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Published: March 4, 2020

Last Updated: March 17, 2020

Many people are surprised to learn that income from illegal activities, such as income earned from theft, fraud, prostitution, and the sale of drugs and narcotics, is taxable. In fact, the Canada Revenue Agency (“CRA”) purposely audits taxpayers convicted of criminal behaviour and then estimates, if necessary, the amount of income they believe the taxpayer has earned as a result of the illegal activities. For the purpose of taxation CRA is indifferent as to how a taxpayer earns the business income, or what business is carried out. CRA is only concerned with whether the income was reported, as required by tax law.

The CRA’s Special Enforcement Program is tasked with identifying and auditing income from illegal activities through Special Enforcement Audits. According to CRA, 834 of these audits took place in to 2010 to 2011 period. In that period an additional $87,000,000 in tax owing was discovered.

Once audited, CRA normally assesses the taxpayer’s illegal income for tax owing. In addition, CRA routinely applies gross negligence penalties, which are usually 50% of the tax owing. Under section 238 of the Income Tax Act (the “Act”), every person who fails to file a return or otherwise comply with the Act is liable on summary conviction for a $1,000 to $25,000 fine. Under section 239 of the Act, every person who has evaded or attempted to evade payment of taxes is liable for a fine of 50% to 200% of the tax sought to be evaded. Failure to comply with the Act may also result in imprisonment for a term of up to 24 months. Furthermore, daily accruing interest also applies to the tax and penalties owing. Once assessed, and if the taxpayer does not take advantage of their appeal rights, CRA can proceed with collection activities including garnishing wages, seizing bank accounts, property, etc.

You may be even more surprised to learn that since the illegal income is taxed as income from a business, business expenses incurred to earn the income are usually deductible, thereby lowering the overall taxable income and resulting tax bill. Under normal circumstances, business records are used to establish business expenses. In the case of an illegal business, business records may not be readily available or exist at all. In those circumstances, CRA may still allow for a deduction of a reasonable amount of expenses. However there may be a fight with CRA to allow deduction of all expenses incurred where there is no evidence supporting the amounts. In essence, the taxation of income from an illegal business is not treated differently from the taxation of an ordinary business. However, please note that the Act prohibits the deductibility of certain expenses, such as illegal payments made to Canadian and foreign public officials.

Normally, those who are assessed by CRA on account of illegal income will receive a Notice of Assessment in the mail if they have not filed tax returns for the taxation year at issue or a Notice of Reassessment if they have. After that, the taxpayer has 90 days, and up to a year if an extension is provided under certain circumstances, to begin an appeal of the assessment.

The first step is to file a Notice of Objection outlining the reasons why CRA’s tax bill is incorrect. At this stage a CRA appeals officer will consider submissions regarding business expenses and actual income amounts earned from the illegal business. And of course, if a taxpayer fails at the Notice of Objection stage they have the right to appeal to the Tax Court of Canada, the Federal Court of Appeal, and with leave, the Supreme Court of Canada.

If you require assistance appealing your Notice of Assessment or Reassessment, for illegal income or otherwise, contact our experienced Canadian tax lawyers for a consultation so that we can advise you on the best way, if possible, to lower your tax bill.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. 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."

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