By Theo van de Kletersteeg
A good many of Canada’s small business community, notably farmers, incorporated professionals and small business owners are upset over one or more of the income tax changes proposed by Finance Minister Bill Morneau. Change upsets the status quo, and creates winners and losers, and the current proposals are no different. With the federal government being in chronic deficit, it should be no surprise that it is looking for new sources of revenues, and this time, rather than increasing taxes on the middle classes even more, it appears to have found a possible source of revenues that would be paid for by entrepreneurs and professionals, in other words, people of above-average incomes. The current government’s strategy of extracting higher levels of income taxes from upper income Canadians has both merits and significant potential long-term pitfalls neither of which will be discussed here.
Given the uproar that the proposals have caused, and given the potential long-term dangers to Canada’s competitiveness, it is most surprising to me that neither the federal government, nor the provinces, have made any meaningful efforts to curb the loss of billions of dollars of income tax and sales tax revenues that should rightfully end up in federal and provincial treasuries each year by seriously cracking down on the underground economy. As an entrepreneur and private citizen, there is not a day that passes during which I don’t see untaxed cash disappearing into people’s pockets. The Prime Minister is big on talking about social justice, but he makes no efforts to curb the biggest source of social injustice in Canada: the illegal enrichment of some small business owners by transacting in cash, and hiding the anonymous cash to under-report sales, or not report it at all. Those who are caught get off lightly, usually being forced to pay the avoided taxes with penalties and interest, but no jail time. Effectively, the lack of serious consequences is an incentive for people to commit this crime of theft. Those small business people that offer goods or services for cash, without charging sales taxes, know that this gives their business a competitive advantage, and provides the business owner with an opportunity to generate untaxed income. So, some will engage in these activities because the rewards are significant and the risks are minor.
Another manifestation of illegal cash transactions occurs when work is being performed for cash, removed from the regular payroll. This, in turn, puts pressure on company owners to sell to customers for cash, because they have to “find” untaxed cash to pay “off the payroll” workers.
Combatting the underground economy is the easiest and least expensive form of tax avoidance to combat, and the one that can produce the greatest returns at the lowest cost. Canada’s underground economy is thought to represent some $30 billion annually, with most activity taking place in residential construction, retail, and food services. However, from personal experience, I would add automotive repair services, and even professional services provided by lawyers and dentists. Accordingly, cracking down on tax avoidance, starting with a crackdown on cash sales, could make a meaningful impact on federal and provincial treasures. However, of equal or perhaps greater value would be the increased sense of social justice that those of us who do pay their taxes would receive from seeing real consequences imposed on those who don’t. The tax system is highly complex and evolved over decades. It’s an important tool for governments to raise the revenues they need to pay for things that the population wants and needs. In addition, it’s an important tool to foster social and economic justice.
Ironically, when Alberta and Ontario will raise their minimum wage levels from $12.20 (Alberta) and $11.40 (Ontario) to $15.00 by January 1, 2019, we should expect to see increases in underground economic activity in both provinces, as businesses that rely on low-wage labour will feel pinched, and will attempt to shed “on the payroll” labour, and substitute lower cost “off the payroll” cash labour.
Tax laws, like any other laws, only have meaning if they are observed and enforced. Our governments have largely decided to ignore the underground economy, and have thereby encouraged the enrichment of cheaters at the expense of the general taxpayer. Our government should practice what it preaches and, together with the provinces, should commence a meaningful crackdown on the underground economy.