If you paid the guy who replaced your kitchen counters in cash, you might be contributing to a problem that costs the government billions in unpaid tax dollars each year.
Canada’s underground economy is still thriving, according to a new report from Statistics Canada, in spite of efforts to cut down on the number of transactions that “escape measurement because of their hidden, illegal or informal nature.”
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The value of Canada’s underground economy in 2013 totalled $45.6 billion, or about 2.4 per cent of the country’s gross domestic product.
That’s pretty much exactly where the numbers were in 2012, give or take a few billion dollars, and where they’ve been hovering since 2002.
Something as simple as paying a neighbourhood teen to babysit the kids or supporting a church bake sale contributes to the underground economy. But nobody is breaking tax laws during these transactions, unless certain thresholds are cleared.
For example, work like babysitting or mowing the lawn does count towards taxable income for the person providing the service and should be included in a tax return. But Canadians have to be making a little over $11,300 before the government starts claiming tax — far more than your average 16-year-old babysitter earns in a year.
“When no tax is owing, the individual is not required to file a tax return,” said a spokesperson for the CRA on Monday. “However, an individual may wish to file a return despite not being taxable in order to build RRSP contribution room for future investment.”
These types of services would normally also be exempt from GST/HST, provided that the total sales of the supplier of the services are below $30,000, the spokesperson added.
The Canada Revenue Agency doesn’t put effort into monitoring these mini-transactions. They are ubiquitous in Canadian homes, and the CRA has far bigger fish to fry.
Just three industries account for more than half the total value of the underground economy, according to Statistics Canada. They are:
- Residential construction (27.8 per cent)
- Retail trade (12.5 per cent)
- Accommodation and food services (11.7 per cent)
Residential construction is the worst offender by far. Statistics Canada believes it is largely a result of contractors taking payment in cash and then failing to charge, or pay, the required taxes.
In these cases, it’s technically the contractor who is breaking the law, but the CRA encourages Canadians to always avoid paying someone in cash or “under the table” to save a buck.
Such transactions open a consumer up to liability if someone is injured on their property, provide no warranty on the work and give homeowners little recourse if the job is poorly done.
Paying your employees – even domestic ones like nannies – under the table is also illegal. And tips earned on the job are part of overall income and must be reported on a personal income tax return.
“Wages not accounted for in payroll records and tips on undeclared transactions totalled $21.4 billion in 2013,” Monday’s report noted.
Statistics Canada didn’t include some illegal activities, such as the drug trade or prostitution, in its study. That means the value of the underground economy, which Statistics Canada has been tracking for years, may actually be larger than estimated.
The CRA considers it to be a major problem, explaining on its website that the underground economy “hurts all Canadians.”
“Unpaid taxes mean less money for programs, such as health care, childcare, employment insurance, and pensions,” the CRA notes. “It undermines the integrity of our tax system.”