If you own a business, you may choose to accept cash for goods or services. However, the Canada Revenue Agency (CRA) requires you to report the cash as income and pay applicable taxes.
When you accept a cash payment, it will not be instantly recorded in the same way credit card or cheque payments are. For this reason, some business owners assume that they are not required to report cash payments as income to the CRA.
Unfortunately, this is false. The CRA requires you to report any income you receive, regardless of the form in which you receive it.
Much like cash transactions, income from trading and bartering must also be reported to the CRA. If you accept goods or service in exchange for a service you provide as part of your business, the goods or services you accept are subject to income tax.
For example, if you are a dentist and you provide dental work to a patient in exchange for tickets to a play, the CRA will consider the tickets as income. Accordingly, you must report the amount you usually receive for such services. Record this amount in your bookkeeping or accounting software, and remember to make a note detailing the transaction.
If you received a trade that greatly exceeded the value of goods or services you traded, you may need to report a capital gain.
Reporting Your Business Income
You must report your business income — including cash and trade payments — to the CRA annually. Complete Form T2125 and include it with your federal tax return.
You do not have to include your records and receipts with your return, but you must store them for at least six years from the last day of the year in which they were reported. If the CRA reassesses your return or audits you, they may request to records and receipts to supplement the information on your return.
Records and Receipts for Cash Payments
When you receive a cash payment, ensure that you note the payment in your bookkeeping ledger, spreadsheet, accounting software or other record-keeping system. Record the same information you would include with any other payment received, such as date, reason for payment, client name and other pertinent details.
If possible, issue a receipt when a client pays in cash. The CRA encourages consumers to request receipts from businesses — especially those providing services. It is recommended to have a plan in place to issue receipts.
Penalties for Failure to Report
If the CRA determines you have failed to report income, you may be charged a penalty of 10 percent of the amount you failed to report. Additionally, if the CRA decides that you have been grossly negligent in your failure to report income, you may be charged an additional 50 percent penalty on the tax not paid. In cases of gross tax evasion, fines and jail time may result.
If you have unreported cash from previous years, the CRA offers a voluntary disclosure program.