If you are a business owner, chances are that at some point along the way, someone has asked you if you will provide your product or service for “cash, no tax.” Many business owners choose to participate in this practice and pocket the money and never report the sale on their HST and/or tax return. But, do these business owners realize that doing this could cause them to lose their business and could even land them in jail?
Also called “working under the table,” participating in the underground economy is very risky for business owners, not to mention it is illegal. As of 2015, Canada’s underground economy was estimated to be worth approximately $42 billion dollars, or approximately 2.3% of Canada’s total business transacted. The underground economy is any business activity that is not reported or under-reported for HST or income tax purposes. Examples of this type of activity can include skimming off a portion of a sale, not or under-reporting a sale for HST purposes, not or under-reporting your income on your tax return or not or under-declaring a portion of your income from sources such as tips or gratuities.
All of these activities are considered tax evasion, which is illegal in Canada. Tax evasion can lead to significant penalties, criminal convictions, fines and even jail time. You would also lose your business too. Why any business owner would take this risk is incomprehensible. It also harms us all as Canadians because our tax dollars fund so many important things like schools, hospitals, our communities and other services that we all use every day. The underground economy also hurts many honest and hardworking business owners, which in turn can result in lost jobs and an honest person now struggling to feed their family.
You can protect yourself as both a business owner and a consumer in many ways. First, and foremost, follow the rules. Report all income whether it was paid in cash or not. Charge HST if you are an HST registrant and issue proper invoices to all of your customers. If you are working with another business, insist on receiving an invoice, contract or receipt. Ensure that any businesses that you work with are registered for HST if their annual sales are greater than $30,000. Did you know that all HST registrants are required to provide their HST registration number on all invoices issued? Always check to make sure anyone you are buying products or services from disclose this 9-digit number on their invoice. Don’t hire anyone who offers to do work for you under the table for cash. Clearly they aren’t running their business on the up and up! Just imagine if you hire a contractor to do some work for cash, then that person gets injured on the job in your home. Chances are that they aren’t paying their WSIB premiums or have proper liability insurance in place. You could end up getting sued personally! Or, if you have an issue with the quality of workmanship and need to make a warranty claim, but you don’t have a contract or an invoice to stand behind. Trying to save a few bucks could cost you thousands, or more!
If any of this applies to you as a business owner, you need to take charge of the situation and rectify it as soon as possible. There is a program through CRA called the Voluntary Disclosure Program where you can “come clean” and correct your situation before CRA finds you. Under certain conditions, you can correct your tax situation, pay the amounts owing and avoid penalties or persecution. Just remember, if they find you first, you could be subject to any of the penalties or persecution described above.
For more information, visit CRA’s website here.