Undergrounders being defined as those who either buy or sell in the underground economy.
This whole underground scenario was created by our government and can only be fixed by CRA and the Government of Canada. The underground did not create itself, it was created by the government creating a system and a tax regime that is not seen as fair and ethical by the population.
Without the support of the average citizen, the stick is not going to beat the beast into submission. So long as the tax system is seen as unfair and so long as society does not offer alternative solutions that citizens can buy into…. Life by way of undergrounding will go on.
It astounds me that CRA has for so long cried foul on the people in the underground economy. Yet there are such obvious answers to the problems they helped create. No amount of whining wailing and wondering is going to fix things; only positive action will make a difference.
CRA has and is currently looking for solutions to the problem – that has the solution right under their noses. The challenge for CRA is that there very modus operandi is based on fines, penalties and punishment. The time has come where CRA has to look at how they treat businesses in Canada and understand a simple concept. Honey attracts more bees than vinegar.
Those who have little to do with the underground economy are those who are either doing things right because they know what CRA can do to them and those – who like criminals, don’t believe they will be caught or see no alternative to the unerground and have nothing much to lose.
The underground economy is not a byproduct of those who refuse to pay their fair share of taxes. Rather the underground economy is a byproduct of a system that does not work for the little guy.
I don’t necessarily believe we are over taxed, I think we are unjustly unfairly and unequally taxed.
Let’s look at those who are in the underground economy.
- Insolvent individuals.
- Those who cannot find employment.
- Those who are on welfare looking for extra cash.
- Illegal emigrants.
- Those earning low wages in their day jobs.
- Just about every person in Canada, in one way or another. (Usually unknowingly or are willfully blind to it.)
Let’s look at the majority of people who don’t sell in the underground but buy from underground sellers. They are the people who have legal employment and earn a wage that allows them to live a decent lifestyle. The subjective term “decent” is used because the situation could require the user or the term to see themselves as being kept poor due to over taxation.
These persons are the underground dabblers, and they are not the reason for the underground, they are part of the “enablers.”
Let’s look at those enablers who have no real need to buy from undergrounders. When they stop at a chip truck or a food cart, or any other peddler of products and service who deals in cash, these people are not even thinking that there may not even be anything wrong when they buy… no receipt… no business number or HST number. Take it and go – kind of deals.
So let’s take a look at this picture.
In my opinion the number one reason for people being in the underground economy is that they are simply having a problem meeting the financial demands of even a basic minimum lifestyle.
People who are experiencing financial challenges, often are operating without credit, sometimes can’t even open a bank account (although banks are not supposed to reject personal bank accounts). CRA could be chasing them. If one does not have a bank account, they have to resort to a cash income, of which the obvious solution is the underground.
Once underground what was to be a temporary solution becomes a permanent one. Once someone goes underground – even if the taxman catches them, there is little CRA can do. If the person does not have assets to take, a bank account to freeze or an income to garnishee.
Those who are likely to be caught by CRA are those who have one foot in the underground and the other foot above ground. From a practical perspective, – persons should not have one foot in and one foot out. Either be underground because you have no choice or be out of it and don’t deal with undergrounders.
Let’s look at the reasons to be an undergrounder.
- 13% HST. Undergrounders have a financial edge over legitimate businesses.
- Income tax. Undergrounders have a huge edge in their pricing because they lose nothing to the tax man.
- Insurance. Undergrounders have an edge in pricing because they don’t need to buy business insurance
- WSIB. Undergrounders don’t have to pay for WSIB.
- The Ministry of Labour, is a load undergrounders don’t carry.
- Accounting, undergrounders have a cost of business edge because they don’t have to pay for the expense of accounting and filing tax returns.
- Undergrounders often have CRA issues and can’t go legit because CRA will come after them.
- Undergrounders can’t deal with the complexities or the costs of accounting.
- Technology has made it easy to buy and sell via the internet.
- Buyers can save a huge amount of money when purchasing from an undergrounder.
We need to look at who would benefit by getting rid of the underground economy. Firstly, CRA, above ground businesses that lose business to undergrounders, accountants who would get work from micro businesses getting on board and the general population who would likely get a tax break on a level playing field.
Unfortunately, CRA has no momentum with business to bring about change. So unless CRA finds a new approach to getting the public on side, it will be harder to get the support from the man on the street.
The big joke here is the salaried worker who proclaims “Just pay your tax like the rest of us.” They have no pedestal to stand on because they have no choice about paying tax. The employer deducts the tax at source and the legitimate vendors charge HST at point of sale. Most of these whiners buy from the underground economy.
When we look at the causes of an underground economy: There really are not a lot of reasons people do things. The three big motivators are;
We can safely say that “love” is at the bottom of the list when it comes to the underground economy. So that leaves us with fear and greed as the motivators to be an undergrounder.
According to Maslow’s hierarchy of needs,
The original hierarchy of needs five-stage model includes:
- Biological and Physiological needs – air, food, drink, shelter, warmth, sex, sleep. (Fear of not having this)
- Safety needs – protection from elements, security, order, law, stability, freedom from fear. (Fear of not having this)
- Love and belongingness needs – friendship, intimacy, affection and love, – from work group, family, friends, romantic relationships. (Fear of not having this)
- Esteem needs – achievement, mastery, independence, status, dominance, prestige, self-respect, respect from others. (Fear of not having this)
- Self-Actualization needs – realizing personal potential, self-fulfillment, seeking personal growth and peak experiences. (Fear of failure)
Based on that the number one reason for the existence of undergrounders is; Biological and Physiological needs – air, food, drink, shelter, warmth, sex, sleep. I believe that fear of not meeting these needs are what has created the underground economy.
Maslow stated that people are motivated to achieve certain needs. When one need is fulfilled a person seeks to fulfill the next one, and so on.
Every person is capable and has the desire to move up the hierarchy toward a level of self-actualization. Unfortunately, progress is often disrupted by failure to meet lower level needs. Life experiences, including divorce, business failure, punitive CRA actions and loss of job may cause an individual to turn to the underground just to look after basic human needs.
Maslow noted only one in a hundred people become fully self-actualized and I believe it is because back then and now in today’s world the underground world prevents people from rising above the nose water level.
Being in the underground economy prevents one from self-actualization. It is a road block to happiness. Based on that concept, it would seem that a solution to the underground economy is to provide a pathway out. A pathway that offers solutions and not just greater obstacles.
CRA is one of the greatest spreaders of fear in our society, they are all about fear and they make the most of it. Their biggest tool is the greatest fear of all… “The fear of the unknown.” When CRA threatens a citizen, they hit at the entire Maslow’s hierarchy of needs.
One consistent tool that is very pubic and very used is to garnishee bank accounts. When someone goes to pay for their family’s groceries and find that their debit card does not work because the last cent is gone from their personal bank account, that person becomes terrorized. (Terror being described as intense fear).
Terror causes physiological harm. Terror causes people to react to extreme fear and move to protectionist behavior. Protecting one’s self by way of becoming an undergrounder allows one to believe that they are pretty much untouchable when it comes to being able to meet the triangle level one needs.
I do not believe that greed is a motivator to be in the underground economy. I suspect that very few rich people made their money underground.
Love does not drive people underground. On the contrary love would likely motivate one to live a less risky life above ground.
So what can we do to fix this?
I don’t see it as all that hard. Big brother has all the tools it needs.
To address this, let’s start with HST and the excise tax act. Largely it is an exercise in bureaucracy. The thirty thousand dollar threshold where small businesses need to register needs to change to any amount of gross income. Any money received needs to be tracked by a business ID number that is assigned to all citizens. That would eliminate the excuse of undergrounders working in the under thirty thousand dollar market.
CRA already uses the banks as an extension of their regime, so why not change the way bank deposits work. That would open up an expanded bank service provided to all citizens. There would be both a SIN and a BIN. The banks would collect more information and duly record all deposits that are not taxable deposits by way of stated reason. Such reasons would be; tax refunds, gifts, loans, business refunds, etc. All other deposits automatically withhold the HST and remit it to the government. The bank account holder submits a monthly HST return to the government and get their input tax credits credited to their income tax. At the end of the year there will either be income tax owing or a refund coming.
The banks would all need to standardize on one standard bank statement. That statement would be expanded to collect the necessary data to be used in bookkeeping and tax filings.
In terms of the income tax act, it is without doubt absurdly complex. So much so experts argue about meanings and we often need the CRA Rulings Directorate or the tax court to rule on what is right and what is wrong.
Further in terms of income tax, CRA is very clear that if you do anything that is primarily to reduce your income tax, they are going to fight you over it. The new business wisdom is to stop doing things that cause CRA to audit and assess those who take aggressive tax strategies. “Aggressive strategies” are business actions that are tax motivated.
To reduce the complexity, we need to break the tax act down into simple terms. Such as all business expenses that are incurred for the purpose of earning income are deductible. There would be limits and an expansion of the list of what is not deductible. Things that would not be deductible would be anything that is solely to the benefit of the taxpayer. If the benefit was shared, only the percentage could be taken as is currently done on entertainment expenses.
We would need to get rid of all the special tax breaks such as the five hundred thousand threshold for small businesses and to replace it with a consistent tax rate across all businesses, incorporated or not.
There seems to be no appetite for a flat tax, in spite of the fact that HST is a flat tax, so what we need to do is simply do as we do for personal income tax, which is to have a business tax table based on amount of net income.
Changing the tax system would not only make it easier for individuals to stay out of trouble that leads to them being underground, but would also curry favor from businesses who have to deal with the tax accounting nightmare that all businesses have to deal with.
A refined government and tax system, would dramatically reduce costs for both business and the government and bring billions of dollars of tax revenue up from the underground economy.
If we get businesses to buy in to a better tax system, those business owners would be less inclined to participate in any underground commerce or any tax driven strategies.
CRA needs to stop being a cause of bankruptcy and accept that they need to be a finance company that would make it possible for taxpayer having enough time to pay their tax debts. It would be far better to make a workable deal than to get from nothing to thirty cents on the dollar via a trustee. Countless millions of tax revenue is lost due to this irrational process.
To get undergrounders to come out, there needs to be an amnesty program. One where forgiveness could be granted in exchange for going legit. There needs to be a simplified accounting system for small business to be able to understand what they are supposed to do. It is rather pointless to have laws in place that cannot be followed by the masses of small business.
It is not just small business owners who need to understand how to keep books but the same applies to big business.
If there is a shred of doubt to the need for easy accounting that is CRA compliant, then one needs to answer the elephant in the room question which is; “Why is it that the vast majority of businesses are not audit ready?” Audits are all done the same way, all the time, if the auditor is following guidelines. An auditor just needs to know if there is any unreported income and any over stated expenses. The rest of the big business bad accounting is just playing around with complexity for the sole purpose of paying less tax.
CRA can’t change the underground economy by doing what they always have done. First CRA has to change their behavior and then so too will undergrounders change their behavior. When CRA changes their behavior, then business will change theirs in response. When CRA is seen as a friend and ally, then business will fall into line and the underground economy will wane and fade. If CRA changes how they are perceived, then mainstream citizens will then begin to reject the undergrounders.
Until such time as CRA addresses the real issues and works to make tax simpler instead of more and more complicated, all the time, year by year, they will continue to bemoan the beast that builds momentum day after day. The underground is the escape route from the nightmare of dealing with CRA and government bureaucracy system in this country.
This article just touches the tip of the iceberg of the oblivious, where tax revenue sinks to the depth of the abyss. Change needs to come so that government bureaucracy can get out of the way of progress.