A Canadian Tax Law Primer for Pimps, Swindlers and Other Criminals
Can a Canadian resident be taxed on the profits he or she made from an illegal business, such as gambling? Yes, there is much established Canadian case law to that effect. But what is the difference between non-taxable gambling for fun/entertainment and gambling that is taxable because it constitutes an illegal “business”, in the eyes of the Canada Revenue Agency? The answer is, as with any task, the CRA will look at how seriously the person takes the goal of money making. Both swindling people for money and stealing from clients may be taxed, depending on whether the actor intended to pay the money back (before being caught) and how skilled, organized and serious that person was in his or her enterprise.
In the case of Luprypa v. Canada (1997), a pool shark did not report income he had made from playing in pool halls. The court decided that because he was not playing for entertainment, but rather as a source of income, he ought to be taxed. What was relevant in this case was that Luprypa practiced daily, played/worked Monday to Friday evenings, abstained from drinking during the week in order to gain an advantage over his inebriated opponents (whom he chose strategically) and that he actually had a reasonable expectation of profit each night (close to $200/night). Accordingly, Luprypa was taxed on his income from gambling each night.
At first glance, things seem bleak for swindlers, the fraudulent, and others in the employ of the underground economy. However, the scales of justice have remained balanced. This point is best illustrated by the case of Eldridge (1964) where the court viewed it as unjust to impose tax liability on a person’s income, regardless how earned, without allowing the correspondent expense deductions normally available, in order to offset the tax burden.
Eldridge was a madame in Vancouver, B.C. She was under surveillance by the morality squad of the Vancouver police, which eventually arrested her and her employees (including call girls and phone operators) and seized her files. The cops handed over the files to the Taxation Division of the government, which assessed Eldridge for the 1959 and 1960 tax years. Eldridge objected to the assessment on the basis that she had additional expenses, not recorded in her files, and her taxable income should be lowered to the extent of those expenses. In fact, for the year 1959, if Eldridge’s expenses were fully taken into account, she would not have had any taxable income, but rather a loss for that year. Eldridge claimed the following additional expenses:
– The Apartment rent of one of the part time call girls deduction allowed because the apartment was used as a place of congregation for the girls, while waiting for calls, as well as a place to carry out acts of prostitution.
– Inspections to check for telephone listening devices planted by the cops ($1,000) deduction not allowed because Eldridge did not have records/receipts for the service and could only provide a vague estimate of the actual cost.
– Protection fees (money paid to law enforcement authorities in exchange for information relating to which hotels are being staked out) deduction not allowed because Eldridge could not reveal who the recipients of the bribes were, for fear of bodily harm. The judge commented ” I must assume that the law enforcement officers are conscientious in the exercise of their duties and are incorruptible and such assumption can only be rebutted by convincing evidence to the contrary.” Whether such judicial notice is supportable is a separate issue altogether.
– Motel room fees – deduction allowed, since Eldridge had receipts.
– Legal Fees paid to a criminal attorney to defend one of Eldridge’s call girls against criminal charges – allowed since the money was laid out for the purpose of earning income. The girl returned to work that week, which she could not have done had she been sentenced to imprisonment.
– Liquor (one case of whiskey/week) given to officials of the civic administration (i.e. bribes) Not allowed as no documentation was adduced supporting her claim.
– Hired goons to exert physical strength in order to protect the call girls, whenever necessary deduction allowed for those amounts paid to the goons by cheek, but not allowed when paid in cash.
There were other amounts claimed but such expenses will not be discussed here as they are both uninteresting and/or fail to offer valuable tax insight. I hope the foregoing provided the reader with pragmatic tax lessons which might be applied in his or her own enterprise. Moreover, the above should serve to illustrate perhaps the sole reason why tax law is cool – it is blind, not only to a person’s race, religion, sexual orientation, and all the other enumerated grounds, but to criminal orientation, as well!