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Tax

All taxpayers feel impact of construction sector's cash economy

For the average homeowner, it is important to pay contractors via cheque or credit card and receive a receipt, as participating in the underground cash economy can have severe implications for all taxpayers, Canadian tax lawyer David J. Rotfleisch writes in Canadian Accountant.

In the article, Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation, explains that he is building a cottage in Muskoka and has given the contractor strict instructions that all workers have to be paid on the books. However, he says, construction has been delayed as it has been difficult to find employees who will accept a cheque as payment, with source deductions taken off.

“Welcome to the black money, underground economy of the construction sector, where income is illegally obtained or not declared for tax purposes, a priority and focus of the Canada Revenue Agency,” he says.

“Other workers ask first if they’ll be paid in cash and won’t accept the work otherwise. While most give no reason for declining the work, some have no qualms about saying they are collecting WSIB benefits, EI or welfare,” he adds.

Although many homeowners willingly pay cash in order to avoid paying HST when undertaking home improvement projects, Rotfleisch says they will end up with no warranty or protection in the event of shoddy work.

In addition, he writes, “they are also assisting the contractor in tax evasion. Not only is the supplier not paying HST, he or she is certainly not declaring the payment for income tax purposes. So this 13 per cent cash saving with the HST leads to a 45 per cent income tax loss to the system when the contractor does not declare the income.”

This cash, he explains, becomes part of the underground economy.

“The cash paid off the books by the homeowner has severe implications for us all. The underground economy is estimated at $41 billion. This means a loss of taxes of between $10-$20 billion annually that has to be met by the tax-paying public. Statistics Canada has estimated that almost $444 billion of unreported income was earned in Canada from 1992-2008, excluding illegal activities, by average Canadians who are not declaring their income,” writes Rotfleisch.

Ultimately, Rotfleisch says thousands of average Canadians are participating in tax evasion that can impact all taxpayers.

“To those folks I say, if you have undeclared income, you can avoid prosecution and penalties and come back into the tax system through a voluntary disclosure,” he writes.

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