A teacher has a second job as a freelance writer; a plumber takes on side jobs for cash to make a little extra money; a mom selling her crafts on Etsy. These are all examples of the underground economy – activities, both legal and illegal, that add up to trillions of dollars that take place “off the books” each year. Often called “moonlighting” or “working under the table,” these off the books transactions have long been around, but are now increasing around the world and are significantly impacting the Canadian economy. In fact, Canada’s underground economy totaled $45.6 billion in 2013, or about 2.4 percent of gross domestic product, according to new figures from Statistics Canada.
According to the Canadian Revenue Agency, underground activities can include bartering, failing to file tax returns, omitting an entire business activity from your tax return, “skimming” a portion of business income from your reported taxes, and not reporting a portion of employment like tips and gratuities. Statistics Canada states that three industries alone account for more than half the total value of the underground economy. They are:
- Residential construction (27.8 percent)
- Retail trade (12.5 percent)
- Accommodation and food services (11.7 percent)
Many people think that operating on a cash-basis makes them immune to paying taxes, but evading taxes is illegal and can result in serious penalties, including hefty fines and legal convictions. In addition, the underground economy deprives all Canadians of much-needed funds for communities and essential public services like schools and hospitals, according to the CRA. It also undermines the competitiveness of honest businesses that follow the rules and create employment in the community.
The CRA has put in place sophisticated tools to identify individuals and businesses participating in underground economic activities. In the Federal Government has budgeted $524 million in 2017 to be used to hire more auditors and develop computer systems to “target high-risk international tax” evasion. The Ontario government says it will be cracking down on the underground economy by creating teams of specialized auditors to root out tax cheats.
Here are a few tips to protect yourself and your business and avoid getting caught up in the underground economy:
Patronize the Good Guys – Hire only businesses that will give you a written contract and charge GST/HST sales taxes. Also, be sure to get a receipt while shopping or dining out.
Avoid Hiring “Under the Table” Contractors – When paying for car maintenance or home repair, you put yourself at risk. Everyone loves a good deal, but entering into a cash deal with a contractor leaves you without protection against poor or incomplete work, cost overruns and damages, among other fraudulent actions.
Report Abuse – If someone offers to provide off the books services for cash or you suspect they are not complying with tax obligations, contact the CRA through its Informant Leads Program.
Be Tax Compliant – Business owners must collect and remit payroll deductions for employees and meet reporting requirements. If your revenue before expenses is more than $30,000 per year, you must be registered for the GST/HST.
Stay “Above the Table” – Paying employees under the table is not only illegal but robs them of important eligible benefits like employment insurance and workers’ compensation coverage. Failing to follow this rule opens employers up to great risk of a criminal conviction, fines and/or jail time if discovered by CRA.
Come Clean – If your company has participated in the underground economy is the past, you can disclose previously unreported or inaccurate information to correct your tax situation before being discovered by CRA.
Millions of people earn their money from tips and other cash transactions. It’s important to think about the bigger picture and protect yourself and your community by filing accurate and complete tax returns each year. Sloan Partners can assist in helping individuals and companies to correct their tax returns, get relief from penalties and regularize such income.