Tax man gets his cut of criminal profits

It wasn’t the bootlegging, the gambling or the prostitution that brought down notorious gangster Al Capone. It was taxes.

Crime doesn’t pay, they say, but if it does you better claim it as income.

A convicted drug trafficker in Quebec learned that this week when Revenue Quebec received court approval to seize his bank accounts, properties and possessions to cover $270,000 in unpaid taxes for his ill-gotten gains.

The Canada Revenue Agency, too, pursues criminals for unpaid taxes.

The agency’s investigations division acts on tips from police agencies or the public to pursue people who earn money through illegal activities. Those include everything from drug trafficking and prostitution to theft or loan-sharking.

“Like legitimate incomes, proceeds of crime are taxable,” says the agency. “This is an enforcement principle of the Act; its purpose is not only to ensure fairness of the tax system, but also to reduce profits from crime and to help counter the lure of profit that motivates criminal activity.”

In April, a Calgary man was sentenced to 27 months in prison and fined more than $390,000 for tax evasion related to a Ponzi scheme. Milowe Allen Brost failed to declare $1.5 million in income from the investment scheme between 2000 and 2006.

Brost, and his co-accused, were also found guilty in a separate criminal trial of defrauding thousands of investors through Capital Alternatives Inc. and the Institute for Financial Learning.

The same month, a Quebec marijuana grower was fined more than $103,000 for failing to pay income tax on his drug sales. Patrice Fortin, of Laval, Que. will have to pay the penalty in addition to the taxes owed, plus interest.

“The CRA can analyze the lifestyle of a taxpayer to determine if tax laws have been broken when a person seems to be living beyond their means,” the agency says in a statement announcing Fortin’s conviction.

There is a category on the tax form for “other” income. The Income Tax Act does not discern between illegal and legal income.

“Gains from theft or embezzlement as well as cash or property received as a result of extortion, blackmail, bribery, or other similar acts are income from a source and as such these funds or property are taxable in the hands of the recipient,” says the CRA.

More surprising is that taxpayers who report illegal income can claim expenses, according to accountants.

In 2005-2006, the most recent statistics available, the Canada Revenue Agency conducted 1,349 audits of taxpayers suspected of earning income from illegal activities. Auditors found more than $80 million in unpaid taxes.

Over the five-year period from April 2009 until the end of March 2014, the agency’s criminal investigations led to 783 convictions for tax evasion involving approximately $150 million in unpaid taxes.

The federal government and most provinces also have legislation that allows provincial authorities to seize assets obtained with the proceeds of crime.