The underground economy (UE) makes it hard for law-abiding Canadian businesses to compete because it gives an unfair, illegal advantage to those who cheat the tax system.
The Canada Revenue Agency (CRA) is taking action to combat the UE to ensure a fair tax system for all.
What is the Underground Economy?
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.” The UE also includes 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. There are many other names used to describe the UE, including the shadow economy, the cash economy and the unobserved economy.
Why is the UE harmful to businesses?
The UE has a negative impact on businesses, consumers, and the Canadian tax base because it undermines the competitiveness of businesses that follow the law. 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 unfair competitive advantage by paying wages in cash, under the table, in order to avoid paying the employer portion of employment insurance premiums and Canada Pension Plan contributions. Their employees are also deprived of benefits from these important social programs.
Why is the UE harmful to consumers?
Those who avoid paying taxes are taking money that is needed for important investments in schools, hospitals, and other vital government services.
Doing cash transactions with no written contract or receipt to support a claim makes it difficult for consumers to seek recourse and offers no protection to the consumer. Those who take part in the UE are doing so at the expense of the public. The UE also undermines the public’s perception of the fairness of tax laws. Tax cheating places an unfair burden on law-abiding businesses and individual taxpayers and it jeopardizes the integrity of Canada’s tax base.
What are the consequences of participating in UE activities as a business?
The CRA is committed to administering Canadian tax laws in a fair and equitable manner. When taxpayers do not comply with tax laws, the CRA takes action.
Paying 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 under the Income Tax Act and the Excise Tax Act. For more information about criminal convictions, go to http://www.cra-arc.gc.ca/nwsrm/cnvctns/menu-eng.html.
What is the CRA doing to address the underground economy?
The CRA 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.
Identifying and addressing industry sectors where the UE has become widespread, such as construction, home renovation, retail trade, and accommodation and food services will continue to be a priority for the CRA.
The CRA uses a mix of outreach, education, communications, and compliance actions, including audits and criminal investigations, to combat the UE. In doing so, the CRA collaborates with other federal departments, provincial and territorial governments, professional organizations, and key industry groups.
It’s not too late to correct your mistakes.
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 (VDP). 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. The CRA wants Canadians to have the information and tools they need to meet their tax obligations voluntarily. For more information about the VDP, go to www.cra.gc.ca/voluntarydisclosures.
Canada continues to have one of the highest rates of compliance in the world. The CRA is committed to combatting the UE to ensure a fair tax system. For more information on the UE, go to www.cra.gc.ca/undergroundeconomy.