Cheating on taxes does not have the social stigma attached to it that drunk driving now does. It should. Taxes are the main way governments raise revenue for infrastructure, defense, and social services.
The underground economy is estimated at $41 billion. This means a loss of taxes of between $10-$20 billion annually that has to be met by the tax paying public. Statistics Canada has estimated that almost $444 billion of unreported income was earned in Canada from 1992-2008, excluding illegal activities.
Have you ever paid cash to avoid paying GST? Saving a bit of tax on a pair of shoes or a tennis racket may seem innocent enough. But you know that your vendor is not collecting GST and is not reporting income on the sale. Welcome to the underground economy!
Kevin Lee, CEO of Canadian Home Builders’ Association said “The underground economy in home renovations exposes homeowners to significant risk they often don’t understand and that can threaten their financial security. Furthermore, legitimate businesses suffer when they are forced to compete with those who cut corners, and don’t pay their fair share of taxes.” No tax, no receipt, no warranty for a pair of shoes or a tennis racket is one thing. If you pay for a house renovation with no receipt, or a reduced receipt for a part cash job, your risk is much greater if there is any problem with the work.
The underground economy is sophisticated. Electronic Suppression of Sales software (zapper software) is used to hide sales to evade the payment of GST and income tax. Zapper software selectively deletes or modifies, without a record of the deletion or modification, sales transactions from the records of point-of-sale systems (electronic cash registers) and businesses’ accounting systems.
CRA estimates zapper use could account for $3.25 billion in unreported sales annually. Fighting zapper use is a priority for CRA and a major initiative in their underground economy strategy. In 2012-2013, CRA audited 10,822 underground economy files, with a total dollar value of taxes assessed of $305 million.
Tax cheating is also as simple as not reporting income. A 2012 CRA audit of income earned by 145 wait staff at 4 establishments in St. Catharines, Ont., revealed $1.7-million in unreported tips. Wait staff earn up to double their wages in tips, but report at most 10% of it (and in some cases none). Statistics Canada estimated $36 billion in income went undeclared in the underground economy (not including illegal activities) in 2008. Of that, $1.3 billion was from tips.
I had a client who ran a small furniture store and did not report all of his income. He had a separate bank account, albeit at a different bank, where he deposited all of unreported sales. CRA found the bank account and assessed him for the unreported income. We were able to avoid prosecution for tax evasion, but he had to pay full penalties.
Failure to remit trust funds, either payroll source deductions or GST collected, is another common tax cheat. Payroll audits are fairly common, and CRA reviews more than 250,000 GST/HST and 480,000 payroll account files a year and they identify over $1.8 billion in non-compliance. Actual non-compliance is probably much higher.
The simple failure to file an annual income tax return is another prevalent tax cheat, although for many Canadians it arises due to family or business problems rather than a deliberate attempt to evade taxes. Every year, CRA identifies 600,000+ non-filers and finds $2.7 billion in non-compliance.
The ever popular offshore bank account, while still in use to evade taxes, is becoming obsolete. Bank secrecy in traditional tax obscuring jurisdictions, including the grandfather of them all, Switzerland, is very much a thing of the past. There have been leaks to tax authorities from some offshore banks. The Panama Papers tax leak in early 2016 was unprecedented in the scope of offshore information revealed. Canada has implemented the Offshore Tax Information Program (OTIP) that gives whistle blowers up to 15 per cent of taxes collected by CRA. Canada will be joining the OECD tax transparency agreement by 2018.
The CRA voluntary disclosure program allows non-filers and tax evaders to come forward to CRA before CRA approaches them and not be prosecuted or penalized. The participation in the program is increasing annually. For the year ended March 31, 2015, CRA processed over 10,000 voluntary disclosures, almost doubled from the previous year. The amount of previously unreported income more than doubled to $780 million.
Tax cheating costs all of us. For every tax dollar that someone doesn’t remit, another Canadian has to take up the slack to make up the shortfall.
David J Rotfleisch, CPA, JD is the founding tax lawyer of Rotfleisch & Samulovitch, P.C. a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. www.Taxpage.com and email@example.com