By Sheryl Smolkin
Have you ever handed your home renovation contractor cash to avoid paying provincial sales tax and GST? Do you accept cash for your in-home daycare services and conveniently “forget” to remit source deductions or claim the income for tax purposes?
If either of these scenarios strikes a chord, chances are you are a participant in the underground economy (UE). A September 2012 Statistics Canada study on the UE in Canada pegs the level of underground activity at $35 billion in 2009.
The UE is any legal business activity that is unreported or under-reported for tax purposes. This can include failing to file returns or omitting an entire business activity, also referred to as “moonlighting” or working “off the books.”
Under-reporting income received, such as “skimming” a portion of business income, bartering, or failing to report a portion of employment income such as tips and gratuities is also included in the UE. The three most significant industry sectors accounting for almost two-thirds of UE activity are construction, retail trade and accommodation/food services.
Why should you care? After all nobody wants any more taxes than they have to.
Well for one thing, paying your taxes is the law. Evading taxes is illegal and can result in criminal convictions leading to fines and jail time in addition to any taxes, interest, and penalties owing.
For example, in December 2012 a Saskatoon man was fined $15,734 for tax evasion for the years 2008 and 2009. He purchased and sold two separate properties for profit and deliberately did not report the income earned from these sources to evade taxes.
In addition, he knowingly failed to report rental income earned from a property, and management fees received from two other renovation projects. The total amount of income found unreported during the years under investigation was $79,195. This resulted in the evasion of federal income tax in the amount of $19,687.
The fine of $15,734 represents 80% of the tax evaded. In addition to the court fines, all outstanding taxes plus penalties and interest must also be paid.
The investigation of tax affairs arose from inconsistencies uncovered during a routine income tax audit which led the CRA to obtain a search warrant and to seize income tax records from the tax evader’s personal residence.
Tax cheating also places an unfair burden on law-abiding businesses and individual taxpayers because overall tax rates must be higher for governments to raise the necessary funds to pay for services.
Businesses that offer lower prices because of their failure to comply with Canada’s tax laws gain an unfair advantage. Tax-cheating employers also gain an unreasonable competitive edge by paying wages under the table in cash, in order to avoid paying the employer portion of employment insurance premiums and Canada Pension Plan contributions. The “knock on effect” is that their employees are eventually deprived of benefits from these important social programs.
Finally, those who avoid paying taxes are taking money that is needed for important investments in schools, hospitals, and other vital government services. In addition, cash transactions with no written contract or receipt offer no consumer protection and make it difficult for consumers to seek recourse.
Just because you haven’t been caught yet doesn’t mean you won’t be caught in future.
The Canada Revenue Agency has a variety of tools to detect those who do not report all of their income, including on-site visits by officers, information obtained from third-party reporting, leads from other audit files, informants, and indications that taxpayers are living beyond the level of income they report.
If you haven’t declared all of your sales and income in the past, you may be able to correct your information using the CRA’s Voluntary Disclosures Program. If you make a full disclosure before any audit or criminal investigation is started, you may only have to pay the taxes owing plus interest, but not the penalties.
While it may be tempting at times to try and avoid paying some or all of the taxes you, in the long run doing the right thing will actually save you money.
Have you filed your tax return yet? Send us an email to email@example.com and your name will be entered in a quarterly draw for a gift card. And remember to put a dollar in the retirement savings jar every time you use one of our money-saving ideas.
If you would like to send us other money saving ideas, here are the themes for the next three weeks:
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