My Writing > Who's the fairest of us all?

The underground economy's hidden costs
15 Dec 2006

Originally Published by The TaxLetter Vol. 24, No. 12, December 2006


Who's the fairest of us all?

The underground economy's hidden costs

Eileen Reppenhagen


Who is the fairest of us all? Fair" as in "beautiful," or "fair" as in "a level playing field"? These days, I question whether a self-assessing tax system is either beautiful or level. Self-assessing means you are supposed to self-govern and report what you earn, claim reasonable expenses, and assess and pay the tax voluntarily.

This is Canada, land of fairness, or so we are led to believe. Where did we go wrong? Maybe the real question is, "Were we ever right?" Looking back over the past 50 years, has anything really changed? The same people are still working for cash under the table now as did back when I was a kid — there are just more of them. The old saying goes, "The more things change, the more they stay the same."

How well does CanRev actually monitor what is going on? With a few thousand auditors, how do they monitor 30 million Canadians for compliance? About 24 million tax returns were filed in 2004. Is 20% of our population not filing a return at all?

When we hold a mirror up to CanRev to see how they are doing, what do we see and whose eyes do we see it through? The Office of the Auditor General regularly checks on how CanRev is doing. But these reports can also be a predictor of the next hot audit target group, if CanRev takes the Auditor General seriously and changes its focus, training, energy, and funding. For example, the November 2005 AG’s report disclosed that there is no cross-checking that trust income allocated to beneficiaries is actually reported as income by the beneficiaries. You can bet that such cross-checking will soon begin in earnest. If you’re a trust beneficiary, sit down with your accountant and start crossing your t’s and dotting your i’s now.

The estimated 2005-06 audit coverage reported by CanRev to the Auditor General shows Can- Rev planned to review about 3% of individuals and small-business corporations, of which there are over four million. Compare that with the 20.8% audit target of 5,500 medium-size enterprises.

What is interesting is that no one appears to be audited for compliance with capital transactions in stock portfolios or transfers to and from RRSP portfolios. CanRev has reports from your broker on your proceeds, but no audit work is done on calculations of adjusted cost base (ACB).

I polled 110 accountants recently, and no one has ever been asked for calculations of ACB. Very few even track their clients’ ACBs, which was the point of a recent seminar I gave on minimizing risk and maximizing service. Grandma’s noncompliance with capital gains reporting just might squeak through until she dies, and then who knows? If no one is examining those trust tax returns too closely, you just might get to keep that inheritance after all. After a few more little old lady stories, some of my audience told me they had decided to start tracking their ACB.

A recent discussion with one of my staff who’s plugged into the local business scene turned to the size and scope of our local underground economy. As a small experiment, we decided to list all the different local businesses that we knew from personal experience were probably not reporting their income. We came up with a long list of those with opportunity and motive.

We based our list on our combined experiences of who would ask us for payment with the words, "Will this be cash or cheque?" It included the traditional male-oriented construction trades but crossed the dreaded gender border very quickly. It is interesting to note how CanRev targets the independent construction sector while politely turning a blind eye to the more traditional female underground.

Whose mother did not clean houses, work on gardens, take in ironing, or provide caregiver services for cash in the 1960s? Has that changed? Do you pay your cleaning lady cash? I knew a cleaning lady who made $20,000 year cash on top of her CPP, OAS, and GIS. She rode a bicycle around town with her mop and pail when she was here in the summer and spent much of the damp winter months in warmer climes. I admired her lifestyle, guts, abs, and glutes, while detesting her dishonesty. Chances are you know people like this, too.

Through the cracks

Why do some individuals, corporations, or trusts slip through the cracks? Every so often, I run across taxpayers who have not filed returns for many years. They have never even received a single demand to file. "How could this happen?" you ask, as you sweat over a GST audit or a heavy-duty Notice of Reassessment. They have corporations, too. It just seems so unfair. Isn’t there a cross check between provincial and federal records?

I am told that just such a cross check has started this year for the first time ever. How does one slide under the radar for many years? At first I thought maybe those tax-evaders were never ever registered, but that is not true. Often, they filed an initial tax return and then stopped. Why is it that there is no review by CanRev when this happens? Why do we have a voluntary disclosure system but then fail to enforce it by not actively pursuing deadbeats?

So why should you care whether you pay cash or cheque? The plain fact is that if you are paying cash with a wink and a nod, you are in effect paying more than your fair share, because they are not paying their fair share (there’s that "fair" word again).

An often-heard justification for not paying up is that politicians and bureaucrats are all crooks who spend our money without controls. So why pay in the first place? (Unfortunately, there’s plenty of evidence to support that claim: Look at the Liberal party’s Quebec adscam scandal, the AG’s report on spending by Canada’s former prisoner ombudsman, and former privacy commissioner George Radwanski, to name just a few recent high-profile instances of nestfeathering and taxpayer-bilking.)

Still, our current Auditor General, Sheila Fraser, seems to be doing a bang-up job of turning over rocks and uncovering the lowlifes that live there.

Then there are increased medical premiums, because we all run to the doctor (or more often the emergency room) with every little ache or pain, because it all appears to be "free." But someone always has to pay. And if it’s not the cash-under-thetable guy (or gal), then it’s you who are in effect paying twice.

So next time someone asks you will that be cash or cheque, consider just who is paying their fair share. Oh yes, those medical expenses. Quebec has started limiting the amount you can claim for new glasses to $200 while also limiting some of those expensive medical and dental procedures that are purely cosmetic. I get the latter, but glasses? Come on! But I suppose if you cannot see in Quebec, that is a good thing.

As a customer of a cashunder- the-table operator, you have no warranty, no expense or business deduction, no protection in the event of a lawsuit, your insurance company may not provide coverage if you cannot prove your purchase, and to top it all off, you might even be caught up by legislation governing proceeds of crime and money laundering, if CanRev starts investigating your contractor’s operations.

I find that those who choose to come clean under the voluntary disclosures program do so because their conscience won’t let them sleep at night, or their activity is hurting a close relationship, or a disgruntled client is threatening to rat them out to the feds. One has to wonder whether those taxpayers who choose not to file or not to report all of their income can ever really succeed when they always have to fly below the radar to avoid CanRev or the wrath of an exspouse or neighbor.

It gets worse. Often, these people have no insurance for liability or coverage by Worker’s Compensation in the event of an accident or injury. Nor will they have an accumulated balance of RRSP contribution room or have made any contributions to CPP. If they become disabled, they will not qualify for CPP Disability either. They might believe that the Guaranteed Income Supplement will take care of them. But if they stop working at 60, they will have no income until OAS and GIS kick in at 65.

Circumstances like these put you squarely into the income and means tests of provincial welfare, where they watch your entire family’s bank account balance every month and monitor any gifts from family to reduce the amount you are eligible to receive. Believe me, you cannot live on $867 a month. Not only that, but if you did qualify for any CPP benefits, you would be required to apply, and then the feds simply garnishee those benefits.

Bottom line: If you are not filing tax returns at all to stay under the radar, you are not benefiting from tax credit programs like the Child Tax Credit or the GST Credit, which are tax-free distributions. Let’s not even mention fines, penalties, and interest…or jail.

If you have not been to the CanRev Website ( to check out the active enforcement programs and what this means, click on "Convictions" under "Quick Links" for some interesting reading on a stormy night.

Eileen Reppenhagen, Certified QuickBooks ProAdvisor writes and speaks about accounting and tax.  She is a regular contributor to Canadian MoneySaver, The TaxLetter and Intuit’s award winning online publications for accountants and QuickBooks ProAdvisors, ProConnection Newsletter and Advisor Advantage.  

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