No Paper, No Taxes, Just Cash

The $38 billion Dilemma

It is by estimate an annual $38 billion reality in Canada; the underground economy (UE) in which millions of Canadians likely engage or have engaged in.  It’s probably not far off the mark to suggest a significant percentage of those reading this column are doing so because you participate in the practice of cutting various levels of government out of business transactions by avoiding the paying of taxes.

Governments aren’t happy and the federal tax collector, the Canada Revenue Agency, is increasing its efforts to catch you, fine you and if your tax avoidance transgressions are sufficiently significant, criminally charge and possibly pursue jailing you.

And you?  Are you likely to begin to actually change your ways?  Probably not.  After all, sticking it to governments is hardly viewed as immoral.   In fact, if callers to my national radio program are the barometer for public opinion and public action, sticking it to governments by avoiding taxes is accepted as quid pro quo.  Governments stick it to us, so we return the favour.  That is the message which repeats itself time and time again.

The most common daily scenario for cutting the taxman out of financial transactions are, according to what I hear, home and business improvement projects, mechanical and other work on personal vehicles and purchases of goods both new and used.  Contraband tobacco also ranks high on the list.  As tax rates on approved cigarette sales soared, 192% between 2001 and 2006 in Ontario and 119% in Quebec over the same five year period, smokers responded by lighting up contraband smokes.  By 2008, close to 50% of cigarette sales in Ontario and in excess of 40% in Quebec were of the illegal variety.  Taxation revenue losses in Quebec and Ontario alone were estimated at more than $650 million by 2008.  Most of the contraband tobacco, according to the RCMP, finds its way to Canadians through the Akwasasne Mohawk Territory aboriginal reserve.

Whatever the goods and/or services obtained through participation in the underground economy, federal and provincial governments remind the UE dramatically and negatively affects funding of social programs, hurts hard-working Canadian small business entrepreneurs and that pursuit of cheaters is increasingly vigorous.

Still the tax avoidance economy booms. 

“Aren’t you concerned about hurting Canada’s economy by engaging in cash or barter no paperwork transactions” I ask on air.  “I’m so over and unfairly taxed by governments now that my personal economy requires me to avoid taxes wherever and whenever I can” is the most common response.  “If taxes were fair I wouldn’t be part of the cash only economy” argue callers.  Not just one, or a few, but many.  

Small business operators fearful of the consequences of underground tax avoidance work nevertheless tell of having no choice.  “If I don’t do cash only work I’ll be out of business.”  Often the first words a contractor, electrician, plumber and other skilled trades professionals will hear from a potential customer are “do you work for cash?”  If the answer is “no” the job goes to someone who does.

A Hamilton contractor called in to share he refuses all cash only jobs and in a slow economy his decision threatens his company’s survival.  Why does he decline sure money?  He’s setting an example of for his young son.

Raise the honesty issue and recent examples of Canadian politicians being caught, charged and in some cases imprisoned for fraudulent misspending of tax dollars, coupled with the ongoing RCMP investigations into expense spending of appointed federal senators are pointed to as justification for skipping out on paying taxes. 

Threats by Canada Revenue Agency to vigorously pursue tax cheats, particularly middle income tax cheats, isn’t met with roars of approval.  Chasing down and auditing single mom restaurant wait staff in the pursuit of undeclared tips, or a trades person not collecting the government’s declared share for repairing a roof for a senior on fixed income is assessed as bullying and the pursuit of low hanging fruit.  

Nevertheless, on its website CRA makes its intention clear.  “The CRA has a variety of tools at its disposal to detect those people who are not reporting all of their income, including leads from taxpayers, spot visits by auditors, specialized computer software and lifestyle audits.  The agency also operates a Voluntary Disclosures Program which allows individuals to “step forward and correct previous omissions.”  Such voluntary reporting will remove the threat of “penalty or prosecution, as long as you do so before the CRA starts enforcing action.”  A snitch line known as the Information Leads Program is also available.

There’s no question $38 billion lost in annual tax revenue will have a negative impact on government programs we rely on.  Imagine how significantly important even a fifth of that money is to health care delivery and particularly for an aging and increasingly taxpayer funded and care dependent population. 

Make such an argument and it does resonate.  Briefly.

Is the underground economy here to stay?  More than likely.  is it growing as far as true impact is concerned?  The numbers may prove surprising.  In 1999, Revenue Canada (the CRA’s precursor) estimated annual revenue lost to tax avoidance at $12 billion.  Today it’s more than three times that amount.  However, as a percentage of GDP the UE appears to be in gradual decline.  While it grew substantially in pure dollars, the above ground economy outpaced its underground competitor between 1992 and 2008.  In 1992, the UE accounted for 2.7% of GDP.  By 2008 its share had shrunk to 2.2%.

It’s always interesting to pursue the moral aspect of engaging in tax avoidance.  Ask Canadians who avoid taxes in the underground economy if they routinely break the law in other aspects of daily life.  When I’ve asked that question the answer almost invariably is “absolutely not.” 

Roy Green is host of The Roy Green Show, a national program heard weekends on Corus Radio. Follow Roy on Twitter @theRoyGreenShow.