According to an article by The Canadian Press available here, a report (the “Report“) submitted to Canada’s tax agency, the CRA, estimates that the underground economy in Canada is worth over $30 billion annually and apparently next to none of it is targeted for either (a) tax collection; or (b) tax evasion prosecution. Apparently, the CRA has attempted for three years to obtain consensus to move forward with tackling the underground economy as a tax policy matter but has been unable to do so for reasons beyond its control.
The lack of a national effort to tackle taxation in respect of the underground economy appears to be due to a lack of financial resources allocated to the CRA to combat financial crimes (i.e.,. tax evasion, money laundering, terrorist financing through charities, business record fraud) and an inability of stakeholders to reach a consensus on a national action plan.
Underground economy actors
The key sectors that create the underground economy are construction firms, energy companies, the food services industry and the adult entertainment and adult services industry. The latter two are cash intensive and services are paid for in cash and frequently not reported, especially in the adult services industry which operates in an invoiceless environment and in situations where even if one could obtain an invoice and pay with a credit card, the transactions are often fraudulent in the sense that false invoices are created to misdescribe the services.
The Report noted that there was no consensus among the provinces and the federal government on an effective strategy to collect tax revenue from actors in the underground economy, and the lack of consensus coupled with a reduction in funding to CRA, has resulted in an increase in non-compliance by all Canadians – legal and natural persons alike.
According to an Auditor General’s report, the lack of resources allocated to the CRA has resulted in it not being able to remain current in respect of global trends in illicit movements of money by Canadians, particularly to offshore tax havens.
Asia becoming tax haven central
In recent years, Asia has become a tax haven destination, particularly Hong Kong and Singapore. Physical distance, a different legal structure, lax anti-money laundering controls, and beneficial ownership structures that conceal the true shareholders of private corporations (similar to British Columbia) make countries in Asia difficult to investigate.
Another important change is that the users of tax havens from Canadian and American clients now primarily involve hedge funds, investment funds and private equity funds, which use private companies and bank accounts offshore, although Canadian private equity funds tend to favour the Cayman Islands. Without access to beneficial ownership information and expertise in deciphering corporate finance and beneficial ownership, tax evasion is hard to tackle.
Tax evasion is a $15 billion annual problem of money laundering
Not all of the uses of offshore tax havens necessarily involve financial crime. However, tax evasion through the underground economy and use of offshore tax havens seems by all accounts, to be a massive problem in Canada. Part of the reason the problem does not get the attention it deserves it is one of optics – it is not characterized for what it is – a financial crime and money laundering problem.
The reality is that all tax evasion involves proceeds of crime and all tax evaders are money launders.
Financial speaking, it’s a $15 billion annual problem.
During the three year period the CRA attempted to get buy-in for a national strategy, it appears to have cost taxpayers $45 billion in lost taxes – money that money launders kept in their pocket and continue to keep.
Integrity of financial system
There are costs to Canada beyond obvious economic costs of tax evasion. Financial crimes that are not prosecuted encourage other criminal behavior by the same actors and their associates who take advantage of jurisdictions with little enforcement. Tax evasion places an unfair burden on legal and natural persons who do pay taxes. Perhaps even more important, however, is the reputational sting associated with jurisdictions that allow money laundering of this magnitude to go unchecked. It isn’t so much that the integrity of CRA’s mandate may be affected, as alleged by some Parliamentarians, its that money laundering on a massive scale affects the integrity of the entire financial system.