moved:
That in the opinion of this House, the government should consider the following initiatives for addressing the underground economy: a ) an enhanced information campaign to educate the public and to encourage their participation in addressing the problem; b ) a limited amnesty on interest and penalties otherwise payable when a taxpayer voluntarily declares income previously undeclared; c ) a tax credit to taxpayers on home improvements and renovations to provide an inducement to create the essential paper trail and to serve as one of the primary vehicles for the information campaign.
Mr. Speaker, the underground economy materially and adversely affects the lives of all Canadians and literally costs us billions of dollars of revenue each year as a result. That is why I submitted Motion No. 382 to the House for consideration.
While the existence of the underground economy in Canada is an undisputed fact, estimates as to its size vary widely depend-
ing on the methodology employed to measure it. Estimates range from 2.5 per cent to 3 per cent of GDP to over 20 per cent of GDP; in dollar figures $20 billion up to $140 billion.
Even at the lower end of the range the revenue potential I believe warrants further initiatives to realize the potential and to contribute to the restoration of Canada's financial health.
There are good reasons why we should act now. As the finance minister has said, everything is on the table. It is imperative that moving forcefully on the underground economy be part of the overall strategy to meet our financial targets. Now that the economy is growing we must encourage as many people as possible to integrate back into the legitimate economy of the country.
The government currently has better tools to address the problem of tax evasion, but tax evaders are also becoming more sophisticated. Given this reality, it would be prudent to take advantage of new provincial information sharing and other initiatives before this new advantage is neutralized.
There are some general assumptions about the underground economy I would like to note. There is the premise that once you are underground it is very difficult to come out even if you wanted to. That is primarily because people who are working underground generally have offered arrangements and deals to their customers and clients substantially below the otherwise market price. That means customers come to depend on them.
In addition, once a taxpayer has evaded taxes and not reported that income and paid those taxes, there is interest and possibly penalties which grow over time and may grow to an amount which would be prohibitive as far as the taxpayer's being able to settle it.
Most of the underground economic activity is very difficult to detect because there is no paper trail, no invoice which would verify such activity. That is one of the aspects I hope to address with Motion No. 382.
Some of the arguments for dealing with the underground economy include the statement that if every Canadian paid their fair share we would all pay less. We must all do our part and fulfil our responsibilities and become part of the solution.
Since the recession clearly added to the underground economy these new additions are the people we have to get back before their dependency becomes irrevocable. I believe focused efforts on certain segments will be most successful but a general initiative should still have positive results because the first wave of results will come from reminding Canadians of their legal and moral obligations.
While the size of the underground economy is elusive, Canadians consider it large enough to warrant attention. There are a number of reasons people choose to participate in the underground economy.
The first and most fundamental is basic greed, people taking care of themselves at the expense of others. The second is a belief in the myth that everyone is doing it and nobody is getting hurt, which clearly is not the case. Some feel it is easy to get away with because we have an honour system in our tax system of declaring income. There also is a perception that no major effort is being made to stop it. Some would suggest the income tax system is too complex and too cumbersome to operate within. We have matters such as the level of respect for government and politicians. It is a problem in today's society.
The objectives of the strategy to address the underground economy generally include to recover revenue legally owing to Canadians, to encourage voluntary compliance and to protect the interests of honest taxpayers.
To educate Canadians on the facts about the seriousness of the underground economy and how we can help is extremely important. We need to demonstrate to Canadians the government is appropriately discharging its responsibilities in enforcing the law through tough but fair actions. We want to eliminate illegal activity which harms the Canadian economy and thus all Canadians.
Tax evasion compromises the government's ability to provide essential social and economic programs. It leads to unfair competition to honest businesses and it places an unfair burden on honest taxpayers.
I refer to the 1994 report of the auditor general in relation to the income tax system: "The success of the tax system depends ultimately on the public's willingness to meet its tax responsibilities through voluntary compliance. This willingness is fostered by showing respect for the taxpayers and gaining their confidence through a proper balance between facilitation and enforcement". Today I am tabling this motion and its proposals to address in part both of these aspects.
In the tax act there are consequences for failing to declare income, to report a tax return. I will outline them very briefly. If a taxpayer fails to file a return he or she can be subject to a penalty of 5 per cent of the tax unpaid. In addition, there is an interest charge of 1 per cent a month to a maximum of 12 per cent. Failure to report income can get up to a 10 per cent penalty on the income if the person were shown not to have reported income in the previous three years. In all these cases interest is compounded daily.
With regard to wilful tax evasion, the penalty prescribed is up to 50 per cent of the tax owing. If the individual is charged there can be an additional penalty ranging anywhere from an addition-
al 50 per cent up to 200 per cent of the tax plus imprisonment of up to five years. Needless to say these penalties are very extreme and reflect the seriousness of the problem of non-compliance with the Income Tax Act.
I do not suggest the government is not interested or not taking appropriate steps with the underground economy. Much to the contrary, I believe the motion compliments much of what the government is now doing.
As we all know, the government has entered into a number of provincial information sharing agreements to assist in detection, including joint audits, shared strategy and techniques and training. There have been increased investigations and audits, particularly in identified areas of high non-compliance. These include home renovations, construction, auto sales, restaurants and jewellery, as well as other service sectors.
The government has also embarked on a program of higher publicity of prosecutions. It also has found that as a result of this increased publicity the amount of voluntary disclosures has doubled. Each year Revenue Canada handles 15,000 leads or referrals as a result of its audit activity. It is working closely with the key stakeholders, with businesses, professionals and with the provinces to deal with tax evasion, the underground economy and smuggling.
To give an idea of the extent to which it has that co-operation, Revenue Canada has held consultations with more than 240 groups representing a wide range of industry sectors, including the Canadian Institute of Chartered Accountants, the Canadian Homebuilders Association, the Direct Sellers Association, the Canadian Jewellery Association, the Canadian Restaurant and Food Association, tourist associations and chambers of commerce.
These initiatives have helped to refine our strategies, identify areas of non-compliance and explore initiatives for improving that compliance. I believe that Motion No. 382 complements these initiatives by placing a greater emphasis on the role of the Canadian public.
I would like to suggest some general approaches which we can consider in addressing the underground economy. Certainly the information sharing agreements with the provinces will lead to enhanced opportunities for the traditional audit. The public, through an educational and information campaign should be assured that the agents of law enforcement will get appropriate support as well as become more effective. In fact in 1994-95 Revenue Canada's enforcement activities and its underground initiatives are expected to add an additional $3.8 billion to its tax assessment. Other approaches must concentrate on labour intensive sectors and other high probability areas, some of which I have already mentioned.
In launching a general information campaign to address the myth that everyone is doing it, we are going to go a long way in breaking the back of the underground economy. Most Canadians will think twice if they know there is a serious and substantial risk of being caught and that the consequences which I previously outlined are very serious.
Tax evasion is a crime. It is not a victimless crime, as often is argued. All Canadians are its victims because tax evasion leads to among other things job losses and an increase in the deficit. Honest taxpayers are carrying more of the burden of taxation. Legitimate businesses are operating in an environment of unfair competition, often leading to their bankruptcy. We must stress the theme that people who evade taxes are in fact cheating honest taxpayers, including the poor, the needy and the disadvantaged.
We need to publicize the number of investigations, leads and referrals which are received by Revenue Canada each year from Canadians who know tax evaders and are very concerned about the prevalence of tax evasion within our society. Many more Canadians would contact Revenue Canada if they only knew that those calls would be followed up. We must encourage and promote voluntary compliance as well as enlist the support of all Canadians. We have to ask them to just say no to tax evaders.
The preferred approach to non-compliance is voluntary disclosure and voluntary compliance. That is why this motion emphasizes public education and incentives for compliance rather than some aggressive measures which others may propose. The taxpayer must ultimately be treated fairly and with respect.
The underground economy permeates Canadian society for the benefit of some but to the detriment of all. Canadians must realize that underground economic activity makes victims of us all. Honest businesses are faced with unfair competition. There are job losses because many of those businesses go bankrupt. Health, education and other essential economic and social services must be reduced because of the reduced revenue. Honest taxpayers must pay more to make up for those who do not pay.
Most Canadians have been faced with an offer to pay cash for a lower price. What we do not realize is that to accept a deal from a disreputable service provider is not only to condone the crime but also to promote tax evasion. When someone offers a lower price for cash but no invoice, not only do we lose the revenue but the consumer also gives up needed protection.
In my experience we do get what we pay for. When we go underground to provide services, or particularly when consumers accept underground services, they can expect lower quality work and lower quality materials because those businesses do not have to comply and will not comply with the industry regulations. As well and most important, consumers do not get the protection and the guarantee they would otherwise have if
they had an authorized purchase order and/or an invoice. When the customer goes underground as well, he has no recourse and no protection.
This motion also asks the House to consider a couple of very specific initiatives.
Members should be aware that in the United States 25 states have at one point or another attempted to introduce or have introduced amnesties of sorts where tax evasion is a problem.
I am proposing a limited amnesty. It is not very specific in terms of its details, but is a limited amnesty of approximately a two or three month period on interest or penalties otherwise payable when a taxpayer voluntarily comes forward and discloses and reports income previously unreported. I would like to repeat that. The amnesty has to do with interest and penalties, not the taxes otherwise owing.
Phase two of the amnesty would implement an enhanced effort to crack down by engaging more investigators on a contract or commission basis possibly. This phase would continue as long as there is a favourable pay back.
With regard to ongoing efforts, we would report regularly to the public on the success of the program and consider an extension of the time frame as has been done with such things as gun amnesties. Our analysis of those who come forward will also provide information to the government which it can use to focus future efforts, thereby creating a ripple effect of the benefits.
This particular aspect of a limited amnesty is merely a suggestion which may or not have merit quite frankly. It is the kind of thing however I am hoping that the House will give due consideration to in committee.
The second specific new approach I proposed in this motion was an input tax credit. We must let the public know that when they patronize a supplier for the cash price without an invoice, they are actually condoning fraud. By refusing to do business with those who do not give invoices, they will become part of the solution.
After some work that I had done with the finance committee particularly with regard to the hearings on the GST, one of the facts that came out clearly throughout that process of public consultation was the extensive admission of underground activity in certain sectors. That was readily forthcoming, particularly because honest businesses represented by these associations and organizations were hurting. They were going bankrupt. We were losing jobs.
The construction industry particularly related to home renovations and improvements was found to have, based on the information from those associations, anywhere from 25 per cent to 40 per cent of its activity underground. That is over $1.5 billion to $2.4 billion. There is a substantial amount of tax revenue lost to the government because that business activity has not been reported by those businesses.
The proposal therefore states that as an inducement for the public to be part of the solution, we offer a tax credit possibly for the GST paid on home improvements or renovations. The taxpayer would be required to submit an original invoice or at least keep one available for a review should they be subject to audit and submit it as part of their tax return or by a separate filing.
The objective here is to create a real paper trail in an area of abuse with which most people are familiar. Their reward is a tax credit. Although that tax credit would reduce the revenues otherwise available to the government, it does mean that we generate reported income on which federal, provincial, corporate or business taxes are paid on which withholdings for payroll, health care and other source deductions that are matched by the government also would come into the system, thereby generating substantially more revenue.
This initiative would also I believe constitute an excellent vehicle through which to educate the public on the problem and to discourage generally under the table economic activity. Finally, this initiative is basically geared to help support honest businesses that are prepared to provide an invoice.
Consider someone who has been operating underground for sometime who approached a prospective customer. If that customer asked for an invoice, it is very likely that the business person would refuse to do the business simply because they would have to provide a piece of paper which would provide that essential audit trail and be a verification of the economic activity.
Initiatives like this may assist us in terms of dealing with the underground economy.
I have taken the opportunity to speak with members of all parties about the matter. I am finding across the House a very strong interest in this subject matter because of its importance to all Canadians.
I am not very concerned with regard to the specific initiatives. The ultimate objective is for the House to adopt this motion as a vehicle to bring the underground economy as an issue of importance to all Canadians to committee. Then together we can explore methods in which we can address one of Canada's most serious problems, the underground economy.
