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Canadians use cash to avoid tax

Published Oct. 6, 2005

In Canada these days, cash is king.

A young hairdresser who works out of her home cuts her prices for cash-paying customers. When she buys supplies, she pays less if she uses cash. When shopping for a new purse or piece of clothing, she always asks for a cash discount, and nearly always gets it. Even her accountant gets paid in cash.

The hairdresser's mother redid her kitchen recently and paid the contractor in cash. He charged half the over-the-table price.

Needless to say, the Canadian government collects no taxes on any of these transactions, depriving it of an estimated $15-billion a year in revenue.

Government officials and experts say they fear that Canada's underground economy is getting out of hand. Once considered one of the most law-abiding peoples in the developed world, Canadians now flout the rules in dozens of ways daily. Their purpose is to evade taxes, but the effect may be to enhance already rising distrust in government and laws.

"The underground economy is not all smugglers," Finance Minister Paul Martin said after taking office last November. "It is hundreds of thousands of otherwise honest people who have withdrawn their consent to be governed, who have lost faith in government."

To say that Canadians have lost faith in government is to say the nation has lost some of its essential character. Canada long has relied on government more than has the United States _ to settle the west, to mediate disputes, to provide for the general welfare. Even now that a long recession has dented that trust, Canadians' defiance takes the form of individual actions, not mass protest.

"I interpret it as a form of tax revolt," said Ted Carmichael, an economist with Burns Fry Ltd. "Rather than marching on Parliament Hill . . . or throwing tea in Boston Harbor, Canadians are just finding ways to get a break and then taking full advantage."

One of the reasons Canadians can flout the laws so thoroughly is that they have an accomplice to the south. Many types of goods _ tobacco, liquor, jewelry, clothing _ are generally cheaper and taxed less in the United States. And the world's longest undefended border makes it difficult for Canadian customs officials to control passage of contraband items.

"If we were located between Germany and France, we wouldn't have this problem. It's all your fault," joked David Perry of the Canadian Tax Foundation.

Prime Minister Jean Chretien acknowledged as much earlier this month when his government reduced taxes on cigarettes to slow tobacco smuggling from the United States.

In addition to the tax reduction, Canada is stepping up enforcement not only against contraband from the United States but also against people who evade national sales and income taxes by conducting their business in cash.

"Canadians have had the biggest increase in their tax burden of any developed country, and they don't have much to show for it. Their frustration level has gotten quite high," Carmichael said.