A babysitter is someone who watches children irregularly - date night, etc - and isn't able to depend on regular income.
Anyone who watches children on daily basis, even if different children, is a day home, regardless what she calling herself.
If a parent willing to pay under the table, they are selfish and risk that carer losing her business and the carer is stupid to permit risking her business. Whether paid under table or not, the rules apply.
I not heard something so ridiculous as to ask if it illegal based on form of pay.
The regs are about child care and ratios are for safety. The regs not care how someone paid or if they declaring income. CRA are people who interested in undeclared income, not the department.