Restaurant, construction company bosses justify $240-billion underground economy
Don Butler
Sun
OTTAWA — 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 multi-billion-dollar underground economy.
The study, held in February by Sage Research, is based on 20 focus groups with 163 owners and managers of small- and medium-sized construction and restaurant, bar or catering businesses. It offers a window into a thriving, but mostly uncharted, segment of the economy.
Results of 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 justified 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 paid very well 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,” Tedds said in an interview. “And it really is a guess.” The number includes money earned through illegal activities, which the CRA doesn’t count in its definition of the underground economy.
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.
In construction, the underground economy thrives in the home renovation market. According to the focus groups, that’s 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 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 officers and teachers, who do construction work during their time off.
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.
Catherine Jolicoeur, spokeswoman for the CRA, said the study will help the agency inform and educate businesses about the “risks and consequences” of participating in the underground economy and to refine its strategies for addressing the problem.
