According to the latest estimates from Statistics Canada, the size of the nation’s underground economy (UE) is approximately $35 billion per year*, costing Canada’s treasury millions in unpaid taxes. UE activity, defined by the CRA as “business activity that is unreported or underreported for tax purposes,” can be found in any industry.
But according to the CRA, the three most significant UE sectors are construction, retail trade, and accommodation and food services. Together, these sectors accounted for 61 percent of the UE estimate.
To combat this problem, the CRA has made it a priority to target these industries and similar cash-based businesses, including audits to verify tax credit documentation. In fact, more
than half of CRA HST/GST audits are due to documentation issues.
What’s the Problem?
There are several typical UE scenarios: A seller provides an invoice that includes HST/GST for taxable goods or services. The buyer pays the invoice, but the supplier never reports the
transaction and thus never remits the HST/GST as expected. Instead, the seller pockets the excess money. Or, the invoice doesn’t include HST/GST, the deal is done in cash and no invoice is presented, or the invoice includes a bogus business number.
When the buyer files for the HST/GST tax credit, there is no corollary remittance on the seller’s part. Buyers are often caught off-guard and, in some circumstances, may be unable to claim their credit. But it doesn’t have to be this way.
Sellers: Follow the Rules
The documentation rules are straightforward: Suppliers that are not considered “small suppliers,” meaning they have sales over the $30,000 small supplier threshold per year, must register for a GST/HST number.
For all sales, the seller’s invoice, receipt or contract for taxable goods or services must show the business name, date and total amount payable. For sales between $30 and $150, the invoice, receipt or contract must also show:
• The business’s GST/HST number.
• That the total amount paid or payable includes the GST/HST.
• The amount paid or payable for the goods or services, with the GST/HST amount shown separately.
• The GST/HST rate that applies.
For sales over $150, the invoice, receipt or contract must also include a brief description of the goods or services and terms of payment. (For a full list of invoice requirements, visit the CRA website. See URL below.)
Buyers: Verify Information
The required information on a seller’s invoices, receipts and contracts lets buyers support their claims for the GST/HST credit. It is the responsibility of buyers to validate the GST/HST number provided on the seller’s invoice. This is easily accomplished by entering the number on the CRA’s online GST/HST registry. Validating the business’ number should be routine for any new vendors.
Buyers should also know what types of information are required to be listed on the invoice and insist that all invoices contain all pertinent information.
The CRA is serious about combating the UE. In fact, the CRA website has pages of information explaining how it is targeting the UE, with a strong warning about penalties, fines and jail time to those who evade taxes. “Operating in cash and failing to keep records does not make you immune to taxes,” the site says. There’s even a special pamphlet aimed at those in the construction industry warning about reporting cash payments.
For more details, visit the CRA website at http://www.cra-arc.gc.ca
Questions about GST/HST documentation? Contact DJB’s Commodity Tax Specialist for the answers you need.
*Source: Estimating the Underground Economy in Canada, 1992 – 2009
Click here to read more Foresight Newsletter articles.