Q: Can I be taxed on money I make from growing marijuana?
A: If you live in Vancouver, then you are no stranger to the idea that there is a bustling and thriving drug trade occurring beneath the very noses of every honest, taxpaying denizen of this city.
Not much time goes by without some mention of gang activity or people being brought before the courts with charges of trafficking in drugs or guns or producing drugs (methamphetamines or marijuana). To me it seems that these are common underworld “businesses”. In fact, the minister of national revenue agrees with me and also considers these activities as businesses. It does not matter that of course these “businesses” are fully illegal.
A curious offshoot of being charged with trafficking in drugs and guns or producing drugs is that you do not only face the prospect of jail time for these illegal acts, but you face serious issues with the Canada Revenue Agency. People engaged in selling drugs or guns or producing drugs chose a lucrative industry—income can be in the millions of dollars and therefore the tax owing on this income is substantial.
Since 1955, the tax courts have consistently maintained that tax authorities are not concerned with the legal nature of an activity, but rather in taxing the large amount of wealth generated by the operation of a lucrative, though ill-fated, business. Yes, the Tax Man doesn’t care where you got the pie, as long as he gets his slice.
So when it comes to light that you have been running a business that brought in thousands of dollars that, for obvious reasons, you did not mention to your accountant, you can expect to hear from the CRA. They will likely send you a notice of assessment letting you know that you owe thousands of dollars in back taxes.
Ninety days from the date you received that notice of assessment, interest begins accruing on the amount owed and the minister of national revenue has 10 years to collect the tax debt.
So you may have many questions. One might be: I didn’t keep any records! How can they assess me?!
Well, they can assess you in any number of ways. One method is the net worth assessment. The CRA can attribute income to you by tracking your bank accounts and taking account of your assets for a given period of time; if the income you reported during that time cannot reasonably be expected to support your lavish lifestyle, the CRA attributes an income to you which would be necessary to support your accumulation of wealth during that time period. This is an exceedingly arbitrary process.
Another method of reconstructing your income is by using experts. The CRA will determine through expert reports the expected or anticipated value of your business if it was consistently maintained for a given period of time (i.e. one gram of marijuana has a street value of $10; you had 1,000 plants in your home; one plant produces X pounds of marijuana; a marijuana producer usually has three harvests a year, and you got away with it for X number of years).
A third method to tax an illegal business providing a “good” is to assess the business for GST/HST owed. Working from the alleged volume of business you are accused of having conducted and the standard rate for which the “good” is commonly sold, the minister can determine how much you must remit to the government in GST/HST.
But you do have some wiggle room! You can demonstrate to a court the actual income from your illegal business and you can make appropriate business deductions. The thought is that if the CRA is going to tax your business like a legitimate business, then you should be allowed to deduct expenses like a legitimate business.
The bottom line is, however, not good. A tax debt once owed cannot be negotiated away or easily escaped in any other way. Having trouble with the CRA can truly hinder your opportunities to live your life freely (even if they don’t send you to jail).
Reasonable Doubt appears on Straight.com on Fridays. The column’s writers, Laurel Dietz and Nancy Seto, are criminal defence lawyers at Cobb St. Pierre Lewis. You can send your questions for the column to them at firstname.lastname@example.org.
A word of caution: Don’t take this column as personal legal advice, because it’s not. It is intended for general information and entertainment purposes only.