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I recently visited one of my favourite restaurants and the food and service, as usual, were out of this world, something a food delivery service cannot replicate. The restaurant has a strict “cash only” policy, so I always need to remind myself about that before I go and, obviously, as a tax guy, I wonder if the cash-only policy is a signal that the owner is participating in tax evasion.

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Cash-only businesses have often been a target for the Canada Revenue Agency to review and determine if the proprietor is reporting income in full.

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In some cases, it’s obvious that tax evasion is the objective. For example, I’ve interviewed many renovators of my homes over the years and some of the prospective contractors will have a two-tiered pricing structure: a lower cash price and a higher traditional invoice structure. In other cases, it’s obvious that things, such as avoiding high banking costs or credit card fees, might be at play.

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For the small number of cases that involve tax evasion, I’m often curious why such people engage in that illegal behaviour and are prepared to risk serious criminal penalties, including possible jail time.

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The answers are important because if you can understand the motivation, governments can design policy to eliminate that. Tax evasion is not a pervasive problem in Canada — reliable statistics are lacking, but it is likely that less than three per cent of taxpayers willingly participate in such criminal behaviour — it is, again, important to understand the motivations.

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There are several motivations, with the most obvious being excessively high personal tax rates. Eight of the 13 provinces and territories have marginal tax rates that exceed 50 per cent at the high end. In 1966, the Royal Commission on Taxation — the only time that Canada had a comprehensive tax review leading to reform — released its voluminous report and said this about personal tax rates:

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“We are persuaded that high marginal rates of tax have an adverse effect on the decision to work rather than enjoy leisure, on the decision to save rather than consume, and on the decision to hold assets that provide monetary returns rather than assets that provide benefits in kind. We think there would be great merit in adopting a top marginal rate no greater than 50 per cent. We think there is a psychological barrier to greater effort, saving and profitable investment when the state can take more than one half of the potential gain.”

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That almost 60-year-old comment is just as valid today as it was back then.

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Other reasons include:

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