In Canada, our tax laws are strange: We expect to share in your profits from the same businesses that we have our police try to shut down. But for tax laws, we are your partners, whether your business is illegal or legal. If you make a profit, we share; if you have a loss, you can deduct it from your income from that business or from other sources: Your loss is ours.
You can deduct your expense and loss if you incurred it “for the purpose of earning income.” (Para. 76) Legality and morality don’t matter in tax law. So, if the police seize your illegal drugs, you may be able to claim the value of the drugs seized as an expense against your income from the trafficking business or from other sources. (But if your property is forfeited under a court order as compensation for victims, the amount may not be deductible. See ITA s. 67.6: penalties and fines not deductible.)