It can be a complete shock to taxpayers when they learn that any money they made from illegal activities is still subject to tax.
If an individual is caught committing a crime, and the police suspect that the person has made money from their crimes, the police can and will report this to the Canada Revenue Agency (CRA). The easiest example to draw from is a drug dealer who is caught with drugs and large amounts of cash.
Once the CRA is tipped off, they will begin auditing that individual. Occasionally, they will even widen their net to include auditing family members and/or their related businesses.
Typically, a taxpayer is assessed a large amount of unreported income by the CRA. It then becomes the job of the taxpayer to fight the assessment in any way they can. Where this becomes difficult is when the taxpayer has no books and records, and cannot properly account for this unreported (illegal) income, nor can they account for their expenses. That is because they usually do not keep books and records.
Without books and records, CRA will not usually provide deductions for amounts paid to operate the business, nor will they allow Input Tax Credits.
If you are operating an illegal business, the Voluntary Disclosures program might be right for you. You should keep in mind that once an audit has started, this program is no longer an available option.
With the recent rash of marijuana dispensaries being shut down, it is only a matter of time before that information is passed from the Police to the CRA.
If any of the above concerns you, please seek assistance from a lawyer to know your rights. Give us a call today!
Brizzi v. The Queen, 2007 TCC 226 – Illegal Income, Forfeiture and Loss Deductibility
Canada v. Sifto Canada Corp., 2014 FCA 140 – Legality, Morality, and Taxation
Demers v. The Queen, 2014 TCC 368 – Taxability of Funds received from a Ponzi Scheme
Brown v. Canada, 2013 FCA 111 – Criminal Activities (Income) and the Information obtained by Police and its use by CRA
Detailed case law analysis may be found here.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.