CRA, Tips and Underground Economy

Before we start, I would like to issue a warning: this article contains the data from the Statistics Canada. Personally I am a big fan of Mark Twain, and his famous quote: “There are three kinds of lies: lies, damned lies and statistics”. So I have to apologize in advance for using the latter in this article.

In their statement released August 5th, the CRA addressed waitresses, taxi drivers, hairdressers and others with the following warning:

When you earn tips and do not report them, you are participating in the underground economy—you are increasing the tax burden on your friends, family, and neighbours, who have all of their income reported by their employers on their T4 slips.

As you probably remember, all tips and gratuities that are not reported on your T4 by the employer should be shown on Line 104 of your personal income tax return. CRA assumes that while the above mentioned employees receive lower hourly wages, their take on tips can be couple hundred dollars a day.

According to the CRA, According to CRA, identifying and addressing industry sectors where UE has become widespread, such as construction, home renovation, retail trade, and accommodation and food services, will continue to be a priority for the agency.

And now let’s refer to the most recent statistics (BTW, the Government tried hard and spent tons of your money preparing this data, just don’t forget about Mr. Twain).

In 2011, the four most significant sectors in terms of underground (UE) activity were construction (28%), finance, insurance, real estate, rental and leasing and holding companies (FIRE) (13%), retail trade (12%) and accommodation and food services (12%). These four industries together accounted for almost 65% of the total UE value added. UE activities in the retail trade industry declined in the last two years. In 2009, the retail share of UE activity was estimated at 14%.

As we can see, UE is highly concentrated in a few industries with the top four being construction, FIRE, retail trade and accommodation and food services. However when looking at the share of UE in proportion to the industry GDP, the picture is somewhat different. The top five industries in terms of their share of UE are: accommodation and food services with as much as 12.5% of its output being the result of underground activity followed by other services (except public administration) with a share at most of 9.1%, fishing, hunting and trapping (9.0%), crop and animal production (8.6%) and construction (8.5%).