Porter CEO battling CRA over tax bill from 'significant losses' from 'high-risk' pandemic trading
OTTAWA — Porter Airlines’ CEO is fighting the CRA over a six-figure tax bill linked to an unsuccessful incursion into “high risk” trading in the early months of the COVID-19 pandemic that cost him over $5.7 million.
When the COVID-19 pandemic hit Canada in March 2020, Porter’s top executive Michael Deluce saw opportunity. As economies suddenly shuttered and investors scrambled to grapple with the global pandemics, markets experienced some of the largest one-day swings in nearly four decades .
According to a document filed to the Tax Court of Canada, Deluce noticed market volatility and decided to liquidate an investment portfolio containing low-risk investments that would generate capital, but only in the long-term.
Instead, Deluce put the funds into a self-managed investing account and swung for the stars.
According to an appeal he filed in court, the airline executive thought he could make significant amounts of money by investing in high-risk exchange-traded funds (ETF).
He tried to short the S&P 500 index because he had a “very pessimistic view” of the market’s reaction to the pandemic and thought he could “profit off a potential fall of the stock market”.
On March 20 — the same day Porter suspended all flights for what would become 18 months — Deluce invested in an ETF focused on the price of futures contracts on crude oil, the document shows. His bet was that oil prices would rise within days after plummeting in early March amid a sharp dip in demand in the U.S. (they did not).
“(Deluce) traded high-risk investment products with the intention of capitalizing on the volatility of the market caused by the Covid-19 pandemic, and to realize significant short-term profits,” reads his appeal.
But Deluce’s gamble did not pay off. His appeal states that he incurred “significant losses” in his attempt to bet against the S&P 500, and losses in the four days he bet on oil prices rising starting March 20, 2020, but some gains from purchasing and selling units of a third ETF on March 26, 2020.
After eight months of trading, he had accrued nearly $5.8 million in investment losses as well as interest fees on the loans he took out to fund his trades, according to his filing.
Deluce is the son of Robert Deluce, who founded Porter Airlines in 2006 after a lengthy battle with the City of Toronto about development at Billy Bishop Toronto City Airport where the airline is headquartered. Michael Deluce was named CEO of Porter Airlines in 2019 and Robert Deluce assumed the role of executive chairman.
Because he believed he was acting as a trader, Deluce claimed the amount as a business loss on his 2020 income tax filing as well as some retroactive amounts going back to 2017, reads his appeal. The losses generated over $800,000 in retroactive refunds for 2017 to 2019 and contributed towards generating a $13,000 refund for the 2020 tax year.
But years later, CRA reviewed his claim and decided that Deluce was not acting as a trader, so his losses didn’t qualify as business losses but instead as capital losses.
“We are of the view that you did not behave in a commercial manner of conducting a business, like a day trader would do. (limited number of transactions, long period of ownership, etc.),” reads an excerpt of the government’s reassessment notice quoted in Deluce’s appeal.
“If your intention was to earn business income, you should seek daily goals and should have not be expected to track the underlying index over periods longer than one day… Therefore, the loss was capital in nature and not on account of business.”
The different is financially significant. If the losses are considered to be from a business, Deluce could claim them against any revenue he made. But if they are capital losses as CRA says, he could only claim 50 per cent of them and only apply them against income from capital gains.
As part of its reassessment, CRA claimed over $900,000 in additional income tax, arrears interest and refund interest from Deluce.
In his appeal of that decision, Deluce argued that the losses were incurred in the course of an adventure in the nature of trade and that he “acted in the same way as a trader would.”
“The operating motivation of (Deluce) was not to pursue long-term capital appreciation,” reads he document. “Deluce completed a significant number of transactions within a short period of time. He made trading decisions based on research, market trends and his own knowledge and professional experience.”
In a statement, Porter Airlines spokesperson Brad Cicero said the issue was a personal matter for Mr. Deluce and “unrelated to Porter and its business activities.”
In a separate statement, Deluce’s counsel Ed Kroft said the same: “this tax matter is strictly a personal matter and has no relationship to any Porter activities.”
In an interview, veteran tax lawyer David Rotfleisch said Deluce’s battle with CRA is one of the most common types of appeal to be litigated in the tax court.
“The case will come down to, does he have the ability and the fact that will persuade a judge that, yeah, this guy did this as a trading transaction, not with an intention to buy an asset, sit on it and sell it down the road,” Rotfleisch said, noting that courts look at intention, expertise and sources of financing in these cases.
“The guy has got a background in business. He worked for Scotia capital. He was a trader. These were short transactions. He borrowed money, he bought on margins. These are all (indications) of an adventure in the nature of trade ,” he added.
The CRA declined to comment while the case is in front of the court. The agency has not filed a response to Deluce’s appeal.
cnardi@postmedia.com
National Post
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