Working for cash and thinking because it’s cash and there is no paperwork you’re all good? Think again – particularly as it relates to sub-contractors, people in the construction trades, waiters and waitresses, or any industry where cash businesses is common (repairmen, auto body shops, service industry). Often these individuals and business owners think that because they deal in cash, they are safe as far as taxes and CRA is concerned.
Anytime you are receiving income which you are not reporting you are playing with fire.
Canada Revenue Agency is always adding technology and other techniques to respond to the demands of Government to collect taxes from the underground economy.
CRA has an arsenal of tools and techniques that they use to catch tax cheats.
If you have undeclared income anywhere in the world you are more and more likely to find yourself in serious trouble with the tax authorities. We are seeing more cases like this than ever before. And that is because CRA are getting better at their job.
Here are some typical examples of how people get caught.
You may assume that because you were paid cash that the other person will not declare what they paid you as an expense on their tax returns. They may have directly said this to you. You may think that because no invoice was exchanged, there is no record and so no proof. Often individuals who pay in cash will still declare the amount paid as an expense on their returns. This is the person who was trying to enter into an illegal transaction with you – so we know they cannot be fully trusted. If CRA comes knocking they may not have a receipt but in an effort to prove the expense, they may furnish CRA with your information.
This will inevitably lead to CRA coming and knocking on your door. CRA then can proceed to audit you… so you may think – go ahead because there are no records. Well, CRA has a number of methods they will deploy to determine that you earned more than was declared. Here are some examples:
- They can audit your bank account and assume that every cash deposit is in fact income – it will be your burden to prove otherwise (such as the money was a gift).
- They can perform an indirect determination of income by expenses. They can look at your current lifestyle and expenses and estimate a minimum you must be earning in order to pay for the lifestyle that you maintain.
- They can do a net worth assessment – see what you own and conclude that earned the money to pay for it. If there is not enough money on the tax returns you filed – watch out. You are getting an aggressive assessment plus penalties plus interest. Proving your innocence is very difficult to do.
It only takes one individual or transaction to get you onto CRA’s radar resulting in a world of pain. Consequences you could face due to CRA determining you have undisclosed income can include retroactive penalties and interest and even prosecution. This past year alone over 40 business owners and individuals have been convicted of some form of tax evasion.
These convictions are to deter other tax cheats.
Stop looking over your shoulder (or your spouse’s shoulder if they are tax cheat). With snitch lines and technology more people are being caught and while the number of convictions seem low thousands more are paying huge administrative penalties.
The undeclared income problem is a huge headache for the Canadian Government. Our system relies on everyone paying their fair share. CRA is putting increasing resources to find this income and tax it.
Tax agreements to share information with other countries – that bank account, business or property you inherited and rent out overseas are now getting focussed.
I will share one simple example. A man had inherited a small commercial building in Lisbon, Portugal. For twenty years he accumulated the profits in a bank account in Portugal intending to leave it to his children. He never spent one cent of this money. His Toronto construction business ran into problems and he needed c ash flow to complete the project. He brought $30,000 from Portugal. He got caught in a CRA audit (one of his employees had failed to declare his income properly and CRA audited him and then widened the net to include this employer). CRA saw the $30,000 increase in cash flow, asked questions and found the Portuguese bank account. This hard working, otherwise man who was already struggling to keep his business afloat now had a tax bill that included penalties and interest that tripled the amount he had to pay. A lien went onto his house. His bank account was frozen and he went bankrupt. The $30,000 had led to uncovering undisclosed income of almost $1,000,000. The CRA auditor was a hero and this otherwise good man saw a lifetime of hard work blow up in his face.
CRA want you to come clean and if you do so they have a program that if handled correctly allows you to just pay the tax and reduced interest but no gross negligence penalties.
We always recommend getting to CRA before they get to you. Correctly use the Voluntary Disclosure Program and save yourself. This is a one shot opportunity. We recommend that you do not risk it as an amateur or use an accountant who does this maybe one time a year. There are professionals who are experts in this area. What price can you put on your freedom and peace of mind?
If your tax debt will involve a penalty, is more than one year old and CRA has not yet approached you about the tax year in question, you may qualify to make a VDP application. Once a VDP application has been accepted, CRA essentially agrees to accept your income declaration and will not charge you penalties, interest that would have accrued on the penalties or prosecute you for failing to declare income.
If CRA is already asking questions, you still have options. These options are more complicated and you likely need the help of someone who has deep experience dealing with CRA and difficult tax problems to get guidance. Do so long before you consider having a direct conversation with CRA. CRA agents are going to try and trick you so it is usually better to put someone between yourself and CRA.CRA put up a webpage on this topic which outlines their position on not declaring cash income and consequences if caught. You can access it here: http://www.cra-arc.gc.ca/nwsrm/txtps/2014/tt140707-eng.html?utm_source=mediaroom&utm_medium=eml.
If you know that you have earned cashed that has not been declared and want advice feel welcome to reach out to us and our experienced. Call Tax Solutions Canada today at 1-888-868-1400.