Do I have to report cash income? What you need to know
Has this ever happened to you?
You are enjoying a beauty service (eyelash extensions, anyone?). You finish up, head to the front desk to pay, and the business owner says, “If you pay cash you don’t have to pay tax.” It's a pretty common scenario. At least, it happens to us often enough with a range of services - from beauty to construction, and everything in between. Last week at a similar appointment, the business owner said she takes “cash only.” Since we never carry cash, it got us thinking. What is behind the cash economy, and how does it affect small businesses owners like you?
The underground cash economy
Every country has an underground economy, which operates mainly in cash. According to stats, Canada’s estimated underground economy was $61 billion in 2020. That’s 2.8% of GDP!!!
Now, not every business that deals in cash is necessarily participating in an underground economy. A lot of people still carry cash around as it can be convenient and also can be a good way to budget. There are also systemic issues that limit accessibility to non-cash options and keep marginalized people dependent on cash-only.
In this blog we tackle all the angles.
Read on...
Cash and tax
We know what you are thinking- "If I take cash payments does that mean I don’t have to pay tax?" Yes, we can read minds!
The fact is that you are obligated to report all your income. That’s the short answer and the true answer. If you choose to take cash as payment and don’t issue a receipt and don’t deposit it into your business account, it can become easy (and tempting) to ‘hide’ that income. It may seem like common practice, especially in certain industries but the fact is that cash sales are just as taxable as other types of sales and need to be reported to the CRA for GST/HST (if registered) and income tax purposes. If you do not, you do run the risk of the CRA catching on and taking action; they call this tax evasion.
The CRA has a variety of ways that they get 'tipped off,' including an actual tip hotline where people can call in anonymously.
The benefits of accepting cash
(and what to watch out for)
If your business has a high volume of small transactions, there are benefits to cash. Let's say you run a gift shop/ coffee shop etc… with a high volume of small transactions. Accepting cash can save you money on credit/debit card processing fees and it can be convenient for your customers. Cash transactions are also immediate, and you don’t have to chase invoices or deal with declined cards and technical glitches.
Where we would caution business owners is in taking cash only. It can translate to your customers as a red flag in some cases. It’s not a good look to be perceived as not paying your fair share of taxes. It also adds a layer of friction to your customers’ transactions. Your customer may not carry cash regularly and that extra trip to the bank may be what causes you to lose their business in the first place.
Cash and COVID
It seems like the transition to digital has sped up over the last two years. COVID motivated many small businesses to implement “no cash” policies. It aimed at fighting the pandemic by minimizing contact between people and high touch surfaces. This puts a whole new spin on the phrase "dirty money." The fact is, COVID has only accelerated the lean towards digital transactions, and many businesses are adopting digital-only policies - a trend that will only continue to grow, especially as Canada’s largest financial institutions also aim to minimize cash transactions through their branch networks .
But there's another side to cash only…
Cash is political
Access to bank accounts and credit is a complex topic. Many marginalized people in Canada are stuck in systemic cycles and can’t get bank accounts, ID, or credit cards. Because of this, they can't get mortgages, access to business opportunities, and many other products and services that we often take for granted. For some people, the cash economy is the only way to survive. It can be hard to imagine our life if we had no access to any banking services. Suppose we had to work for cash and could only spend cash.
Whether or not you accept cash in your business can be an accessibility issue. By only taking digital forms of payment, you could be preventing marginalized people from participating in the mainstream economy. This doesn't apply to every business, but is an issue worth your consideration.
The bottom line
There’s no such thing as free money in Canada. If you earned income, you should report that income. Whether or not you pay tax, how much tax you pay, and how you pay it is a whole other blog! We’re of the belief that paying tax is not such a bad thing! It’s a sign that your business is making profits, which is something to be celebrated! Also, claiming all the income that you earn, even if it means paying tax, puts you in a position to be able to apply for and gain access to credit - which is so important! Stay tuned for more on this topic in our blog post next month where we teach you the key ways to prepare for applying for credit. Although our tax system may not be “perfect” in Canada, we sure do enjoy living in a place that usually makes it to the top 10 list of the best places to live in the world… and that definitely has something to do with our tax dollars.
Interested in learning more from us? Follow along with us through our social media accounts (find us on Instagram @growcpa) and sign up for our newsletter for more educational and fun financial content.
Wishing you success in your business,
- Martina + Ashli
Date published: May 15, 2022
Disclaimer - The information provided in this blog is general in nature and solely for educational purposes. Readers use and implementation of the information comes at their own risk and is their own responsibility.
