Q: Recently, I received a letter from the Canada Revenue Agency (CRA) that demanded that my business collect and report to CRA workers that subcontract to my business. Briefly, CRA considers my type of business as construction-related and therefore falls under their reporting requirement rules. I disagree! Must I comply?
A: The underground economy in Canada is a multi-billion dollar industry. If you extrapolate 10 per cent as the approximate size of Canada’s tax dodgers, CRA would be out almost $15 billion. The underground economy includes a wide variety of tax dodgers such as some of the following:
- Cash businesses that only transact in cash and leave little or no transaction audit trail.
- Non-income reporting by individuals and corporations that have failed to file returns for several years and continue to be under CRA’s radar.
- Bartering goods and services that are not recorded and therefore not reported.
- GST avoidance by some individuals and businesses.
- Tax evasion by individuals and businesses that completely ignore all the tax reporting and filing requirements.
CRA, in an attempt in 1996 to crack down specifically on the construction industry’s underground economy introduced the “Contract Payment Reporting System” on a voluntary basis. Unfortunately, participation in this program was unsuccessful. Many businesses ignored the voluntary reporting system. Subsequently, in 1999, CRA made it mandatory for businesses that pay subcontractors to maintain records and report annually to CRA or face penalties. Therefore, if your business is in the construction industry and makes payments to subcontractors, you are obligated to report these subcontractors to CRA. However, wages paid to employees continue to be reported using the T4s and Summaries.
All construction-related businesses that pay subcontractors must report using T5018, Information Return. Construction is defined as erection, excavation, installation, alteration, modification, repair, improvement, demolition, destruction, dismantling or removal of any structure or part, including but not limited to buildings, roads and bridges. T5018s must be reported on an annual basis and filed with CRA. Businesses are not required to provide T5018s to subcontractors. The following should be included:
- Subcontractor’s name.
- Subcontractor’s Business number or Social Insurance number.
- The period being reported.
With this information return, it becomes a simpler task to discover which individuals or businesses are in non-compliance.
Henry Choo Chong, CGA provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304. Any questions to Money Matters should be e-mailed to firstname.lastname@example.org.