Introduction - GST/HST Obligations of Self-Employed Sex Workers in Canada

Sex workers provide services ranging from phone-sex operators, erotic dancers, sex-toy makers, and strip-club managers to pornographic actors, webcam models, and prostitutes.

All Canadian sex workers have one thing in common, however: tax. In particular, a self-employed Canadian sex worker might need to register for a GST number and start charging GST (and any applicable provincial sales tax, like HST) on services provided or goods sold to clients.

This article discusses the GST/HST obligations of self-employed Canadian sex workers carrying on business through a sole proprietorship, partnership, or a private corporation. It ends by offering tax tips to Canadian sex workers.

Sex Work as a Taxable Supply & The Requirement to Register for GST/HST

Section 165 of the Excise Tax Act imposes GST/HST on "every recipient of a taxable supply made in Canada." A "taxable supply" is the provision of a property or service in the course of a commercial activity, or in plain English the sale of goods or services. Basically, it captures most business transactions-including the exchange of sexual services for financial gain.

The obligation to pay GST/HST falls on the person who receives (i.e., purchases) the good or service; the obligation to actually collect the tax falls on the person who makes the supply-that is, the supplier of the good or service. A supplier need not collect GST/HST if earning less than $30,000 in gross revenue annually. But a Canadian business earning $30,000 or more in worldwide gross revenues must register for a GST/HST number and begin charging GST/HST on services provided or goods sold. Failure to do so is subject to tax penalties plus interest and possible prosecution for tax evasion.

This means that, if earning $30,000 or more in gross revenue, a self-employed sex worker must register for a GST/HST number with the CRA, charge GST/HST on goods and services, collect that GST/HST, and pay it to the CRA. This also means that a bookkeeping system has to be put in place and the business is subject to a tax audit by CRA.

If the sex worker paid GST/HST to business vendors, the sex worker may claim those amounts as an input tax credit (ITC), thereby reducing the net GST/HST payable to the Canada Revenue Agency. Examples of amounts claimable as ITCs include the GST/HST payable on commercial rent, the purchase of internet services, or cell-phone use to the extent that it is business related.

GST/HST Filing Requirements for Self-Employed Canadian Sex Workers

If obligated to register for GST/HST, the sex worker must file GST/HST returns for each reporting period-even if the worker earned no revenue during that period or had no net GST/HST payable for that period.

The length of a taxpayer's GST/HST reporting period determines when it must file GST/HST returns and pay the net GST/HST. A GST/HST reporting period can be annual, quarterly, or monthly.

  • If the reporting period is monthly, then that reporting period's GST/HST return and net GST/HST payable are both due by the end of the following month.
  • If the reporting period is quarterly, then that reporting period's GST/HST return and net GST/HST payable are both due within one month from the end of the quarter.
  • If the reporting period is annual and the business is incorporated, then that reporting period's GST/HST return and net GST/HST payable are both due within three months of the fiscal year-end.
  • If the reporting period is annual and the business operates as a sole proprietorship, then that year's GST/HST return is due by June 15th of the following year. But that year's net GST/HST payable is due by April 30th of the following year. (In other words, the filing and payment deadlines match those for income tax.)

The length of a reporting period depends on the business's annual revenue during the last fiscal year. A business that earned $1.5 million or less may opt for an annual, quarterly, or monthly GST/HST reporting period. A business may opt for a quarterly or monthly GST/HST reporting period if it earned over $1.5 million but not more than $6 million. And a business must use a monthly GST/HST reporting period if it earned over $6 million during the last fiscal year.

Director's Liability for the Unremitted GST/HST of an Incorporated Business in the Sex Industry

A corporation is a separate legal entity. That is, the corporation's obligations, rights, and liabilities are its own; they generally don't extend to the corporation's shareholders, directors, or employees. So, if the corporation, say, defaults on a loan or on rental payments, the creditor may sue the corporation for the unpaid debt, but the shareholders aren't personally liable because the corporation, not the shareholders, borrowed the funds or signed the lease. Of course, if the lender or landlord obtained a personal guarantee from the shareholder, then the shareholder would be liable, but the liability comes from being the guarantor, not from being the shareholder.

That said, a sex worker who solely owns and operates an incorporated business should know that the Canada Revenue Agency can pursue the corporation's director for the corporation's GST/HST debts. If the corporation failed to remit GST/HST, subsection 323(1) of the Excise Tax Act confers vicarious tax liability on "the directors of the corporation at the time the corporation was required to remit." Each director becomes "jointly and severally liable" to pay the corporation's unremitted GST/HST. In other words, if serving as the director of a corporation with GST/HST debts, the sex worker may personally inherit that GST/HST liability.

Tax Tips - Claiming Input Tax Credits, Avoiding Director's Liability, and Correcting Non-Compliance under the Voluntary Disclosures Program

As mentioned above, a sex worker may reduce the net GST/HST payable to the CRA by claiming input tax credits. The amount of the ITC equals the amount of GST/HST that the sex worker paid to its commercial suppliers. Depending on the nature of the sex worker's business, the sex worker might claim ITCs for the GST/HST payable on, for instance, the purchase of condoms, makeup, leather bondage apparel, sex toys, pornographic material, or lingerie; the manufacturing or importing of sex toys, porn, stripper poles, etc.; home renovations to create a BDSM or dominatrix dungeon; or the Internet and service costs to run a webcam sex show.

To qualify for an ITC, however, the sex worker must meet certain criteria. For instance, the sex worker must have been a GST/HST registrant during the reporting period in which the GST/HST was paid or became payable. The sex worker must also obtain documentary evidence substantiating the ITC. Our experienced Canadian tax lawyers can provide GST/HST advice about the benefits of registering for GST and about qualifying for and claiming ITCs.

If serving as the director of a corporation with GST/HST debts, the sex worker may personally inherit that GST/HST liability. The Excise Tax Act prescribes a two-year limitation period on a director's exposure to a corporation's GST/HST debt. The Canada Revenue Agency cannot assess a director for a corporation's GST/HST arrears "more than two years after the person last ceased to be a director of the corporation." So, the sex worker may limit exposure by resigning-thereby starting the clock on the two-year limitation period. But the resignation must meet the requirements of the governing corporate law. Further, after resigning, the sex worker must cease all tasks that only a director may perform. By continuing to carry out the duties of a director, the sex worker remains vulnerable to a director's liability assessment even after validly resigning. Consult one of our expert Canadian tax lawyers for advice on ensuring that a director's resignation is both valid and able to withstand CRA scrutiny.

By failing to comply with GST/HST obligations, a sex worker can face monetary tax penalties and criminal tax prosecution. In many cases, the best remedy is the Canada Revenue Agency's Voluntary Disclosures Program, which provides qualifying taxpayers with relief from tax penalties and tax prosecution. Our experienced Canadian tax lawyers have helped countless taxpayers avoid sanctions with the Voluntary Disclosures Program. To find out whether you qualify-or to discuss your options if you don't-consult one of our certified Specialist in taxation Canadian tax lawyers today.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.