Another Tax Question

[oldjones]

But scrooge, while keeping a common bawdy house is illegal, adult entertainment is not. If said entertainment actually amounted to prostitution, that is quite legal, although advertising such a service might be determined to fall under the 'communication for the purpose' prohibition of the Criminal Code, and therefore be non-deductible.

 

[MissCroft]

From what Miss Croft wrote all that the person at H&R did not do was put a description of the job in the info section of the T2124 form (that is the self-employed business statement). She didn't say they didn't claim expenses, just that they didn't fill that form out completely.

What he said...lol. I've also gotten PMs from people telling me that I should just pay the CRA what I owe them and that I should always pay my taxes, etc. There seems to be some confusion - I DID pay my taxes and I did say I was self-employed just like I did in previous years. I think the problem was that the guy at H&R Block didn't fill this out properly on my return. So now the CRA is asking me to be specific about the source of income, the nature of the payment (salary, wages, etc.) and to provide info on the payer of this income. And yes, I do plan on talking to an accountant (and quite possibly a tax lawyer just to be on the safe side) and don't plan on doing my taxes through H&R Block again...

Thanks everyone for all the information!!

~Chloe~ XOXO

 

[scrooge]

But scrooge, while keeping a common bawdy house is illegal, adult entertainment is not. If said entertainment actually amounted to prostitution, that is quite legal, although advertising such a service might be determined to fall under the 'communication for the purpose' prohibition of the Criminal Code, and therefore be non-deductible.

Right - my point was that, to the extent the business is illegal, expenses would not be deductible. So prostitution is theoretically legal.

As for advertising, does the freedom of speech granted by the Charter not override the "communication" prohibition?

 

[My Johnson]

Sorry Scrooge.....Even income from from illegal activities is taxable (less expenses incurred to earn the income). I know...I do this for a living

 

[Moraff]

While i agree dragonbiz that there are some at H&R that do not know a lot about taxes, i actually DO and have been working there for 14 years.

Judging from stories I have heard about H&R I would say that they seem a lot like Canadian Tire mechanics.... There are good ones out there, but your chances of finding one are small.

I'm glad to hear that you are one of the good ones.

 

[My Johnson]

I vaguely recall from the ole' Beam and Laiken text that expenses related to criminal activities were not deducted. That's how they screw you...by taxing you on the top-line

I had Stan as an instructor.

Remember....being a sex worker is not illegal in Canada. Also, the CRA is not a law enforcement agency. Their mandate is to collect taxes. They only contact LE if you avoid paying taxes or commit tax fraud. Therefore, there is absolutely no risk to Chloe for claiming her taxes. Also, there is no where on the tax form that asks what your occupation is.

Any money that you have to spend in order to make your income can be claimed. This includes, cosmetics, cosmetic surgery, clothing, condoms, implements (see Rosa, do search) , transportation ie: taxi or driver or mileage on your own vehicle, etc etc etc….. You can’t claim anything you do not have a receipt for.

I think Stan was probably was referring to selling drugs, money laundering etc.

The other issue to consider is that you'll build up RRSP room and Canada Pension Plan.

There are also some great tax planning ideas available...especially if you structure up right. Right now I'm doing work for on SP and she may incorporate to access accelerated pension room.

Anyway...je degress.. Chloe has no big issue except for the misinformation she's receiving...but she's smart enough to figure out that one.

MJ

 

[scrooge]

Sorry Scrooge.....Even income from from illegal activities is taxable (less expenses incurred to earn the income). I know...I do this for a living

When did I say that? Did you not see from my post at 904am on 10-13-07 that I said gross receipts from an illegal business is fully taxable? (The question was whether expenses can be deducted.)

 

[scrooge]

Also, there is no where on the tax form that asks what your occupation is.

Any money that you have to spend in order to make your income can be claimed. This includes, cosmetics, cosmetic surgery, clothing, condoms, implements (see Rosa, do search) , transportation ie: taxi or driver or mileage on your own vehicle, etc etc etc….. You can’t claim anything you do not have a receipt for.

I think Stan was probably was referring to selling drugs, money laundering etc.


MJ

Not sure if your first statement is entirely correct. By default, a taxpayer is supposed to indicate whether the taxpayer has income from employment and/or business in the T1 Jacket. By doing so, the taxpayer is disclosing (at a minimum) whether the taxpayer is an employee or carries on business. In the latter case, a T2124 should be prepared in which the "main product or service" is supposed to be disclosed.

As for your second paragraph, are clothing and cosmetic surgery not deductible because they are on capital account? Also, strictly speaking, a taxpayer carrying on business cannot deduct "mileage" on own vehicle but a portion of the costs of operating the vehicle and tax depreciation relating to the business use.

As for your third paragraph (and assuming that you are right in your recollection), why would the deductibility of expenses be any different between selling drugs/money laundering vs. prostitution?

Certain illegal payments relating to officials corruption are by statutory prohibition not deductible. In the case of payments not covered by that section, the general rule appears to be what you mentioned - expenses incurred to earn income are deductible even though that income is earned from an "illegal" business. However, a court has denied such expenses based on "public policy".

 

[oldjones]

Bottom line on deductibilty of expenses incurred to earn illegal income*: By the point it becomes an issue, you're paying the taxes, and the only question is how much. Assume they're deductible, keep and claim all the receipts and let the courts—eventually—decide the matter. CRA will settle long before then if you're being at all reasonable.

*And yes, we all know prostitution is legal, although receiving income from someone else's prostitution is not.

 

[scrooge]

I think you're right on that one. The example was selling drugs; the cost of goods was not deductible.

However, I also recall that a Tax Court decision being overturned to allow a taxpayer to deduct fines related to breaching production quotas. "Legality" should distinguish between Criminal Code vs. other statutes.

Yes, the egg quotas case made its way to the Supreme Court of Canada where the taxpayer won.

You are right about distinguishing - in what I mentioned, the "illegal payments" made for corrupting officials are still contrary to the Criminal Code. Those payments contrast with fines and penalties (but not contrary to the Criminal Code) were dealt with in the eggs quota case.

 

[My Johnson]

Let me chime in here:

CRA is bound by confidentiality rules that prohibit sharing information with police.
CRA’s agenda is to collect duties and taxes that people owe. It’s not to report people to the LE. Confidentiality can only be broken when the agency is served a warrant by police, or if organized crime groups or gangs are involved.

In the case of Chloe, her income would not fall into the organized crime or gang category. She appears to be deducting expenses and should be fine if in the remote chance she was ever audited. (I assume she kept receipts)

Also, remember that the amount she earns (less than 100 K a year) is small for CRA to spend much time with.

Without seeing Chloe’s letter, it is hard to figure the main issue. She has been reporting her income so evasion is not an issue. They appear to want to know the source of the income. It may be to see if she is really self-employed as opposed to claiming self employed while working for one employer. It may be that GST is an issue.

This may be one of those general fishing letters they send out to the self-employed. The last one I saw was asking people if they had reported all their income (implying they knew something) I simply called up the CRA rep and asked what’s up and ended the issue in 10 seconds. There are a number of options she can use here.

Re Scrooge and 2124…yes there is a description and SIC code but these are pretty vague an certainly don’t have prostitution as a selection.

Re: Illegal activities and expenses. Most people in serious crime don’t bother to keep receipts so the point is somewhat moot. The bigger issue is they can levy penalties of up to 200% of the unpaid tax.

On deductibility of expenses, my experience is that clothing (non-personal use ie special clothing) and cosmetic surgery are deductible. Mileage assumes she pays the driver by the km as well as his personal time. Capital vs expense is always an issue but not for the purposes of this thread.

 

[tboy]

No, they don't automatically assume that you make $X per year, but you would be put into a different audit risk category (because of the cash nature of your income).

While cash-based earnings are subject to a higher probability of audit, it is not as though it is guaranteed to happen. A "lifestyle audit" is extremely time intensive, and it presumes a suspicion of tax evasion. The CRA only has a limited staff pool who do that sort of work. You are more likely to be asked for receipts to substantiate expense claims.

Actually I read somewhere that CRA just hired another 100 or so auditors just for this purpose...

 

[scrooge]

The risk is much more with a "net worth assessment" rather than a "lifestyle audit". It is much more difficult to conduct a lifestyle audit where expenses are paid with cash than to conduct a review of one's bank accounts and assets based on income reported on the T1.

 

[Rockslinger]

I am almost afraid to ask this question. Do agency ladies get a T4 from the agency? Or, do they get a T4A? Or, do they get no tax slips at all?

 

[Mikehorn]

(like me .. wink)

Or me

 

[Moraff]

I am almost afraid to ask this question. Do agency ladies get a T4 from the agency? Or, do they get a T4A? Or, do they get no tax slips at all?

Just a guess here. I would think it would depend on how "legit" the agency was running. If they are declaring the income, I would imagine that they would be providing tax info to their employees. But that's just a guess.

 

[JessiMae]

As a guess..some agencies are actually incorporated and some are not...so I am guessing some get T4's and some just receive the cash and nothing is filed.

Easy they are Independent Contractors (sp?) and not employees of the agency.

 

[scrooge]

Whether to file a T4 does not depend on whether the agency is incorporated. Every person (individual or corporation) must file a T4 if salaries, wages or remuneration has been paid in the year.

JessiMae is right when saying T4's are not required for independent contractors. However, it is a question of fact as to whether they are independent contractors in the first place.

 

[MissCroft]

Well, I received another ominous looking letter from the taxman yesterday. Opened it up to find that they've done a 'reassessment' from a previous year and I now owe another $4000! A fair chunk of that is in late fees/penalties).

Don't want to sound like I'm whining but I think it's unfair to charge the penalty fees when I filed my taxes and paid my taxes on time. In theory, could they not also go back a few more years and 'reassess' those as well and charge me 5 years in late fees!?! I don't see how they can do that, but then I'm not very well-versed in the whole income tax thing.

I haven't gone into great detail here about why they're charging me extra and would rather not (possibly in PM). I have spoken to someone professionally about it but would also like some other opinions. Is there a way to dispute the late fees with the CRA or is it a losing battle? Feel free to PM me though I probably won't be able to respond right away as I have to get going...busy day ahead!

 

[Mikehorn]

You can file a Notice of Objection, but what you would say depends on the reason they give for the reassessment. They have to include a reason somewhere.