We all know about the underground economy – a quiet, cash-in-the-pocket exchange for a product or service. For many people, conducting business in this manner is considered a ‘win-win’ since tax savings are had on both sides of the transaction. But are you really coming out ahead when you put your reputation and credit rating at risk?
Contractors caught not reporting cash income face serious consequences, such as penalties, court fines and even jail time. And of course, this is all in addition to having to pay the taxes (plus interest) that they are trying to evade in the first place.
For consumers, cash transactions typically mean there is no expressed or implied endorsement of the products or services provided. This means that they are left without guarantees, warranties or recourse for service completion or poor workmanship along with the added risk of liability should an injury occur on their property.
Tax law enforcement
The Canada Revenue Agency (CRA) enforces tax laws to make sure everyone pays the taxes they owe. Following the principle of ‘fair treatment for all’, the CRA protects the social and economic well‑being of all Canadians through an equitable tax process that includes finding unreported income. Despite cash transactions and improper record keeping, CRA auditors and investigators can find unreported income by:
• Conducting a lifestyle audit for individuals seemingly living beyond their means;
• Comparing reported income or expenses to industry or regional averages;
• Following up on leads received from informants, enforcement agencies, and other tax authorities; and
• Comparing tax returns to information received from third parties.
Voluntary Disclosures Program
Mistakes do happen and the CRA offers a Voluntary Disclosures Program (VDP) to correct tax errors or omissions. Valid disclosures raised in advance of learning that the CRA is taking action can limit punitive measures and result in only having to pay any outstanding taxes and interest. More information on the VDP can be found on the CRA website at www.cra.gc.ca/voluntarydisclosures.