A recent tax case in the Federal Court of Appeal (FCA) involving the RONA home improvement chain (Rona Inc. v. Canada (Minister of National Revenue) seems to suggest that CRA may have a special project on the go to target Canadian home improvement contractors that are currently operating in the underground economy.

In Rona, the CRA took steps under subsection 231.2(3) of the Income Tax Act (ITA) and subsection 289(3) of Excise Tax Act (ETA) to issue Requirements for Information (RFIs) to RONA, seeking contact and business information of  unnamed contractors that had purchased supplies from 57 RONA hardware stores across Canada from 2012-2015. Although not clear, it is likely in our view that the CRA has taken similar steps against other home improvement chains like Lowe’s and Home Hardware

RONA was able to identify the information through loyalty programs (and possible credit card information), and even some cash transactions.

The FCA considered the matter, and ordered RONA to provide this information to the CRA.

Obviously this sort of information could be quite valuable to the CRA as it would give them a basis, when auditing these same contractors, to compare things like reported cost of sale/services, and actual inventory purchases.  CRA would also be able to extrapolate overall revenue figures by applying a standard expected industry mark-up on a contractor’s purchases (e.g. standards that it develops from audits of national contractors not operating in the underground economy).  Through that process, CRA would be looking for under-reporting of income for income tax purposes, and under-reporting of gross sales for GST/HST purposes.

“Net worth” assessments can also be expected to be employed to value the alleged under-reporting over longer periods of time (e.g. Facts:  The taxpayer owned nothing but a $25,000 truck in 2007, but after 10 years of reporting only $25,000 of net annual income, is now living in a home purchased for $2.0 million, and with only a $500,000 mortgage; CRA Audit Conclusion:  There has been approximately $1.25 Million in under-reporting income over the last 10 years). 

Clearly a day of reckoning is coming for Canadian contractors still operating in the under-ground economy. CRA is coming and the results will not be pretty when they find them. 

Taxpayers sitting in this kind of position should probably seek immediate help, as there are ways in which they can still help themselves, including through the CRA’s voluntary disclosure process.  That said, this system is in the midst of change, and professional help is probably warranted to stick-handle through those hurdles.

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