The underground economy is toxic. It costs jobs, makes it harder for above-board businesses to compete and ruins faith in our tax system. It can also leave you holding the bag when you get sub-par results or someone gets burned in a cash deal.
With an estimated value of $45.6 billion in 2013, according to Statistics Canada, the underground economy is a problem so big that any single person might feel powerless to correct it.
But there is something we can all do, and it's simple. Don't spend your money on people and businesses that don't play by the rules. Seek out and reward businesses that are run with integrity. If enough of us deny business to shady operators, together we can begin to erode the underground economy and eventually eliminate it.
Don't spend your money on people and businesses that don't play by the rules.
The Canada Revenue Agency (CRA) says reducing participation in the underground economy is a matter of fairness that requires collaboration and commitment -- no one organization or government can do it alone. It needs partnership, and that's why the CRA has enlisted CPA Canada and other organizations to change behaviour and the attitudes that drive it.
As a member of the minister of national revenue's underground economy advisory committee, I welcome the opportunity to work with people from industry and academia in providing input on Canada's strategy to reduce participation in, and acceptance of, under-the-table dealings.
Of course, Canada is not alone in the struggle to curb willful non-compliance with tax rules. The committee has looked for inspiration from some innovative strategies employed in other countries:
The U.K. tax authorities are thinking about making specific business services and licences available only to businesses with a valid tax registration. The idea is to make it easier for businesses to register for and pay tax, and harder for them to shirk their responsibilities.
For example, tax registration could be made a condition of access to licenses issued by local authorities for taxis, trading, scrap metal, planning or property rentals -- all sectors with high numbers of underground economy operators.
The U.S. Internal Revenue Service is moving away from reviewing tax returns to target specific areas of tax risk more broadly. First, widespread non-compliance issues are identified, like cheating related to employee fringe benefits or losses from hobbies. Then mitigation strategies are designed to suit the risks, whether through targeted audits, letter-writing campaigns or guidance.
The IRS is also training auditors to specialize in specific business types and their common issues, such as the potential for skimming in gas stations, restaurants and other cash-intensive businesses.
The Australian Tax Office's framework for tackling the underground economy includes community engagement as a key component, with communication strategies that leverage influencers such as industry associations, community organizations and the media to spread their anti-tax cheat messages. Tax practitioners are singled out as particularly influential, given their involvement in the filing of 93 per cent of small business tax returns.
Important to all underground economy strategies are efforts to change behaviour, nudge more compliance upfront, and exploit data and analytics to better understand and target areas of non-compliance.
The Canada Revenue Agency uses a mix of these approaches. Its campaigns include using social media products and channels to shift attitudes on the supply and demand sides. Operators are told that operating a business in cash and not keeping records doesn't make them immune from taxes. Employees are told about the benefits they lose when they work for cash.
On the demand side, people looking for home renovators are one of the CRA's target audiences. The CRA warns that instead of saving a few dollars, you can protect yourself, your home and onsite workers by asking for:
- A signed contract that includes a warranty
- Proof of liability and workers' compensation insurance
- Assurance that required permits and inspections will be secured
- Clear invoices with a GST/HST registration number
- Written receipts for your payments
Learn more on the CRA's website.
The CRA is also working to boost the profile of its Informant Leads Program. Its National Leads Centre accepts detailed information from the public. The CRA wants to hear from honest taxpayers who believe others are making it more difficult for their businesses to compete. Over 32,000 leads were shared with the centre in the past year alone.
While many of us are averse to "snitching," keeping quiet and turning a blind eye condones and supports behaviour that creates huge costs for us all.
For stories on the underground economy, check out CPA Magazine's latest issue.
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Keep a copy of every investment account in which you have non-registered funds and make sure you have a T-slip for all the investment income (dividends, interest, capital gains) you earned during the year.
Locate your notice of assessment from the year before to see the exact amount of RRSP contribution you can make this year. Also, check if there are any unclaimed contributions.
From that same notice of assessment document, check to see if there are any expenses that have been carried forward that you may use this year.
If your income is going to be substantially higher next year, do not claim your RRSP contribution this year. Wait until the following year when you are in a higher tax bracket to claim it.
If you have children currently enrolled in post secondary education, consider transferring the tuition credit to your own tax return.
If you or anyone in your family has a medical condition that restricts your daily activities, consider filing for the disability tax credit. You may be able to recover this tax credit as far back as 10 years – which is equal to about $1,500 a year.
If applicable, don't forget to record the capital gain on the sale of your cottage in Canada or vacation property outside the country. However, you may not always have to declare your summer home. Talk with your accountant to see what makes better financial sense. If the cottage, for example, has increased substantially more in value than the house you currently reside in, it may make sense to declare the summer home as your principal residence. Remember, this move does not attract capital gains and defers paying capital gains on the home you reside in.
If you need to travel outside of your region for medical care, don't forget to claim meals and travel for yourself and your spouse.
If you live in a household with two taxpayers, consolidate donations and have one taxpayer claim them all. This way the tax credit increases substantially on donations over $200.
If your income is low, don't forget to report your rent or property taxes in order to qualify for provincial tax breaks for rent and/or an HST refund, for example.
Stuck? Get in touch with an accountant. To be extra cautious, ask if they attend tax update seminars through the year to stay current. Avoid people who strictly rely on tax software.
This year, keep a file handy to hold all of your receipts and other documents required for filing taxes. This way, everything will be in the same spot come April of 2015.
Follow Gabe Hayos, FCPA, FCA on Twitter: www.twitter.com/cpacanada