Good points all.

I just began a new thread which is a CRA 'quasi-response' to the situation.

Oh, ok, I see it hasn't changed much. Here's the updated version of Income Tax Act, Section 5(1) which refers to tips and gratuities.

http://www.canlii.org/ca/sta/i-3.3/sec5.html

Ray

http://www.cra-arc.gc.ca/nwsrm/rlss/2008/m01/nr080121-eng.html

I agree with you, but unfortunately the CRA does not. My old CA tax text gives it as Subdivision A, Subsection 5(1) of the Income Tax Act (Income or loss from Employment). Not too sure if that's what it still is.

Ray

The requirement for waitresses to declare their tips annoys the hell out of me.

A "tip" is not a wage. A tip is not guaranteed as a wage is. A tip is a gift, given by the customer, to say "thank you for great service".

I would tend to believe that this per-person "low-volume" tax evasion occurs in most industries. We all have friends who can either, fix our car, remove viruses from our computers, repair our fence, etc.. When they do this, sometimes we toss them a few bones, or perhaps offer up a meal and a few beers. At the end of the day, an exchange of services took place. If the the CRA attempted to track every taxable dollar at such a micro level, more money would be spent policing then collecting any of the tax revenues.

O.C.

This is an excellent and interesting article. Just how much does Caesar have coming to him?

Another shocking point, contained in a CRA blurb, was that most tax cheaters were turned in by friends and family members. Any comments about the truth of this?

Ray

Its not surprising that people would do this.With the population taxed up to their necks its almost the only way to survive for a lot of people. There is a simple fact that the politicians just dont get,you cannot spend money if you have none to spend. If you start using credit to pay for everyday things in order to survive ,well we know where that ends up.
Its most likely only to get worse as more and more people are running short and they will look for way to save with underground market etc. The area i live in the underground market is doing very well,i wont say where as if i did the they would surely send in the army to get that few extra dollars of taxes they would be missing.

Many Feel Tax Evasion 'Justifiable' : CRA SOTW

Restaurant, construction sector workers sympathize with smaller evaders: study
Don Butler, The Ottawa Citizen
Published: Monday, September 01, 2008

A limited amount of tax evasion by otherwise honest business owners is justifiable, say people who run companies in the construction and restaurant sectors.

Their views are reported in a $133,000 study done for the Canada Revenue Agency that examined why workers in those two sectors are among the most frequent participants in Canada's multibillion-dollar underground economy.

The study, done by Sage Research, is based on 20 focus groups held last February with 163 owners and managers of small- and medium-sized construction and restaurant, bar or catering businesses. It offers a rare window into a thriving, but mostly uncharted, segment of the economy.

The study found participants don't have a black-and-white view of those who conceal income to avoid paying taxes.

Someone who evades a large amount of tax "is generally seen as committing a crime and deserving to be punished," the study says.

But for smaller evaders, "some degree of evading tax is quite often seen as justifiable," it reports. "Depending on the circumstances, these 'small' tax evaders were not seen as being 'bad' people."

Concealing income may be acceptable, participants said, if done to keep a basically legitimate, but struggling, business afloat.

Many also justify cheating because they think small business pays too much tax, government wastes the money it collects anyway and small business people deserve compensation for working long hours.

"I spend 150 hours every two weeks at work. I'm tired and sometimes I don't get a day off," said one participant quoted in the study. "I deserve some extra money."

Many also sympathized with wait staff who don't declare tip income, noting they're not well paid and need all their tips to earn a reasonable living.

Some participants described tax evasion as a "victimless crime," while others called practices such as paying employees "off the books" or doing cash jobs for customers as a "win-win" for both parties.

Estimates of the size of the underground economy vary widely, but a 2005 study by Lindsay Tedds of the University of Victoria put it at 15.3 per cent of gross domestic product. That equates to about $240 billion.

"That is our absolute best guess estimate," Ms. Tedds said in an interview. "And it really is a guess."

The number includes money earned through illegal activities, which the revenue agency doesn't count in its definition of the underground economy.

Ms. Tedds said the problem has been ignored for far too long. "I just don't think it has captured the policy focus at higher levels that it should."

The issue is important because those in the underground economy aren't paying their fair share of the tax burden, she said. As a result, "we're paying higher taxes than we should be otherwise."

According to the study, paying short-term workers off the books -- with none of the requisite paperwork or deductions -- is quite common. Completing the paperwork for workers who last only a few weeks is time-consuming and costly, participants said.

Some who apply for jobs in the restaurant sector prefer to be paid off the books, many said.

They include people receiving government benefits, newcomers who don't have legal working status, people with student loans, divorced or separated people who face alimony or child support payments, and those with regular jobs looking to earn extra money.

As well, the study says, labour shortages can leave employers feeling they have no choice but to hire a worker off the books.

Participants said some bars and restaurants use two cash registers -- one in the public area, where all sales are recorded, and one in the back, where only some sales are recorded. Only the income from the latter is reported.

In construction, the underground economy thrives in the home renovation market. According to the focus groups, that's largely driven by a preference for cash payment by homeowners, who assume they'll save money.

"They're just trying to get the best deal," said Ms. Tedds. "They don't view it as being an illegal activity."

The study says some in the home renovation sector work almost entirely underground, especially shift workers such as firefighters, police and teachers, who do construction work during their time off.

The same is true of caterers who work from home. Some are professional chefs who cater private dinner parties on the side. "They call it personal chef service," said one participant. "It's huge."

One thing that limits participation in the underground economy is "the desire to be an honest, law-abiding person," the study says.

While the risk of getting caught is also a consideration, few focus group participants knew of businesses in their sector being prosecuted for tax-related underground economy activity in recent years.

As a result, many assume the risk of getting caught is relatively low.

Most participants felt that getting caught for tax evasion would have no impact on a restaurant, bar, private caterer or home renovation business.

"Private individuals are perceived to care about quality and price, and to not care much about whether a business owner has been caught for tax evasion -- unless the amount of tax evaded is very large," the study says.

However, most thought commercial customers would react badly if a contractor was caught evading taxes, partly because they're more likely to have the attitude, "if you are cheating the government, you might be cheating me."

Catherine Jolicoeur, spokeswoman for the Canada Revenue Agency, said the study will help the agency inform and educate businesses about the "risks and consequences" of participating in the underground economy and refine its strategies for addressing the problem.

© The Ottawa Citizen 2008

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