TAX NEWS - JUNE 2010

Canada Tax: Marc Emery's tax dollars at work

by Travis Lupick, 03 June 2010 -- Marijuana activists Jodie and Marc Emery have always kept interesting company. But people might be surprised to learn that Marc, who was recently extradited to the U.S., has spent quite a bit of time with officials from the Canada Revenue Agency.

"They would have meetings with him," Jodie Emery told the Georgia Straight in a phone interview. "Officials from Revenue Canada would sit down and say, 'Hey Mr. Emery, how is it going? Good, good. How are sales? Oh, slow time of year? That's too bad. Well, hopefully you can sell some more.' "

While the meetings were apparently congenial, the Canada Revenue Agency (CRA) wasn't wasting its time. According to Emery, between 1999 and 2005, her husband paid over $580,000 in provincial and federal income tax on the sale of marijuana seeds alone. And the Canada Revenue Agency (CRA) is currently after an additional $300,000, Emery said.

She questioned whether or not this made the Canada Revenue Agency (CRA) culpable for profiting from a criminal act, which is illegal under Section 462.31 of the Criminal Code of Canada.

Bradley Alvarez, a spokesperson for the Canada Revenue Agency, told the Straight that privacy legislation prevents him from talking about specific cases.

"What I can tell you is the fact that the Income Tax Act does not distinguish between income… being legal or illegal," he said in a telephone interview from his office in Vancouver. "All it says is that any income that you make is reportable and subject to income tax."

Alvarez explained that the Canada Revenue Agency (CRA) has a division called the special enforcement program, which assesses income derived from illegal activity.

Numbers supplied by Alvarez show that, during the 2009–10 fiscal year, the program conducted a total of 921 audits that resulted in federal tax assessments totalling $73.4 million.

According to Caitlin Workman, a Canada Revenue Agency (CRA) spokesperson based in Ottawa, a body of federal and provincial case law has established that collecting taxes on illegal income does not constitute a breach of the Criminal Code.

In 1983, then – B.C. Supreme Court judge Beverley McLachlin ruled that the proceeds of a crime constitute income as defined by the Income Tax Act.

In her decision, she quoted a 1927 court decision that stated: "There is no doubt that the word income in the Income Tax Act is sufficiently wide to include money other than that received from bona fide transactions. The fact that profits are derived from an illegal business does not make them immune to taxation."

Furthermore, McLachlin dismissed the argument that by taxing illegal income, the Canada Revenue Agency (CRA) is profiting from a crime.

"The Tax Department would be in violation of section 312 only if it had in its possession property which it knows or wilfully blindly ignores is obtained by unlawful means," McLachlin wrote. "The monies used to satisfy the tax debt may come from lawful means, even though they are calculated on unlawful activities…"

Neil Brooks, an expert in tax law at Osgoode Hall Law School at York University, argued that it would be downright odd if the Canadian government did not try to tax illegal income.

"It would seem to me to be quite strange that we would treat — for tax purposes — people that were making their income illegally more favourably than we treated people who were making their income legally," he said in a telephone interview. "Income tax is supposed to be levied on the basis of people's ability to pay."

Brooks noted that privacy protections built into the Income Tax Act make the release of information on specific cases a rare occurrence. But he said that some people who make their income illegally do report that money to the Canada Revenue Agency.

"They worry more about being charged with tax evasion than they might worry about being charged with their illegal activity," Brooks explained. "Al Capone is the paradigm case—the Americans sent him to jail on tax evasion."

In an interview conducted on May 25, five days after Marc Emery was extradited to the U.S., Jodie Emery described the federal government's actions as "ironic and somewhat unjust".

"Let's ask the federal government and Revenue Canada if they can explain how it is fair that Marc Emery gets extradited and sentenced to five years when they accepted the proceeds of crime," she challenged.