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The Underground Economy Is Eroding the Integrity of Our Tax System

07/15/2015 12:37 EDT | Updated 07/15/2016 05:59 EDT
Troels Graugaard via Getty Images

How is it that everyone seems to know someone who's paid under the table, but no one concedes to doing it? Of course, that's no surprise. Who wants to admit to putting personal gain ahead of the greater good?

But, of course, that's exactly what the underground economy (UE) does. It costs jobs, undermines businesses that play by the rules, and deprives the government of much needed revenue for vital programs. It also erodes the integrity of the country's tax system.

Statistics Canada says the UE totalled $42.4 billion in 2012, roughly 2.3 per cent of gross domestic product, much of it occurring in the construction, finance and real estate, retail and hospitality industries.

As a member of the Minister of National Revenue's UE Advisory Committee, I welcome the opportunity to work with people from industry and academia to advise on the Canada Revenue Agency's (CRAs) three-year strategy. The strategy, announced last fall, focuses on reducing the UE in Canada by having the CRA:

• Further refine its understanding of the UE

• Seek to reduce the social acceptability of participation in the UE

• Deploy a range of initiatives to encourage compliance and reduce UE participation

To that effect, UE Specialist Teams have been fanned out to 20 cities across the country to focus on high-risk taxpayers in all industries. Budget 2015 proposes spending $118 million over five years to add 15 additional teams, for a total of 30, and to support them with the use of advanced analytics.

In the retail sector, point-of-sale audit teams are tackling electronic suppression of sales. Business intelligence is helping CRA auditors identify the highest risk taxpayers. Other initiatives include a social marketing strategy to encourage Canadians to avoid UE operators and instead reward businesses that play by the rules. And in partnership with the Canadian Home Builders' Association, the CRA is reviving the "Get It In Writing" awareness campaign to help homeowners make good decisions when hiring contractors, and protect themselves by getting receipts. These steps should help.

Trust needs to be restored

Recently I requested feedback from Chartered Professional Accountants (CPAs) on what might be done to reduce the UE. Some suggested that reducing income tax rates for small businesses and individuals would greatly reduce the incentive to act illegally.

Yet, even lower tax rates won't be enough if people don't feel they're getting good value. The government needs to ensure that Canadians see that their tax dollars are being well managed, and understand how they benefit -- in the form of quality infrastructure, healthcare and post-secondary schooling, among other programs.

CPAs also told me that people will only view the tax system positively if their dealings with those who administrate it are positive. Some of their suggestions for improving the interface between CRA and the taxpayer include:

• Allowing more discretion when applying penalties for minor lapses

• Ensuring complex tax reporting rules hit their intended targets, without burdening the rest of us

• Requesting follow-up receipts for tax claims in high-risk situations only, instead of routinely

Importantly, CPAs say the CRA could better convey to taxpayers that it regards most as honest people who may simply need some friendly assistance with the country's extremely complex tax rules.

Canada's CPAs are working with the CRA to bring about such change. Last year, the national body representing Canada's professional accountants, CPA Canada, cemented a collaborative relationship with the CRA through a framework agreement. The ongoing relationship will be managed through seven committees, addressing Services, Compliance, Tax Administration, Scientific Research and Experimental Development, Commodity Tax, Red Tape Reduction and Training. These committees provide a forum for senior CRA and CPA Canada representatives to engage in constructive dialogue on tax-related matters.

Lastly, some readers suggested that CPAs have a role in educating the public about its obligations, and in discouraging participation in the UE. As trusted professionals, CPAs can help improve the public's tax literacy and its understanding of the harm that the UE causes to communities.

Shifting public attitudes takes time. But, as the campaign to end impaired driving demonstrates, persistence pays off.

To learn more about what the CRA is doing to deter the underground economy, click here.

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