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Mark Feldstein & Associates Tax Accounting Blog

The Underground Economy

The temptation is always there – holding down a steady day job that pays the bills by day, and by night, ply your trade for a little extra spending money on the side. People in almost every sector of industry, from construction and renovation to finance and teaching, are in a position to work for themselves in addition to having a regular job. Many of these people report their earnings on their personal tax returns as self employed income in a sole proprietorship. This income then added to their existing income and taxed accordingly.

However, there are many individuals who receive their payments 100% in cash and as cash is difficult to trace, they do not report this additional income for tax purposes. If the cash is never deposited into a bank account, it is extremely challenging for the Canada Revenue Agency to try and trace the cash payments to each person.

The classic example of not reporting cash earnings would be workers in the food and entertainment industry. Many people who earn cash tips to supplement their regular income under-report the cash they received. Many people simply report nothing at all.

All income earned, whether paid directly by cash or via cheques or direct deposit, must be reported on that person’s income tax return and taxed accordingly. Cash sales should be tracked and summarized for the year, to allow for simple reporting for the tax return. Of course, if the individual is required to charge, collect, and remit HST, this needs to be done as well.

Doing any less would be illegal, and the person involved would become a member of the ‘underground economy’.

The underground economy refers to the population and the financial transactions that are involved with not reporting or under-reporting the income earned in order to avoid taxation by the government. While most people view not paying their taxes as a victim-less crime (much like buying tickets from scalpers!), this is just not true. Money collected by the government gets used to pay for municipal infrastructure maintenance and public projects. It also funds social programs, such as the health and education sectors. By one portion of the population not paying their taxes, the burden to fund these projects falls on everyone else.

Furthermore, a portion of the underground economy activity has been linked to criminal organizations, which operate illegally through Canada.

On the Canada Revenue Agency website, there are numerous press releases each month of individuals and companies that have been prosecuted and convicted by the government for tax fraud, tax evasion, and under-reporting income on their tax returns. The consequences of these actions range from six months of house arrest and probation, to fines, to two years of jail time, which is a criminal conviction. The fines are usually a percentage of the estimated unreported income, which can vary greatly from case to case.

If YOU are a person who has already filed tax returns that have significantly under-reported the income, then there is an option to report this income under the Voluntary Disclosures Program of the CRA. This program allows taxpayers to come forward and report the additional income with the CRA. In exchange for reporting this income, and paying the resulting taxes on said income, the CRA will eliminate all of the related penalties on this income. As the penalties for gross negligence are very substantial, it would be in the taxpayer’s best interest to come forward under this program.

It is recommend to contact a chartered accountant to discuss your situation before applying under this program on your own.

Robin Wong, CA