Roughly $45.6 billion of the Canadian economy was “hidden” in 2013, according to a Statistics Canada study about the underground economy that was published in June 2016.
That amount was up 7.5% from the $42.4 billion that was off the books in 2012, and it represents about 2.4% of the nation’s gross domestic product. The lost revenue partly helps explain why the Canada Revenue Agency (CRA) tried to up its game by sending “nudge” collection letters to encourage players in the underground economy to pay up.
Unfortunately, the nudge experiment reportedly failed. An internal CRA report obtained by CBC News states: “In conclusion, we failed to find evidence supporting any of the three behavioural outcomes that the nudge campaign expected to produce.” (The campaign involved sending two different types of collection letters to taxpayers who were assessed — but hadn’t paid — their taxes. One version used friendly encouragement. The other contained less-friendly language. The results were compared with those from a standard stern collection letter.)
The CRA defines the underground economy as “business activity that is unreported or underreported for tax purposes.” The problem is so great that Ottawa has made it a priority to collaborate with provincial, territorial and industry partners to reduce it. In Budget 2015, the government earmarked $118.2 million over five years to bolster the CRA’s audit capacity by expanding its Underground Economy Specialist Teams. These teams use advanced data analysis to identify and adopt new approaches to combat the underground economy.
Appealing to the Public
But the CRA also wants help from individuals and businesses. On its current website, it states: “Hiring a landscaper? Paying cash to avoid the tax is risky.”
It goes on to say that the risks are particularly high when it comes to home renovations. In fact, residential construction accounted for nearly one-third (27.8%) of the underground economy in 2013 followed by:
1. Retail trade (12.5%), and
2. Accommodation and food services (11.7%).
Explaining the Risks
The CRA elaborates that when you deal with a contractor in cash, you have no protection against:
- Poor or incomplete work,
- Lawsuits if a worker gets injured,
- Cost overruns,
- Use of substandard materials,
- Responsibility for damages to your or a neighbour’s property, and
- Fraud, if you pay for work that’s never done.
In another focus area, the CRA is tackling the problem of unreported income in property flipping, which involves individuals buying and reselling homes in a short period for a profit. This includes real estate agents. Flipping is believed to be one of the reasons for overheated housing markets and underreported income.
Starting with the 2016 tax year, in order to claim the full principal residence exemption, taxpayers are required to report basic information (date of acquisition, proceeds of disposition and description of the property) on their income tax and benefit returns if they sell their principal residences. The tax agency also now requires that every sale of a principal residence be reported on Form T1-2016 Schedule 3, Capital Gains (or Losses).
The tax agency is also taking on businesses. It warns them that there are serious consequences for participating in the underground economy. Businesses must report all sales or income, as well as all work performed for cash. Otherwise, an enterprise owner could wind up paying hefty fines, face a prison term and lose the business. “It’s that simple,” the CRA cautions.
Employer responsibilities generally include:
- Collecting and remitting payroll deductions for employees,
- Reporting employees’ income and deductions on T4 or T4A slips, and
- Registering for the GST/HST if revenue (before expenses) is more than $30,000 a year.
The CRA emphasizes that paying employees under the table is unfair to them as well as against the law. Affected employees are deprived of such benefits as:
- Employment Insurance,
- Canada Pension Plan payments, and
- Workers’ compensation coverage.
Employers who pay in cash put themselves at additional risk. They could face administrative penalties and legal repercussions by provincial workers’ compensation boards for failing to report accurate payroll amounts, or failing to report an accident if the worker is injured on the job. In Ontario, for example, the fines for not following provincial workers’ compensation rules can be up to $500,000.
What can taxpayers do about all of this? Quite a bit actually:
File returns. Those who must file individual, corporate, or goods and services tax/harmonized sales tax (GST/HST) returns should do so accurately and on time.
Check payslips. Employees should check to be certain that their employers are withholding taxes to ensure they’ll receive their entitlements and benefits.
Make deductions. Employers, trustees, estate executors, liquidators, administrators or others who pay various types of taxes should be sure they make the required deductions. They must also remit those amounts, as well as any share they owe, to the CRA and report the income and deductions on T4,T4A or other summary and information returns.
Ask questions and get transactions in writing. Individuals planning to hire contractors or others should obtain written contracts and ask for proof of Workers’ Compensation or equivalent private liability insurance to cover injury and any damage that might occur in their homes.
If someone offers to provide services for cash, or you suspect an individual or business hasn’t reported all their income or GST/HST, you can contact the CRA through its Informant Leads Program. The agency will review the information provided to help identify and follow up with taxpayers who aren’t complying with their tax obligations.
The CRA urges individuals who may have participated in the underground economy to come clean and correct their tax situations through the Voluntary Disclosures Program. Under certain conditions, this program allows individuals to correct inaccurate or incomplete information on their tax returns. They can disclose amounts that weren’t previously reported, without penalty or prosecution. They’ll pay the taxes owed plus interest.