My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, June 24, 2013

Paying Cash to Avoid HST– What’s in it for the Contractor/Service Provider?

A few weeks ago while waiting in line at the bank, I overhead a customer in front of me bragging to his friend about how he had saved several hundred dollars in HST by paying a painter in cash. I thought to myself, besides being illegal, this guy was totally oblivious to additional tax benefits he had conveyed upon the service person by paying him the full price of the service, sans HST. So, I thought today, I would discuss the overlooked aspect of why (other than competitive pressures) any supplier, service provider, contractor, professional etc. would agree to an illegal act by accepting cash for their services?

This question brought me back to an article Roma Luciw of the Globe and Mail wrote in September, 2012, titled “Most Canadians have paid under the table to avoid tax" in which she stated that “Most Canadians have paid cash in order to avoid the sting of taxes – and they don’t feel bad about it either, according to a new poll.” Roma noted that for 2008, Statistics Canada reported the underground economy in Canada to be in the ballpark of $36 billion dollars – a staggering figure.

I was quoted in Roma’s article as saying the following: “Retailers and contractors who get paid under the table are clearly evading income tax. They would not only be subject to income tax on any sales not reported but potentially subject to penalties for tax evasion." I also suggested that "Contractors and retailers run the risk that consumers will snitch on them to the CRA, if the good or service does not meet their expectations, while consumers risk having no legal recourse without an invoice for the goods or services.”

Any cash payment for services or goods has two distinct components: (1) the avoidance of HST and (2) as I note above, the avoidance of income tax. I don’t think many people give much thought to the second issue when they pay cash for services, so that’s the area I want to key on in my post today.

Let’s return to the person in line at the bank. It is clear he illegally saved 13% in HST and based on Roma’s article and the attitude of most Canadians, he probably did not lose much sleep over the matter. But how about the painter who provided the service, how did he make out? Let’s take a look at his situation.

Say the bank-goer paid the painter $1,000 in cash. Let’s also assume that the painter paid his assistants $400 in cash to help paint the house. 
  • The painter collects $1,000 in cash.
  • He then pays $400 in cash to his workers.
  • He now has $600 (tax free) under his mattress.

But what if the bank-goer had refused to pay cash and the painter recorded the transaction properly in his books?

  • The painter (in Ontario) would have collected $1,130 including HST.
  • He would then remit $130 in HST to the CRA (it is important to note, the painter is essentially a tax collector for HST and there is no cost to actually collect HST since he receives $130 HST and then just remits it to the CRA).
  • The painter now has $1,000.
  • He then issues cheques totalling $400 to his assistants as either salary or subcontract fees.
  • The painter would report $1,000 of income in his books and claim an expense for $400, leaving $600 to be taxed.
  • Assuming the contractor is in or would be in the 35% income tax bracket if he reported all his income, he would owe $210 of income tax ($600 profit x 35%).
  • At the end of the day he, the painter would have $390 left ($600 - $210 tax).

Based on the above, although illegal, the painter benefited by $210 because he accepted cash. The bank-goer saved $130 by paying cash. So essentially, the painter benefited 1.5 times the bank-goer for the risk he took in evading both HST and income tax; some would argue that is an illegal win-win for both the consumer and service provider.

What if the $1,000 cash was paid to a professional who did not require any assistance in providing his/her professional services? He or she would receive $1,000 and would keep it all. Since the professional would probably be in the 46% tax bracket, they would save $460 by accepting the cash. In this circumstance, their tax savings would be approximately three and a half times the savings of the person not paying the HST on the service provided.

It goes without saying that not paying HST and income tax is illegal. I am not in any way condoning the payment of cash. My intention in posting this blog is to point out how much money leaks out of the system when people pay for services or goods in cash and how the service provider benefits to a much greater extent than the consumer for taking the risk of evading income tax.

Stock Market Challenge for Charity

I would like to take a minute to point out an initiative that I think is worthwhile and fun for stock pickers and closet stock pickers alike. I’ve participated in the Blog for Financial Literacy Campaign and created the Bloggers for Charity Initiative … and as you know, I feel strongly that everyone should work towards financial literacy and help those less fortunate wherever and however possible.

Steps Foundation, an organization that supports financial literacy education programs in Toronto, is holding its “Bay Street Stock Market Challenge” this week (June 25-July 26) to raise money for financial literacy education. I hope you have time to check it out and test your market and investment knowledge with their virtual stock and option trading. (I’m told you are given $100,000 USD and $100,000 CAD of virtual money. The participant with the highest portfolio value at the end is the winner and claims 50% of the event’s proceeds).

As a side note, a portion of the funds raised during the competition will help Steps Foundation continue to fund a debt management clinic at WoodGreen, a charity my firm has been actively involved with. The firm and staff have donated money and one year the whole firm spent a day during the summer building furniture for the single mothers who work hard to get education and jobs to provide for their children.

So please consider entering the contest and supporting financial literacy, although it will be tough trying to beat me :).

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.


  1. Could it not be argued that the consumer did nothing illegal here? If I pay a painter $1,000, it is up to the painter to discount for HST IE he nets $893 and pays the appropriate HST. If he pockets the entire $1,000, is that on the consumer to pay HST?

    1. Hi Alphabet

      It is a question of what you negotiate. If you say I will pay $1000 including HST, it is the painters issue and he should issue an invoice for $885 plus $115 HST. If it is left unsaid or wink wink and no invoice is issued, I would suggest the consumer is complicit.

  2. The one thing you left out of the calculation is expenses the painter incures other then payments to helpers. These could include, paint, brushes, vehicle expenses, advertising expenses, etc. How has the painter handled his input tax credit for these items? Would he be willing to claim his input tax credits and not claim his HST collected?

    I have tried to convince self employed individuals to be above board. If you are dealing with a customer that wants a cash deal, calculate what you would charge for the job, bumb that up a bit and add the HST. Then tell the customer the price if invoiced and the price if they pay cash. You can let the client think they are getting a deal by paying cash, then you record it all in your books, remit the HST and claim the income for tax purposes. The customer thinks they got a deal and got a tax saving.

    Although I don't have data to back up my assumption, I believe the majority of people wanting to pay cash are focused on the tax savings and can be led to believe you are giving them a deal when you are in fact charging them exactly what you would have.

    1. Anon,

      I would suggest those other expenses are mixed bag. Some are paid by cash and others paid through the business and tax credits claimed. I have been told that this is a big issue with people that do large cash, they need to find others who take cash to keep the cash cycle working.

      I would suggest your last point is valid only if the customer does not have a competitive cash bid that has not been grossed up.

  3. This is one of my biggest pet peeves. I am a professional and never take under the table payment.

    Where do all of these individuals hide all that money? The stuffed under the mattress is likely true. Do they buy gold and put it into a safe? They can only use so much cash in the average day to pay for gas, groceries etc. But the larger bills like mortgage, property tax, natural gas, hydro etc - would that not leave a paper trail that can be tracked?

    If they would pay their share of the tax then we could reduce the national debt in a big way.

    1. Hi Pawdoc:

      It is a good question as to where all the cash goes. There are probably a lot of safety deposit boxes in Canada full of cash. In addition and this goes back to your pet peeve, I would suggest many very large ticket items are purchased or partially paid for in cash. I was recently told a story of how someone wanted to purchase something from someone for cash and that item was worth far in excess of a $500k - the seller declined because they did not want to deal with someone paying all cash.

      The risk for these people is a net worth audit where the CRA says you live a lifestyle of $150k, but we only see income of $30k. But they need to be selected for audit, which seems to be few and far between.

    2. It is a fallacy that if these people paid all their taxes the debt would go down. Instead government expenses would quickly grow to engulf all the new income.

      Money laundering and asset seizure laws have been getting harsher every year for the last 30 years, and the economy has shifted from a mostly cash based to a credit card economy (all transactions recorded).

      We can assume that this has lead to a great reduction in the size of the underground economy (as a percentage of GDP). And yet, deficits keep soaring.

      If the government wanted to reduce the size of the underground economy, they could reduce taxes and thereby reduce the incentive to cheat.

    3. Net worth audits are an interesting concept, but I would guess that most crooks know enough by now not to declare $30k when they're making $150k.

      I would assume that it's very difficult to detect when the ratio is only 1:2.

    4. Hi Anon

      Hard to argue with your comment "if these people paid all their taxes the debt would go down. Instead government expenses would quickly grow to engulf all the new income". Although I am not sure even if the average person felt taxes were lowered to a "fair level" there still would not be significant cash transactions.

      As for the $30k, I think you would be surprised. I have been asked a couple times to take on net worth audits which I turned down, since who wants that work and in both cases, the taxpayer had reported ridiculously low income.

    5. I concede that no matter the tax level, some will always cheat. But I do believe that just as competition has improved our lives in every sphere from farming to iPhones, "tax competition" is on balance reducing our tax rates.

      For the audits, isn't it possible that they got the wealth through inheritance or divorce? Otherwise I find it difficult to see on what basis they plan to contest. Of course, even if they are fraudsters I guess there's still work to be done determining what their real salary was (vs what the government simply estimated)

  4. As you know, I'm a proponent of financial education as well. But I want to question the purpose of a financial literacy contest for education that is based around active trading rather than index funds.

    Give me a contest that requires the best results over 25 years and I'm in :).

    1. Hi Glenn

      Fair enough-- but I think this is more of a fun contest, but I get your point.

  5. I have never paid for a job outright under the table but I have participated in the shadow economy by swapping services. It has never been clear to me where this falls as far as tax law goes but ethically I am ok with it. Paying cash for services to avoid tax is obviously wrong but I understand why it is so popular, thanks for shedding some additional light on the things people should consider before paying cash. I have learned a few things.

  6. Tax loss is even greater than the example given, though I recognize that this is purely a hypothetical example. Other taxes that the contractor is not paying includes all sorts of payroll taxes (CPP, EI, etc.).

    And this article does not mention some of the disservice done by the contractor to his employee. I know of someone who was working for such a cash only/under the table contractor and got injured badly on the job. No WSIB - you are not eligible for things like that when you work under the table.

    1. Anon, yes you are correct, especially the WSIB which is an issue. Also severance pay, where someone considers themselves an employee but they have no T4 salary and thus, often no recourse.

  7. I imagine they caught a lot of these shady dealers with the Home Improvement Tax Credit, since the contractors suddenly had to issue receipts. It wouldn't surprise me if there were a lot of construction company audits right afterwards.

  8. What people are not understanding is that paying cash has lowered the price you would normally get from the painter. He is doing a 2000$ Job for 1000$ as everyone else is trying to compete fairly in this cash market.

  9. CRA does appear to be taking the income tax evasion and HST fraud seriously. They list the convicted offenders on their website. They also provide an easy to use anonymous reporting tool where anyone can open a file on a business or individual. The FAQ on the site states they investigate every report they receive.

    1. Sustainable, thx. Do you have links to the offender website and the reporting tool.

  10. The problem is, because the HST is so high you cannot offer enough of a discount to a homeowner to make your strategy of offering a discount work. Also because the HST is so high, contractors are being faced with not having work just to remain honest. When you consider the risk, it's not worth it but people just don't want to pay the tax. In Atlantic Canada it's 15% in some provinces.