The Growth of the Underground Economy: A Substantial Loss to the Canadian Government

The Growth of the Underground Economy: A Substantial Loss to the Canadian Government

An estimated of $40.9 billion of economic activity goes unreported annually within Canada’s underground economy. Amongst these underground economy values, construction is the largest sector accounting 28% of its value. According to the most recent estimates made by the Canada Revenue Agency, almost a fifth (20%) of private-residence contract work in Canada takes place in the underground economy.

These techniques of tax evasion deprive the Canadian government of the tax revenue upon which the services of the public rely and also risk the homeowner along with the worker. The CRA suggests the Canadians to take help of voluntary disclosure and disclose their unreported income.

Many of the homeowners often assign home renovation without recording those projects like reroofing a home, in a contract and hence become vulnerable to common scams, poor workmanship and legal liabilities. Moreover, roofing is a dangerous task for workers especially for those who do not receive proper training, equipment, and insurance, things which illicit business may be likely to render. Falls are the one of the major causes of critical injuries and death on construction sites in Ontario.

Despite these considerable costs and risks, regrettably surveys reveal that many Canadians discern that paying cash in order to evade service tax is acceptable. The Minister of Labour, Government and Consumer Services and Finance partnered with the Behavioral Insights Unit to tackle this issue, on an online advertising campaign designed to make homeowners aware of the risk in the underground economy by directing these tax evaders form their online searches for roofers to the website of the Ministry of Labour.

In 2012, the Commission on the Reform of Ontario’s Public School, led by Don Drummond identified that it is of utmost importance to pare down the underground economy cost in order to abolish the government’s deficit. Consumers who actively participate in this underground economy, intentionally or unintentionally, put others along with themselves at risk by negotiating beyond the realm of legal safety and provision.

Businesses who do not abide with their tax obligations may also be less likely to comply with other obligations, such as protections, training and access to benefits. Paying for goods or services in cash to circumvent HST is the most common underground economy.

Although Canadian tax system enjoys a high level of uprightness and has amongst the highest compliance rates in the Organization for Economic Co-operation and Development (OECD) membership, this unreported activity constitutes a significant loss to both the Federal as well as the Provincial governments’ revenue streams.

The Canada Revenue Agency is trying to cut down loses by uncovering this underground economy. The Canadians will be audited and if found guilty, they will be charged with tax evasion. Tax evasion is a criminal offence in Canada and the penalties are very high ranging from 50-250% of the tax payable.

The only way out is to resort to the Voluntary Disclosure Program. By resorting to this program, the person will disclose the unreported income to the CRA and will be liberated from prosecutions or penalties.

Prepare and write by:

Author: Mohammed A Bazzoun

If you have any more specific questions, feel free to ask in comments.


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