ADRIAN WHITE: The underground economy thrives

There is no question that COVID-19 has changed the way businesses operate in Cape Breton. The pandemic has forced many entrepreneurs to rethink their operating strategies to ensure their financial survival.

Consider new restaurant security protocols to protect staff and customers from virus transmission. Think about sporting events that take place before nearly empty stadiums and instead focus on the revenue generated by the media coverage of the event.

There are simply too many changes in business practices to list here in this column, including the growth of digitization in our economy, but I wanted to cite a few examples to illustrate some telling impacts.

A major impact is that people do not feel safe traveling outside the province or eating out due to the pandemic. Instead, they are using a portion of those savings to fund home improvement projects right here in the Cape Breton economy. This is a good thing for our community and our workers and it supports the “Buy Local-Buy Local” mantra promoted by the local business community.

The demand in the home improvement industry has skyrocketed and is so strong that it has resulted in a shortage of building materials, rapidly rising material costs and a shortage of skilled labor to undertake these projects. home renovation.

Many new entrepreneurs have entered the home improvement industry in 2020 and many anxious homeowners are looking for their services. Sometimes these entrepreneurs show up when they are expected to do a job and sometimes not. It is a long-standing problem among small business people in Cape Breton.

Some contractors present a formal written quote including HST for the project, leaving a paper trail to follow, while other contractors are more than willing to take money from the client, thereby avoiding the HST. Cash leaves little room for the CRA to report taxable income.

This practice leads me to shed light on the underground economy and its impact on our well-being as a province. Statistics Canada defines the underground economy as “comprised of market-based activities, whether legal or illegal, which escape measurement because of their hidden, illegal or informal nature”.

I use the construction industry as an easy to understand example, but you can imagine other opportunities for tax evasion including buying illegal cigarettes, cannabis sold on the street, tips, cash payment for services, Airbnb cash rentals or undeclared offshore bank accounts. at the CRA.

In Nova Scotia, according to Statistics Canada, the underground economy was estimated at $ 1.28 billion in 2018. This represents almost 3% of provincial GDP. These are revenues that escape government tax. The underground economy in Nova Scotia as a percentage of GDP is above the national average, which is troubling. Taxes on $ 1.28 billion would go a long way to offset Nova Scotia’s forecast 2020 budget deficit of $ 853 million due to the pandemic.

Part of the underground economy is driven by the fact that Nova Scotia has the second highest personal tax rate in the country. It remains one of the country’s three remaining provinces that still practice “bracket slipping” on your personal income tax deduction by not adjusting it to the CPI on your annual tax return.

The higher the taxes, the more they encourage individuals and businesses to adopt tax evasion. Alberta has one of the lowest personal income tax rates in Canada and no provincial sales tax. It abandoned the “parenthesis creep” on its residents decades ago. It also has one of the lowest underground economies as a percentage of the country’s GDP, at 1.8% of provincial GDP.

British Columbia has the highest ratio with 3.7% of GDP. In Canada, the underground economy was valued at $ 61 billion in 2018, or 2.7% of national GDP.

I can only imagine that with increased demand for home improvement projects in Canada due to the pandemic, underground economic activity will likely increase by 50%, reaching almost $ 90 billion by 2020.

In Nova Scotia, residential construction accounts for over 25% of the estimated underground economy GDP. The other six major contributors to the underground economy represent approximately 50 percent of Nova Scotia’s underground economy. These are retail, accommodation / food services, finance / insurance / real estate, manufacturing, professional / technical services, and health care / social assistance.

If we are to grow Nova Scotia’s economy and thereby increase tax revenues to pay for the services we all expect, we will need to rethink the tax burden on individuals and businesses to balance and fair the tax environment. This is one of the reasons we have a hard time recruiting doctors in Cape Breton. Above-average taxes in Nova Scotia hamper economic expansion. High taxes will continue to fuel the underground economy and tax avoidance until we deal with it.

Adrian White is CEO of NNF Inc, Business Consultants. He resides in Sydney & Baddeck and can be contacted at [email protected].

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Shawn G. Randall

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