We suppose it's probably tough being a criminal these days... considering all the new technology out there, an ever expanding police presence, and cameras everywhere. But just in case your own good moral judgment, the threat of jail, or well... any of the actual reasons to stay on the straight & narrow haven't convinced you, we thought it might be a good idea to point-out yet another reason NOT to turn to a life of crime.
Illegal income is taxable in Canada.
Yes, that's right... if you turned to a life of crime just because you thought it was tax free... you've made a blunder. If you're not reporting your illegal income on your tax return, you're committing yet another offense. It's amazing how quickly a life of crime can snowball!
In a previous Canadian tax court ruling, Justice Sharlow said:
“It has long been accepted in Canada that a taxpayer who conducts an illegal business, or a business conducted unlawfully, is taxable on the profits of that business on the same principles as any other business...”
It's a cliché, but at Liberty Tax Service, we obviously feel that crime doesn't pay. It's better to put your talents to use to earn money legitimately, because it generally takes a lot more effort and risk to do things wrong than to do them right.
The retirement plan in most criminal organizations is terrible, job security is weak, the danger level is high, you're not contributing to your Canada Pension Plan, and last time we checked the Workplace Safety Insurance Board (WSIB) doesn't cover injuries if you get hurt or killed as a criminal. Without a legitimate income you can't qualify for a mortgage, get a car loan, and the list goes on & on. In no way are we actually supporting or condoning criminal activities - but we decided to have some fun with this goofy idea of taxing illegal income. What follows contains a very healthy dose of sarcasm.
Okay, so let's get started.
As a criminal who's decided to report your illegal income on your tax return, the first question is how to classify this income. “Import and Export” seems popular amongst crime shows on television, and it's just vague enough that it might not land the police on your door-step right away. But what if you're a contract hit-man? What type of business would this be? You'll want to get the description of your business activities as close to accurate as possible... because you wouldn't want to do anything wrong.
Cost of Goods Sold
Once you've decided to report your illegal income and now that you've figured out what kind of business income you're reporting, there is some good news: you're allowed to claim legitimate business expenses to help offset your totally illegitimate income. The only problem might be getting receipts.
Let's try an example: if you buy a kilo of cocaine and then resell it for a profit, then technically you have to report the entire amount you collected on the sale, but then you can make an expense claim for buying the cocaine as a “Cost of Goods Sold”. But you need receipts, or the Canada Revenue Agency will deny your expense. You may want to contact your supplier in advance, and request they provide a receipt when they make their next cocaine delivery. That might work.
If you buy a gun, you're not allowed to claim the expense for that gun all in one year. It must be capitalized, because in theory you'll have the use of the gun for more than one year. Any criminal claiming illegal income and the appropriate deductions must understand that you can only claim depreciation on capital assets used in your business... they can't be claimed as an expense all at once. If you sell your gun because you don't need it anymore, you'll need to report how much you got from the sale. If the gun increased in value, you'll have to pay capital gains tax on the increase in value and you will also have “capital cost re-capture” on any previous depreciation claimed on that gun. But if your gun goes down in value, or for whatever reason you have to throw the gun away quickly and you don't replace it with another gun... you may have a terminal loss. This is a completely different kind of “terminal loss” than when one of your crew gets “whacked”, so you have to be a bit careful with the terminology. Let's just say you'll want to make a list of any business assets, and keep this list up-to-date each year when filing your tax return.
Inventory gets a little bit complicated. The important thing is to add up your business related inventory at the end of each year, and ensure you're reporting the value of this inventory to whom-ever is doing your taxes.
Well, it happens... criminals do get caught. And now you're paying a lawyer in an attempt to get back to your illegal business activities before Lefty or Pinky takes over your turf. For most people, there isn't a tax deduction for legal fees on personal criminal proceedings, but we think you might have a chance since you've been reporting your criminal activities all along on your tax return. Some might see these legal fees as a legitimate business expense, but since it's a bit subjective, we recommend asking the Canada Revenue Agency for ruling in advance, prior to claiming your legal fees.
Meals and Entertainment
Meal expenses are routinely claimed when operating a business, and since you're now reporting all your illegal income you'll want to know how which meals are claimable, and which ones aren't. Generally, you can claim 50% of the amount on your receipts as a business expense – but only if there's a business reason for the meal. While attending up to 2 conventions per year, you can claim 100% of those meals. So whether you're out of town, or meeting with fellow mobsters, save those receipts for your taxes. Important note: the Canada Revenue Agency expects you to write all the names of the business associates you're meeting with on the back of each receipt. We recommend you write down the names of those you're meeting with in your criminal enterprises after the meeting is over, as your fellow criminals might get the wrong idea and think you're some kind of snitch. Your next business meeting could end up with someone wearing cement boots.
In this case, we're not talking about blackmail material to be used as leverage if needed. That's a completely different type of insurance. We're talking actual insurance. You know, like insurance on your car. Auto insurance, and other vehicle expenses can be claimed, but you need to keep a vehicle log. And only the portion of your insurance, fuel, repairs, and other automobile expenses that relate to your illegal business will be claimable. If you're paying for business liability insurance for your criminal enterprise, this would be somewhat revolutionary. Sure it's 100% claimable as a business expense – but it seems unlikely that your insurance company will cover the expense if you break someone's window in the commission of a crime and then apply to your insurance company to cover it under your umbrella policy when you get caught. With your type of business we don't feel that business liability coverage makes sense. But if you do pay for it, make an expense claim for 100% of the fees you pay to your insurance company.
The Canada Revenue Agency does not allow claiming tickets as a business expense, even if the parking ticket is obtained while in the commission of a... business matter. So it doesn't matter if you get a parking ticket while casing your local bank, or if you get charged with speeding in a high-speed pursuit following a big “score”... it's automatically disallowed. As one CRA agent once told us, “We're not going to reward people for breaking the law.” This approach does raise some interesting questions about the legitimacy of ALL your business expenses, considering the nature of your business. But let's not get too philosophical. If you feel you've been wronged by CRA and you want to challenge a CRA decision, you can make an appointment with the office of the Taxpayers Ombudsman, you can file an official objection using form T400A, and ultimately you can take your argument all the way to the Tax Court of Canada. But considering your aversion to courts, it may be wise to just forego claiming any tickets you may receive as they will be summarily disallowed upon review by CRA.
If your illegal business supplies goods or services in Canada, and your gross sales are more than $30k, you're legally required to set up an HST number and charge HST to your clients. It's important that any business with an HST number provides receipts to their clients upon each sale. Your clients may not enjoy paying the extra 5% to 15% (depending where you live in Canada), but if they are also self-employed HST registrants you can explain that they can claim the HST back when they file their HST. Perhaps this will entice them to claim all their illegal income too!
Don't be a criminal. Your tax return will just be far too complicated.
– Wayne Blackmere, Liberty Tax Franchisee