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Jim Maroney Jim Maroney

:: Taxpayers obtaining illegal income get closer scrutiny by CCRA auditors

:: CCRA issued an interesting notice last week dealing with the taxation of illegal income. The lead-in paragraph states “since 1972, the Canada Customs and Revenue Agency (CCRA) has paid close attention to taxpayers who derive income from illegal activities”. Now that’s certainly reassuring but what happened before 1972?

Seriously, the notice points out “the Agency has set up a special program, administered by the Investigations Division, to identify people who support themselves through illegal activities and ensure that they file income tax returns and financial statements, if necessary, every year. The program's primary objective is to minimize the funds and property accumulated illegally by these individuals. It does this by ensuring that the taxes related to this income are assessed and collected”.

CCRA is particularly interested in anyone who receives funds from the sale of drugs and narcotics, theft, fraud, prostitution, smuggling, loan-sharking, embezzlement and other similar unsavoury activity.

It often comes as a surprise to people to find out that illegal income is taxable in Canada. But the truth be known, the Income Tax Act does not distinguish between income derived by legal or illegal means. Section 3 of the Act simple states that a taxpayer’s income is “the total of all amounts each of which is the taxpayer's income for the year… from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer's income for the year from each office, employment, business and property”.

In the eyes of CCRA income is income – the tax authorities aren’t particularly concerned with the legal nature of an activity, at least from an income tax standpoint. That’s not to say CCRA won’t contact the police (and vice versa) because they do and will.

Perhaps equally surprising to people is the fact taxpayers reporting income from illegal means are entitled to claim expenses incurred to earn their ill-gotten income unless such expense is specifically prohibited under the Act. The only prohibitions that I’m aware of deal with illegal payments to governments and the like – expenses often referred to as bribes. Of course, the ability to claim expenses against illegal income is often a moot point since criminals tend not to be the best record-keepers and, without receipts, legitimizing a tax deduction is an uphill battle.

Probably the most famous case involving the taxation of illegal income concerned the infamous American gangster, Al Capone. In the late 1920s Capone appeared to be above the law running a ruthless crime organization in Chicago. It wasn’t alleged involvement in serious criminal activity that caused Capone to spend time behind bars but rather his failure to pay taxes on the resulting profits.

The CCRA notice points out that 150 people have been assigned to work on this program and that “auditors have a network of special contacts in the various police forces and in governmental and para-governmental bodies who carry out criminal investigations and gather information. The auditors also receive information from the media and leads provided by the public”. Yes, Big Brother is watching.

Locally, if memory serves me correctly, I recall a situation in the late 1980s involving the death of a passenger in a high-speed boat down by the old Silver Bridge in Pitt Meadows. The driver of the boat was eventually charged with tax evasion when a sharp tax auditor, while reading The Province, questioned how someone could afford such a fancy boat on the limited income that was reported on the taxpayer’s personal tax return.

Then in the mid-1990s, BCTV ran a story on a “successful” home renovation contractor who couldn’t resist showing off in his big house and fancy cars before the cameras – there’s nothing like a bragger. Evidently, CCRA auditors found the story interesting too based on the audit that ensued.

The CCRA notice closes by pointing out that in 2001-2002, 566 audits were carried out under this program uncovering $36 million in unpaid income tax. This may sound like a lot but when you consider that the marijuana business in this province is said to rival the forest industry you realize the amount is nothing more than a drop in the bucket.

Nationally, the Auditor General of Canada estimated that in 1997, the underground economy in Canada amounted to $38 billion or 4.5 percent of Gross Domestic Product. This represents a $12 billion loss of tax revenues for that year alone. Of course, the underground economy is much larger than the “illegal economy” but these amounts do provide some insight into the size of the problem. I would hazard to guess that the $36 million the CCRA notice touts in the way of unpaid tax collected on ill-gotten income is a paltry sum indeed.

One gets the feeling we’re not much beyond pre-1972 era, at least where illegal income is concerned.

Free Tax Advice Article Submitted to Income Tax exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

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