Barbara Yaffe: In my opinion
Taxation: Unregulated transactions are placing extra burden on regulated business
A new report suggests B.C. is burdened by the highest levels of unreported and untaxed economic activity in Canada.
Have you ever paid a plumber under the table? Purchased pot from one of Vancouver’s proliferating marijuana dispensaries? Neglected to report rental income from a basement suite?
Such activities typically sidestep taxation, contributing to an underground economy that the Business Council of B.C. believes is especially active in the province.
“We believe that unobserved, unreported and untaxed economic activity is more prevalent in British Columbia than in the country as a whole,” say council chief policy officer Jock Finlayson and chief economist Ken Peacock.
They contend B.C.’s underground economy could be equivalent to 10 per cent or more of reported GDP.
It is not so much that British Columbians are more dishonest or tax-averse than other Canadians. They just have greater opportunity to cheat.
“Our economy is heavily skewed toward self-employment and unincorporated small business, where unreported transactions are more common,” explains a report, issued recently by the council.
Also, home building and renovating are big business in B.C., more so than other provinces, and the construction industry happens to be the No. 1 sector for underground activity.
And, of course, B.C. has a sizable illegal drug industry, accounting for billions of dollars each year in cash-only, unreceipted transactions.
It is noteworthy that while Lower Mainland municipalities try to regulate pot dispensaries, no one is talking about how to make buyers and sellers pay appropriate taxes.
By Statistics Canada’s count, two other provinces with relatively high levels of underground activity are P.E.I. and Quebec.
The national agency, in its analysis, tends to arrive at lower percentages when estimating the informal economy because it excludes activities such as drug dealing, prostitution and whitecollar crime.
Accordingly, it has found B.C.’s underground economy represents just 2.7 per cent of its economy.
Over the past 20 years, various StatsCan studies have put countrywide underground activity at between 2.3 per cent and 5.2 per cent of GDP; or between $45 billion and $100 billion annually.
The problem is hard to quantify — by its nature, transactions involved are unreported and deliberately hidden.
And, it seems, everyone measures it differently.
A 2010 World Bank report, using a more comprehensive measure of underground activity, put Canada’s hidden economy at 15.7 per cent of GDP, placing the country in the middle of a pack of advanced industrialized economies. By contrast, eight per cent of the Swiss economy and 30 per cent of Greece’s GDP are believed to be hidden.
Paying cash to a handyman or getting hold of “cheaper” cigarettes may not seem like venal activities.
But, in a hidden economy, health standards often get ignored, as do labour laws and other administrative procedures, contributing to a weakening of “regulatory regimes intended to protect consumers, workers and the environment,” says the business council.
And, naturally, those who do not pay their share of taxes push a greater burden onto those who do.
They also make it tough for suppliers and business people who pay their taxes to compete on price.
And yet, people sometimes turn a blind eye to the scofflaws, in part because the taxman is viewed as having horns. And because almost everyone can remember an occasion in which they themselves indulged in a little taxation hanky-panky.
The council believes governments need to become more activist in combating the underground scourge, starting with developing a better understanding of its size.
B.C.’s Finance Ministry, reacting to the business council’s spotlight on the topic, reports it recently participated with the Canada Revenue Agency in an “underground economy roundtable” to improve intergovernmental efforts to catch tax cheats.
The ministry reports it deploys an investigations unit focusing on tax fraud and sales tax evasion.
And, since renewing the PST, B.C. has established a new sales tax audit program which last year carried out 7,413 audits, netting $39 million in additional revenue.
It is an uphill battle.