Merchant Advance Blog

Blog Article: The Canadian Underground Economy

In an economy that is increasingly skewed toward self-employment and small business, it’s becoming more and more noticeable that businesses may elect to pay for contractor services, goods, employee compensation, and other costs in “under the table” fashion: in other words, in cash, and in a fashion that goes unreported on official statements for the purposes of recording income and taxation. This is the foundation of the “underground economy” in Canada, and while it appears to be a way to “keep it simple” for businesses, it may have serious consequences for its participants as well as the customers that drive it.

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Also called “moonlighting,” the underground economy is reported by Statistics Canada to be worth $45.6 billion, as of a study concluded in 2013 — equivalent to 2.4 per cent of Canada’s GDP. Residential construction, finance, insurance, real estate and food services industries accounted for the vast majority of the underground transactions.

Businesses that elect to play outside the rules set out by the CRA are exposed to certain significant risks. If you don’t report your sales or income, as well as important employee data such as payroll deductions, you could pay penalties, be criminally convicted and/or go to jail, as well as lose your business.

Underground economy transactions also make life harder for suppliers and business people who pay their taxes to compete on price in an increasingly difficult and margin-driven small business marketplace, one in which smaller firms have to work harder than ever to create value and incentives for their customers compared to larger ones.

Establishing contracts with suppliers or workers in an underground economy puts business owners at risk as well: while convenient, paying under the table creates a situation where there is no method of insurance against cost overruns, unsatisfactory quality of work or product, injury, damages, or fraud.

In short, there’s really no reason to contribute to the underground economy! Small businesses simply can’t afford the risks.

 

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