CRA Recalibrates to Grab Its Share From Burgeoning ‘Underground Economy’

Underground economy tends to grow wherever taxes do, expert says

Construction workers in Montreal in a file photo. The Canada Revenue Agency has launched a new strategy to combat non-compliance with its taxation regime. (The Canadian Press/Ryan Remiorz)

The underground economy is growing but the Canada Revenue Agency has a plan of attack on neglectful and evasive taxpayers, say federal reports.

“The underground economy in 2021,“ a Statistics Canada report released Feb. 20, said the value of unreported transactions in 2021 was estimated at $68.5 billion, or 2.7 percent of gross domestic product (GDP), as first reported by Blacklock’s Reporter. This is a 50 percent increase over the agency’s estimated figure for 2013, which was $45.6 billion, or 2.4 percent of total GDP.

“While the residential construction business has historically been the largest contributor to underground economic activity, it was particularly high in 2021, as underground economic activity in this industry increased 32.8 percent,” the report says.

The CRA indicated similar findings in its 2022+ Underground Economy Strategy published mid-March. Here, residential construction accounted for 35 percent of the underground economy. “Finance, insurance, real estate, rental, leasing, and holding companies” represented 12.7 percent, while retail trade  accounted for 10.5 percent and accommodation and food services accounted for 7.3 percent.

“Without interventions, there is a risk that changes in the social and economic environment can progressively add to the growth of the underground economy,” the strategy reads.

Ian Madsen, senior policy analyst for the Frontier Centre for Public Policy, calls the strategy “another desperate attempt to go after yet more Canadians” as burgeoning federal budgets have left Ottawa hungry for cash.

“They’re desperate for dollars because they have such poor budget discipline. There’s not really a revenue problem in Ottawa—there’s a spending problem, as we know—and this is just an attempt to get at more dollars through any means necessary,” Madsen said in an interview.

“A lot of the tax avoidance in the cash economy is relatively small scale. If someone is effectively trying to run a medium-sized business without paying any taxes, they’re going to be spotted. These are mostly landscapers, handymen, delivery people, babysitters, and people like that. So this is really an attempt to hurt really small-time people who are avoiding tax.”

‘Over-Taxing and Over-Regulating’

The CRA says its strategy is directed at “employees, partnerships, proprietors, and small and medium-sized businesses,” with “education, assisted compliance, and audits” as its preferred methods.

“To get ahead of the underground economy, the CRA will be strategic in its approach, finding efficient and effective ways to address non-compliance and make sure its response is appropriate for the level of risk presented,” the strategy reads.

On its “Putting people first” webpage, the CRA says, “We take pride in serving millions of Canadians each and every year.” The agency says it wants to be “trusted, fair, and helpful by putting people first,” give them “a positive experience,” and “make things faster and easier.”

The tax code has swelled from 10 pages in 1917, when Canada began taxing its citizens, to over 3,200 pages today. Madsen said tax compliance and collection would improve for everyone if taxes were lower and more straightforward.

“It’s mostly an over-taxing and over-regulating government. If they don’t make the burden a lot less, then they should make it a lot simpler,” he says.

“Reforms and clarifications of tax laws and simplification would make it much easier to comply with, at the same time making it harder to evade or avoid paying taxes.”

‘Causal Link’

Steve Ambler, an economics professor at the Université du Québec à Montréal, says a complicated tax code means plenty of paid work for tax collectors and accountants, but wastes time and money for businesspeople who have to navigate the system.

“I believe the accepted definition of ‘avoidance’ is using perfectly legal loopholes and deductions (which are sometimes obscure given the complicated nature of the tax code) to minimize one’s tax liability. This, of course, favours the rich who can afford to hire expert tax accountants,” Ambler tells The Epoch Times by email.

“Lower tax rates would cut down on evasion. It would also cut down on avoidance: smart rich people will invest resources in costly accounting services only to the point where the marginal benefit equals the marginal cost. Simplifying the tax code would have a similar effect.”

Ambler says an underground economy tends to grow wherever taxes do.

“There’s a lot of empirical work that finds a causal link between average and marginal tax rates and the size of underground economies as a fraction of GDP. Quebec probably has relatively the largest underground economy of Canadian provinces, [with] a lot in the construction and renovation sector.”

Taxpayer Attitudes

A CRA poll conducted between Jan. 15 and Feb. 8, 2019, found that 20 percent of respondents either strongly agreed or somewhat agreed that tax cheating is “worth the risk of fines and jail time,” while 13 percent of Canadians are “very likely to cheat on taxes.” The findings were released in the Taxpayer Attitudinal Segmentation Research, which the CRA paid a contractor $159,253.05 to do.

Most taxpayers, 55 percent, agreed with the statement “I pay more than my fair share.” Pollsters found that 34 percent of taxpayers surveyed would “pay cash for a service to get a cheaper price by not paying tax,” 14 percent agreed that “I don’t think of tax cheating as a real crime,” and 10 percent agreed that “I think a small amount of tax cheating is not so bad.”

Over a quarter of those surveyed, 26 percent, said they disagreed that tax cheaters would ever get caught, and 26 percent said it was not “serious tax cheating” for self-employed Canadians to accept cash to avoid paying taxes as long as the unclaimed cash income is under $1,000.

The Epoch Times reached out to CRA but did not receive comment before publication.