Would Cryptocurrency Sooth Canada’s Pains in Taxing the Underground Economy?

As the deadline for filing taxes draws closer (although the Canada Revenue Agency (CRA) has extended the deadline from April

As the deadline for filing taxes draws closer (although the Canada Revenue Agency (CRA) has extended the deadline from April 30 to May 5 due to complications arising out of the Heartbleed bug), attention has been drawn to what is being described as a failure by the CRA to clamp down on tax evasion in the underground economy.

Provinces, particularly Ontario and British Columbia, have been pressing the CRA to update its strategy on how to recover taxes from the underground economy, which is estimated to be worth $35 billion a year. Cash-strapped provinces argue that the CRA’s strategy is outdated, with the current guidance document a decade old and updates that have failed to keep pace with developing technologies. For example, the cash-register “zapper”, a software used to falsify records from point-of-sale (POS) systems, is believed to contribute up to $3.25 billion in unreported sales.

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Years ago, the main culprits were believed to be concentrated in construction, retail trade and food services. Now, the focus has shifted to mining, oil-and-gas and others.

While the provinces pin the blame on CRA, the CRA contends in an October report that, “a number of stakeholders have been consulted, all with varying opinions and suggestions as to what the focus and direction of the strategy should be, such that a strategy has not emerged.” It actually places some blame back on the provinces for lack of progress, saying that there were too many different views amongst them and CRA officials as to what constitutes an underground economy.

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Opportunity for Crypto to Prove Itself?

The existence of physical cash, while occasionally necessary, is also largely to blame in an era where anything and everything is going digital. Some variant of cryptocurrency, potentially but not necessarily centralized, would be the ideal solution for 100% transparency. It would obviously require some connection back to individuals, with restricted access for such data. The groundwork laid by Bitcoin, and even Mintchip with ts unknown fate, can come in useful.

While such a concept is not so novel when it comes to general law enforcement, for taxes it carries a different flavor. For example, a highly regulated environment can find a mechanism to introduce withholding taxes to businesses on the spot, with all relevant tax information already known and factored in.

While one can argue that desperate tax evaders will just revert back to barter, one cannot overlook the fact that we have money for a reason. It is the most efficient mode of value transfer. This is even more true these days when so much of the economy’svalue stream does not take the form of physical goods.

A better argument would be that underground business will gravitate toward other alternative currencies, such as gold, silver- or even Bitcoin, as evidenced by its flourishing in the world of illegal economies. Perhaps then the advent of an official cryptocurrency would relegate its predecessor’s use to solely criminal use, with an ensuing crackdown by governments to eliminate its existence.

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