Published: July 1, 2020
Last Updated: November 11, 2020
Income-Tax & GST Obligations of Self-Employed Canadian Sex Workers – A Canadian Tax Lawyer’s Overview
Introduction – Working in the Sex Industry
A Canadian sex worker’s worldwide income is taxable like that of every other Canadian resident. Like all income-earning Canadian residents, Canadian sex workers have income-tax obligations, and they may need to file a Canadian income-tax return.
In addition, if the sex worker is self-employed, GST obligations might arise. If so, the sex worker must register for a GST number and start charging GST (and any applicable provincial sales tax, like HST) on services provided or goods sold to clients.
This article outlines both the income-tax obligations and the GST obligations of self-employed sex workers in Canada. It ends by offering tax tips to Canadian sex workers.
Sex Work as a Source of Taxable Income
The term “sex worker” refers to anyone earning income in the sex industry. So, it covers a broad range of services, from phone-sex operators, erotic dancers, sex-toy makers, and strip-club managers to pornographic actors, webcam models, and prostitutes. It also covers activities ranging across the entire legality spectrum—from legal to legally grey to illegal.
If the sex worker operates an illegal or legally grey business, one might wonder whether that income is taxable. The answer is that Canada doesn’t shy away from taxing income that someone earned by breaking the law. This might seem like a government’s hypocritical attempt to share in unlawful gains. But this concern is trumped by the perverse incentives that would arise had Canada exempted unlawful income from tax.
Since Canada first introduced personal income tax, Canadian courts have affirmed that income earned from an illegal activity remains taxable. In No. 275 v. M.N.R., 55 DTC 439, a case involving the Income Tax War Act, which Canada introduced in 1917 to finance its efforts in the First World War, the court explained that illegality doesn’t bear on whether income is taxable:
[W]hen the question in issue is whether profits arising from illegal sources are liable to taxation or not, the courts are not concerned, either with the source of the taxpayer’s income, or by the means taken by him to earn it, but merely with the question as to whether or not the said income is liable to tax under the provisions of the taxing statute. Once the courts are satisfied that the income is liable to tax, it is immaterial that it comes from a legal or an illegal business, or a business which is malum in se or malum prohibitum.
In short, this means that a sex worker’s business income is taxable—regardless of where the specific endeavour falls on the legality spectrum.
Of course, it also means that sex workers gain the benefit of claiming allowable expenses and available tax credits. In 65302 British Columbia Ltd. v. Canada, [1999] 3 S.C.R. 804, the Supreme Court of Canada confirmed that a taxpayer may deduct the expenses incurred to earn income from an illegal business:
[…] it is well established that the deduction of expenses incurred to earn income generated from illegal acts is allowed. For example, not only is the income of a person living from the avails of prostitution liable to tax, but the expenses incurred to earn this income are also deductible […]. Allowing a taxpayer to deduct expenses for a crime would appear to frustrate the Criminal Code […]; however, tax authorities are not concerned with the legal nature of an activity. Thus, in my opinion, the same principles should apply to the deduction of fines incurred for the purpose of gaining income because prohibiting the deductibility of fines and penalties is inconsistent with the practice of allowing the deduction of expenses incurred to earn illegal income.
That said, Canada’s Income Tax Act does prohibit a taxpayer from deducting some expenses that an illegal enterprise might more commonly incur. Section 67.5, for instance, prohibits deducting the costs of kickbacks and bribes. And section 67.6 bars a taxpayer from deducting the cost of most government-imposed fines and penalties.
In any event, sex workers will find that most business expenses are deductible. The barrier often concerns not legal principle but adequate records. In M.N.R. v. Eldridge, [1964] C.T.C. 545, the taxpayer operated an illegal call-girl business that incurred various expenses, such as rent, legal fees, assistance for call girls, bail-bond costs, and casual wages. The court allowed the taxpayer to deduct these expenses. In fact, the taxpayer’s main hurdle wasn’t whether some legal principle barred the deduction; it was inadequate record-keeping. The taxpayer’s poor records made it difficult to prove the amount of the expenses. The court allowed all expenses that the taxpayer could prove.
Will the Canada Revenue Agency Report Illegal Sex Businesses to the Police?
If a sex worker operates a legally grey or illegal business, an additional concern might arise: Will the Canada Revenue Agency disclose this information to the police?
The short answer is, “no.” The less short answer is, “it depends.” On the one hand, unless an exemption applies, subsection 241(1) of Canada’s Income Tax Act bars the CRA from disclosing taxpayer information to anyone—including law enforcement. And subsection 241(2) says that a CRA employee cannot be compelled to disclose taxpayer information during a legal proceeding. On the other hand, under subsection 241(9.5), the Canada Revenue Agency may—not must—disclose a taxpayer’s information to law enforcement if the CRA “has reasonable grounds to believe that the information will afford evidence of” a serious crime—examples include: terrorism, organized crime, corruption of a foreign official, domestic government corruption, conspiracy, sexual assault, kidnapping, human trafficking, money laundering, drug trafficking, an offence punishable by a minimum prison term, an offence punishable by life imprisonment, an offence resulting in bodily harm, and an offence involving a weapon. So, unless the illegality associated with the sex worker’s business stems from a serious crime, the Canada Revenue Agency cannot disclose that taxpayer’s information to the police. For example, in Canada, prostitution currently occupies a legally grey area, yet the endeavour itself need not involve one of the above-listed offences. And in practice, it often doesn’t. In those cases, the CRA has no basis to disclose the taxpayer’s information to the police. And CRA employees face harsh sanctions for disclosing taxpayer information without warrant. But things might turn out differently for those who sexually exploit others. This includes pimps, depending on their conduct. Unlike sex work, which some define as a voluntary commercial exchange involving sex, sexual exploitation involves forcing another to commit sexual acts. As such, it often entails committing a number of the above-listed offences. Simply put, the Canada Revenue Agency cares primarily about whether you accurately reported your income and whether you paid your taxes. It doesn’t—and shouldn’t—care about how most in the sex industry earn their income since sex work often doesn’t involve a serious crime.
Canadian Income-Tax Implications for Self-Employed Sex Workers
As mentioned above, even if the business leans toward illegality, a sex worker’s business income is taxable, and the business expenses are generally deductible.
To report income and claim expenses, the sex worker will need to file an income-tax return. The type of return required and the deadline to file that return depend on whether the sex worker operates the business as a sole proprietor or through a corporation.
Canadian Income-Tax Returns for an Incorporated Business in the Sex Industry
If the sex worker operates the business through a corporation, the corporation must file a T2 Corporation Income-Tax Return within six months from the end of its taxation year. (A corporation may have an off-calendar tax year coinciding with its fiscal period.)
The corporation’s tax owing must be paid within two months after the end of its taxation year. But if the corporation qualifies for the small business deduction, it may delay payment by a month—i.e., the tax owing is date within three months after the end of its taxation year.
Canadian Income-Tax Returns for a Sole-Proprietor Business in the Sex Industry
If the sex worker operates the business as a sole proprietor, the sex worker must file a Canadian T1 General Income-Tax Return for a particular tax year by June 15th of the following year.
The tax owing for a particular tax year must be paid by April 30th of the following year.
An unincorporated self-employed sex worker may, however, be exempt from filing an income-tax return in certain cases. In particular, an individual taxpayer need not file a tax return for a tax year unless: (1) income tax is payable by the individual for that year; (2) the individual disposed of a capital property in that year; or (3) the Canada Revenue Agency demands that the individual file a return for that year.
That said, even if you’re not required to file an income-tax return, there are benefits to doing so. First, to receive certain tax credits or government benefits—for instance, the Canada Child Benefit, the GST/HST credit, the RRSP deduction—you must file an income-tax return. Likewise, by filing an income-tax return, you will preserve and update the CRA’s records about certain carryover amounts. For example, you need to file an income-tax return each year to update the CRA’s system about your unused Tuition, Education, and Textbook tax credits. In addition, by filing a return and receiving an assessment, you trigger a 3-year limitation period on the Canada Revenue Agency’s ability to tax audit and reassess that particular tax year. Unless the Canada Revenue Agency can show that you committed fraud or made a misrepresentation attributable to neglect, carelessness, or wilful default, the CRA cannot reassess a tax year more than 3 years after the date on that tax year’s original notice of tax assessment.
GST/HST Obligations of Self-Employed Sex Workers
If earning $30,000 or more in gross revenue, a self-employed sex worker must register for a GST/HST number with the CRA, charge GST/HST on goods and services, collect that GST/HST, and pay it to the CRA.
Tax Tips – the Necessity of Adequate Records, the Advantage of Filing Tax Returns & Voluntary Disclosures Program
Self-employed sex workers can deduct most business expenses. Depending on the nature of the sex worker’s business, deductible expenses could include condoms, makeup, leather bondage apparel, sex toys, porn, bondage classes, lingerie, home renovations to create a BDSM or dominatrix dungeon, and cost of operating a sex cam operation. Our experienced Canadian tax lawyers can provide tax advice regarding the deductibility of expenses.
Personal expenses are not tax deductible. And some legitimate business expenses may also have a personal-use aspect to them. In that case, the sex worker should deduct only a portion of the expense. For example, a webcam model might broadcast sex shows through the Internet from home. Suppose the webcam model spends only 30% of all Internet time broadcasting sex shows. The remaining 70% is spent on personal use. Then the webcam model should claim only 30% of the Internet bill as a business expense. Still, it might be hard to justify claiming even a proportion of some expenses. To secure work, a pornographic actor might need to be in great shape. Yet it’s unclear whether the actor may deduct gym-membership fees.
M.N.R. v. Eldridge illustrates the necessity of good record-keeping. The court confirmed that the taxpayer could deduct expenses from operating an illegal call-girl business. Yet poor record-keeping slashed the amount that the taxpayer could claim. So, sex workers need to maintain adequate records should the Canada Revenue Agency challenge their deductions.
Again, even if you’re not required to file an income-tax return, there are benefits to doing so—to name a few:
- Accessing government benefits and tax credits;
- Updating the CRA’s records about carryover amounts; and
- triggering the limitation period on the CRA’s ability to audit and reassess.
If, on the other hand, you are required to file an income-tax return, you might incur a steep monetary tax penalty should you miss a tax deadline. For example, the penalty for a late-filed tax return is 5% of that year’s unpaid tax plus 1% for every full month that the return is late (up to 12 months). So, a tax return that’s over a year late will result in an additional 17% penalty to your tax bill (and this doesn’t include the interest that may apply as well).
The Canada Revenue Agency offers remedial programs—like the Voluntary Disclosures Program and Taxpayer Relief (a.k.a. a Fairness Application)—that may allow you to either reduce the penalties that you already owe or avoid incurring penalties in the first place.
A Canadian taxpayer must satisfy several—often demanding—conditions to qualify for these remedial programs. And you typically may only apply once—that is, you only get one shot to make your case. As a result, your application must be carefully drafted and prepared. Our top Canadian tax lawyers can assess your situation, provide insight on relief that may be available, and prepare your application accordingly.
Disclaimer:
"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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