Canada Revenue Agency Launches New Underground Economy Strategy During Tax Season

A sign outside the Canada Revenue Agency in Ottawa on May 10, 2021. (The Canadian Press/Adrian Wyld)

The Canada Revenue Agency has launched a new strategy to combat non-compliance with its taxation regime as Canadians are currently going through the filing process.

The agency says its strategy is centred around three pillars to target the underground economy, with the first one being identifying the activities through data research, analysis, and third party collection processes.

The other pillars are prevention through early outreach and addressing the activities with tailored approaches based on the level of risk of non-compliance.

The strategy was released in mid-March and first reported on by Blacklock’s Reporter.

The Canada Revenue Agency (CRA) says the underground economy includes “economic transactions in goods or services which are unreported, resulting in failure to comply with tax laws.”

This can include services paid in cash to a contractor who then doesn’t report the income and the GST/HST, or the failure of a business to remit taxes collected.

The underground economy also includes illegal activities.

“Income earned from activities such as theft, fraud, and the sale of narcotics is taxable and has to be reported as income, despite its illegal nature,” says the CRA.

The agency says the size of the underground economy in Canada was estimated at 2.7 percent of the gross domestic product in 2021, or $68.5 billion.

This is a 50 percent increase since 2016, according to Statistics Canada.

The CRA strategy document says there were four industries in 2021 which accounted for more than half of all the underground economic activity.

The top sector was residential construction at 35 percent, followed by finance, insurance, real estate, rental, leasing, and holding companies at 12.7 percent, retail trade at 10.5 percent, and accommodation and food services at 7.3 percent.

“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,” wrote Statistics Canada in a February report.

The CRA identified factors leading to non-compliance through research conducted by a third-party.

It found that 20 percent of tax intermediaries and small and medium-sized businesses feel that taxes are too high for the level of service provided by the federal government.

The same research also found that less than half of small and medium-sized enterprises and tax intermediaries believe that businesses are very likely to get caught if they cheat on their taxes.