Redress Risk Management (post until May 31/19)
Tax

CRA taking novel approach to underground economy crackdown

The Canada Revenue Agency (CRA) is setting its sights on the underground economy — and taking innovative approaches to find unpaid taxes in the construction, retail sales and food services sectors in particular, Toronto tax attorney David J. Rotfleisch tells Newstalk 1010’s The Night Side.

As Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation tells listeners, the construction industry “is by far and away” the number one culprit.

“I’ve found that there are lots and lots of contractors out there, when I’ve done any personal renovations or even simple stuff around the house, that will blatantly say ‘if you give me cash, I won’t charge you GST or HST.’ And that’s just outright tax evasion on their part,” explains Rotfleisch.

“The issue really is that if they’re doing this, then somebody else is footing the tax burden for our country. We all have to pay taxes to get for the services that we all want,” he adds.

While a customer is not breaking the law by paying cash, the person on the other end of the transaction is, if they are not paying income tax on the amount — and the CRA is currently focusing on these individuals, says Rotfleisch.

In one recent example, he tells listeners the CRA focused specifically on small-town subcontractors by auditing thousands of building permits. The agency identified a number of unregistered building contractors and collected millions in unpaid taxes as a result.

“What they did in this example were two different things. Number one, they went to home renovation stores, and they took a look at people who are unregistered builders, through the renovation stores or other renovators, and they targeted them.

“The other thing they did is they went to municipal building permits, they followed up on the building permits, they went and took a look at the contractor who’s doing the work on the building permit to see if they are registered and if they are paying their taxes. So these are two very much off-the-book types of audit activities, which really are clever on the CRA’s part,” says Rotfleisch.

This initiative in the construction sector, he says, shows the CRA is thinking outside of the box.

As Rotfleisch tells the Financial Post, the CRA has also undertaken casino audits as an indirect way of assessing people’s income and net worth.

“The Agency is looking at casino records to identify heavy gamblers, then auditing them to see whether their reported income is capable of supporting their gambling habits,” Rotfleisch explains.

Taxicabs have also been the subject of indirect audit verification, he adds.

“The auditors work back from gasoline purchases to determine the miles driven, and then calculate how many of these miles have been reported,” Rotfleisch says in the article.

However, Rotfleisch cautions that indirect audits can produce misleading results. One example, he tells the Financial Post, is the case of a taxi driver who lived in Hamilton, had a Toronto license, and a family in Kingston.

“Working back from the gasoline purchases produced incorrect assessments here, because this individual had substantive non-chargeable use of his vehicle," says Rotfleisch.

Also, he says, in the case of a restaurant, “The CRA failed to take into account that this particular restaurant used alcohol extensively in its food recipes and therefore grossly underestimated the food costs.”

Rotfleisch also explains the methodology used in the CRA’s casino audits can be flawed, as it assumes the money gambled from time to time is a cumulative sum, but it may be money that has been turned over through winnings and losses.

The CRA also uses indirect audits to conduct “net worth” assessments, says the Financial Post.

“In these cases, the CRA takes snapshots of two taxation years, and if it sees a substantial increase that is unexplained, it treats the increase as undeclared income,” says Rotfleisch.

“But that doesn’t take into account such things as inheritances, borrowings or offshore remittances to immigrants from families back home.”

As the article notes, taxpayers can challenge incorrect assessments. Those who have previously undeclared income or unfiled returns can file a voluntary disclosure.

“By disclosing before CRA auditors target them, taxpayers can avoid tax evasion prosecution, tax penalties and often benefit from an interest reduction on unpaid taxes,” Rotfleisch says in the article.

As Rotfleisch tells Newstalk 1010 listeners, those found not to have paid taxes are guaranteed to have to pay penalties, as well as interest on both the taxes owing and penalties.

“What the unknown is, is whether you’re going to get charged criminally for tax evasion, and that’s something you can go to jail for,” he adds.

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