I recently visited one of my favourite restaurants and the food and service, as usual, were out of this world, something a food delivery service cannot replicate. The restaurant has a strict “cash only” policy, so I always need to remind myself about that before I go and, obviously, as a tax guy, I wonder if the cash-only policy is a signal that the owner is participating in tax evasion.
Cash-only businesses have often been a target for the
Canada Revenue Agency
to review and determine if the proprietor is reporting income in full.
In some cases, it’s obvious that tax evasion is the objective. For example, I’ve interviewed many renovators of my homes over the years and some of the prospective contractors will have a two-tiered pricing structure: a lower cash price and a higher traditional invoice structure. In other cases, it’s obvious that things, such as avoiding high banking costs or credit card fees, might be at play.
For the small number of cases that involve tax evasion, I’m often curious why such people engage in that illegal behaviour and are prepared to risk serious criminal penalties, including possible jail time.
The answers are important because if you can understand the motivation, governments can design policy to eliminate that. Tax evasion is not a pervasive problem in Canada — reliable statistics are lacking, but it is likely that less than three per cent of taxpayers willingly participate in such criminal behaviour — it is, again, important to understand the motivations.
There are several motivations, with the most obvious being excessively high personal tax rates. Eight of the 13 provinces and territories have marginal tax rates that
exceed 50 per cent
at the high end. In 1966, the Royal Commission on Taxation — the only time that Canada had a comprehensive tax review leading to reform — released its voluminous report and
about personal tax rates:
“We are persuaded that high marginal rates of tax have an adverse effect on the decision to work rather than enjoy leisure, on the decision to save rather than consume, and on the decision to hold assets that provide monetary returns rather than assets that provide benefits in kind. We think there would be great merit in adopting a top marginal rate no greater than 50 per cent. We think there is a psychological barrier to greater effort, saving and profitable investment when the state can take more than one half of the potential gain.”
That almost 60-year-old comment is just as valid today as it was back then.
Other reasons include:
- The complex and onerous reporting requirements that exhaust the average taxpayer. Tax preparers are stretched and scramble to ensure such reportings are accurate and timely filed. An obvious example of this is the foreign reporting requirements and the new mandatory disclosure rules. Governments around the world are infatuated with onerous reporting requirements, with one of the stated objectives being to reduce tax evasion.
While I appreciate the sentiment, the so-called bad guys won’t comply no matter what the reporting requirements are. Instead, such requirements are pushed onto the average tax-compliant taxpayer, which simply adds to the already burdensome compliance. - The punitive treatment of certain activities, such as the ridiculous short-term rental rules that prohibit the deduction of all expenses for certain owners. This, without a doubt, encourages non-compliance.
- The poorly targeted anti-avoidance rules like the horribly complex tax-on-split-income rules that attempt to prevent income splitting amongst family members on certain types of corporate and other income. Such rules often catch legitimate family business arrangements. The rules are often beyond the comprehension of many tax preparers/advisers, which breeds non-compliance, underreporting or the encouragement of other informal arrangements to avoid such rules.
- The lack of access to a simpler tax filing system. Some do not like the idea of the government implementing an automatic tax filing system, but I do, especially since the government has access to much of a taxpayer’s data, such as employment earnings, pension earnings, etc. Instead, taxpayers are often forced to navigate a complex tax compliance system that can encourage the non-reporting of other earnings.
Canada isn’t just taxing people too much; it’s exhausting them. When otherwise good people feel that exhaustion, they will resort to easier options.
It’s similar to the reasons why
successful Canadians are leaving Canada
. The actual number of people leaving is small, but the amount of jobs, wealth and opportunity costs that is departing are staggering. It needs to stop.
The solution to all this is a tax system that is much less punitive from both a financial and compliance perspective, that is much simpler and approachable to the average Canadian, that rewards success rather than punishes it and that is much less political.
The answer isn’t more enforcement or another layer of disclosure. It’s meaningful tax reform that lowers the overall burden, simplifies compliance and rebuilds trust. Not surgical fixes but “Big Bang” reform that encourages compliance. Canadians deserve a system that rewards effort and contribution, not one that drives them underground or out of the country entirely.
Prime Minister Mark Carney
promised
an “expert review of the corporate tax system” during last spring’s election campaign. Not surprisingly, that vague copycat promise — the Conservatives
promised
a fulsome tax reform task force — never made it into the Nov. 4 budget. Canadians don’t need more rhetoric. We need bold action. Comprehensive tax reform is long overdue, and it’s the only way to bring people back to the table.
In the meantime, I’ll keep enjoying my favourite cash-only restaurant, and keep wondering how many more Canadians are quietly deciding that our tax system just isn’t worth the price on the menu.
Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.
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