science from Yale University, and a master of laws degree from Cambridge.[79] He was called to the English Bar in 1965, and was given the rank of Queen’s Counsel honoris causa in 1996.[80] From 1966 to 1987, he worked as a barrister employed by the British government, eventually becoming Under Secretary, in charge of the Courts and Legal Services Group in the Lord Chancellor’s Department. In 1987, he became General Counsel to the Securities and Investments Board (which regulated the UK’s investment business markets), which became the Financial Services Authority (the “FSA”) in 1997. He continued as General Counsel to the FSA until 2000, when he began to practise as a self‑employed barrister in Commercial Chambers, Gray’s Inn, specializing in financial services and financial services regulation.[81] Mr. Blair was qualified as an expert in English law, in respect of financial services and financial services regulation.
[49] As a backdrop to Mr. Blair’s evidence, subclause 17.1 of the Terms of Business and Privacy Agreement (the “Terms Agreement”) between Mr. Chad and Velocity states, “Governing law: This Agreement shall be governed by and construed in accordance with English law.”[82]
[50] Mr. Blair summarized his opinions as follows:
Based upon the facts discussed in this Report, my opinion, on the issues presented … is that an English court would find that:
(a) the Trades [which Mr. Blair defined as meaning “the foreign exchange forward contracts … entered into between S. Robert Chad and Velocity Trade International Limited”[83]] were governed by substantive English law;
(b) applying substantive English law,
(i) the Trades were not shams;
(ii) the Trades were legally effective;
(iii) the obligations under the Trades came into existence on formation; and
(iv) the obligations under the Trades were netted with acceleration of the net resulting obligation.[84]
[51] Mr. Blair has opined as to the manner in which an English court, applying substantive English law, would view the Trades. Mr. Blair has (quite properly) not considered the manner in which this Court, for the purposes of the ITA, should view the Trades. Rather, the questions of whether the Trades were shams or were legally ineffective, for the purposes of the ITA, are issues that fall to me to decide.
E. Ilias Tsiakas
[52] Ilias Tsiakas, a resident of Toronto,[85] earned a bachelor of arts degree (honors) in economics and political science from the University of Toronto, a master of arts degree in economics from York University, and a doctor of philosophy degree in economics from the University of Toronto. From 2001 to 2010, he taught in the Warwick Business School at the University of Warwick, initially as an assistant professor of finance, and subsequently as an associate professor. From 2010 to the date of his testimony, Professor Tsiakas taught in the Department of Economics and Finance at the University of Guelph, first as an associate professor, and later as a full professor. In addition, in 2016 and 2017, Professor Tsiakas was a visiting professor, and from 2017 to the date of his testimony, he has been a sessional lecturer, in the Department of Economics at the University of Toronto.[86] Professor Tsiakas was qualified as an academic expert in FX transactions.[87]
[53] Key elements of Professor Tsiakas’ opinion are set out in the executive summary in his report, as follows:
In my view, the Appellant implemented a highly sophisticated trading strategy, which was designed to be “well‑hedged” (but not perfectly‑hedged) against possible sources of risk. In this regard, the nature of the trading strategy was not consistent with taking risks that would justify earning a reasonable profit. In other words, this was a “low‑risk low‑return” strategy.
… [M]y analysis concludes that the Appellant’s activity in relation to foreign currency exchange contracts involved a low level of risk. In my view, since the strategy was “low‑risk low‑return”, it allowed the Appellant to maintain a portfolio whose value at any given point in time was close to zero. Some of the Appellant’s positions made a large profit and some made a large loss, but the portfolio was well-hedged so that the value of the portfolio was low and close to zero. At the end of 2011, the Appellant closed certain positions that made a loss, while maintaining positions that made a profit, presumably to crystalize these losses before year end. I have calculated the value of the Appellant’s portfolio on the last trading day of 2011 to be approximately $3,000 Canadian dollars (CAD). The reported losses claimed by the Appellant at the end of 2011 were approximately $22 million CAD. The remaining profitable positions in the Appellant’s portfolio at the end [of] 2011 also had a value of approximately $22 million CAD. The unrealized profits in the Appellant’s portfolio essentially offset the reported losses so that the total value of the Appellant’s portfolio at the end of 2011 was approximately $3,000 CAD. Overall, it was possible for the Appellant to maintain a “low‑risk low‑return” strategy and still execute trades that generated the losses claimed.[88]
F. Daniel B. Thornton
[54] Daniel B. Thornton, a resident of Kingston, Ontario,[89] earned a bachelor of science degree (honors) in mathematics, physics and chemistry from the University of Western Ontario, a master of business administration degree from the Richard Ivey School of Business Administration at the University of Western Ontario, and a doctor of philosophy degree from the Schulich School of Business at York University. After working as a staff accountant at Clarkson Gordon from 1971 to 1973, he worked as a lecturer in finance at York University in 1973 and 1974. He obtained his chartered accountant designation in Ontario in 1973 and in Alberta in 1989.[90] From 1974 to 1989, he was an assistant, associate and then full professor in the Faculty of Management Studies at the University of Toronto. From 1989 to 1993, Professor Thornton was a professor of accounting at the University of Calgary. From 1993 to 2000 and from 2001 to 2020, he was a professor of financial accounting at Queen’s University. In 2000 and 2001, he was a professional accounting fellow at the United States Sec