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Published: March 28, 2024

Introduction: Illicit Businesses Still Need to Pay Taxes

Tax obligations exist regardless of whether the source of income is from illegal activities. The Canada Revenue Agency (“CRA”) will target taxpayers convicted of criminal behaviour for tax auditing and assess the amount of income the CRA believes the taxpayer earned from those illegal activities. This article sheds some light on the requirements to pay taxes on illicit activities and the intricacies involved in such cases.

The Legality of your Businesses Does not Matter for Paying Taxes:

Illegal activities, such as income earned from theft, fraud, prostitution of others, crypto scams and the sale of drugs and narcotics, is taxable just like legal sources of income or business activities. For taxation purposes, the CRA is indifferent as to how a taxpayer earns the income, or what business or activity is carried out. What the CRA is concerned with is whether the income was reported and if the appropriate taxes were remitted as required by Canadian income tax law.

Since illegal income is taxed as income from a business, business expenses incurred to earn the income can be deductible. The difficulty that arises in the case of an illegal business is that the necessary business records may not be readily available or exist at all. This lack of records will not stop the CRA from assessing the taxpayer’s illicit business. Instead, the CRA may make assumptions and use evidence available to it to conclude on the taxpayer’s undeclared income. In the Tax Court of Canada case of Chronis v. The Queen, the CRA assumptions resulted in gifts the taxpayer had received being improperly included in the CRA’s tax assessment. Arguing for deductions in these circumstances would be an uphill battle, but not impossible for an expert Canadian tax litigation lawyer. However, certain expenses, such as illegal payments made to Canadian and foreign public officials, are strictly prohibited from deduction under the Income Tax Act [“Tax Act”].

Auditing an Illegal Business:

If an illicit enterprise is found by the police, then the police may refer the taxpayer involved in it to the CRA for a tax audit. Doing so does not require charges or a conviction of the taxpayer by the police. These cases are typically handled by a specific tax audit program developed by the CRA known as the Illicit Income Audit Program. This is the successor to the CRA’s Special Enforcement Program, which was tasked with identifying and auditing income from illegal activities through Special Enforcement Audits. According to the CRA, 834 of these audits took place in to 2010 to 2011 period resulting in an additional $87 million in tax owing being discovered.

Tax owing may not be the only conclusion of such an audit, which could also result in one or more penalties being applied against the taxpayer. The CRA routinely applies gross negligence penalties, which are usually 50% of the tax owing.

The CRA may also prosecution a taxpayer under section 238 of the Tax Act, which stipulates that every person who fails to file a return or otherwise comply with the Tax Act is liable, upon summary conviction, for a $1,000 to $25,000 fine. Additionally, tax evasion charges could be brought against the taxpayer under section 239 of the Tax Act. According to this section, 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 and may also result in imprisonment for a term of up to 24 months.

Pro tax tip: Criminal vs. Civil Investigations:

One of the crucial differences between a tax audit and a criminal tax evasion investigation is the protections a taxpayer receives from the Charter of Rights and Freedoms [“Charter”]. During the gathering of evidence for criminal investigations the police must adhere to the Charter and avoid violating the rights of the accused. Similar restrictions do not apply to CRA tax audits, as was found in the case of Piersanti v. The Queen, 2013 TCC 226. In that case, the Tax Court found that evidence that would have been considered unlawfully obtained under a criminal investigation was allowed to be used by the CRA for its tax assessment of the taxpayer. Thus, understanding when investigation is being conducted for a criminal purpose versus a civil purpose can have a significant impact on a taxpayer’s case. An experienced Toronto income tax lawyer would be able be to advise on these evidentiary challenges that an illicit business may face.


Can evidence obtained by the Royal Canadian Mounted Police [“RCMP”] or a local police department of my illicit business be used by the CRA in Tax Court?

The RCMP can provide evidence to the CRA which would later be used in Tax Court to assess taxes owing’s. In the Tax Court case of Mahmood v. The Queen the RCMP provided to the CRA affidavits sworn by one of their sergeants. This was included in the documentary evidence. These affidavits were a critical part of the court case, which may have worked against the CRA in the end. The CRA focused on the legality of the taxpayer’s business at the expense of other possible legal arguments. This was noted by the Tax Court, which recognized that for the purposes of the Tax Act it was “immaterial whether the Appellant’s activities are legitimate or whether they are of a criminal nature.” An experienced Canadian tax lawyer would be able to craft proper defences in your case regardless of whether the business is illicit or not.

If the RCMP or a local police department seizes my assets and does not return them then can I deduct the costs of the assets?

If the forfeited items were not forfeited as the result of a penalty or fine, then deducting their cost is possible. In the Tax Court case of Chronis v. The Queen, various assets were seized by the RCMP, and a number of those items were not returned to him. The Tax Court found that the assets had not been forfeited as the result of a fine or penalty, and that the taxpayer was entitled to a further deduction of $61,740. An important consideration noted by the Tax Court is whether certain assets would be on capital account or income account. As can be seen from this case, being able to the forfeited assets can have a significant impact on the taxpayer’s financial situation. It is highly recommended that you have an experienced Canadian tax litigation lawyer advise on claiming such assets.


This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.


"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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