On June 20, 2016, Statistics Canada released new underground economy estimates for Canada from 1992 to 2013. The Canada Revenue Agency (CRA) commissioned these estimates as part of its ongoing efforts to increase knowledge about the underground economy. The new estimates update the previous estimates to include 2013 and revise the 2008 to 2012 estimates, using the most up-to-date data available.

The new estimates provide more recent and improved information on trends in underground economy activities for different industry sectors at the national, provincial and territorial levels. This information, combined with information from various other sources, helps the CRA to understand the size and nature of the underground economy, and will refine its focus and activities to combat the underground economy.

Are the underground economy estimates in this study an indicator of the tax gap?

This study does not provide an estimate of the total amount of taxes that are not reported and paid, commonly referred to as the “tax gap.” The purpose of this study was to provide information on the trend of the underground economy as a percentage of the gross domestic product (GDP) for Canada and its provinces and territories.

What do the estimates show?

The revised and updated estimates indicate that the underground economy, as a share of the official GDP, has remained stable over the last decade. In 2013, total underground activity in Canada was estimated at $45.6 billion, which is equivalent to 2.4% of the GDP. Underground economy increased 3.8% from 2012, the same rate of growth as GDP.

The research also shows that, while underground economy activity may be found in any industry, it is particularly prevalent in sectors where cash transactions are most common. Four sectors accounted for 65% of the total estimated underground economy in 2013: residential construction (28%); finance, insurance, real estate, rental, leasing, and holding companies (13%); retail trade (13%); and accommodation and food services (12%).

From a provincial-territorial perspective, the total value of underground activity was the highest in the four largest economies: Ontario, Quebec, British Columbia, and Alberta.

Overall, the study provides encouraging signs that the underground economy remains relatively stable as a percentage of GDP. However, any underground economy activity undermines the integrity of the tax system and impedes the ability of governments to protect the revenue base and keep taxes low. The Government of Canada will continue to work with its government and industry partners to combat the underground economy in key high-risk sectors.

How were the estimates produced?

By its clandestine nature, the underground economy is difficult to quantify with any degree of precision. As Statistics Canada notes, estimates of the size of the underground economy should be interpreted as indicators that have been developed based on reasonable assumptions and methodologies rather than exact measurements. Such estimates could be refined in the future as further research is undertaken and as additional data becomes available.

Variations in underground activity across the provinces and territories could be explained by several factors, such as differences in the structure or performance of economies, tax regimes, government policies, consumer and business perceptions, and more. The study did not look at factors that may cause individuals or firms to engage in underground economy activities.

The methodology used in this study is recommended by the Organisation for Economic Co-operation and Development (see Measuring the Non-Observed Economy: A Handbook). It examines the different types of expenditures and incomes in the economy, and estimates the highest amount of underground activity that is reasonable for each one. This was also the method used by Statistics Canada in previous years. Other developed countries whose economies are comparable in structure with Canada’s have used this methodology.

How will the CRA use the results?

The information in this study will be analyzed along with other information to support the development of targeted strategies to enhance compliance with Canada’s tax laws, and help direct the CRA’s resources to industry sectors of the economy at highest risk for underground economy activity.

What is the CRA doing now to combat the underground economy?

Participation in the underground economy hurts all Canadians, including responsible citizens and businesses that pay the correct amount of taxes. The CRA’s efforts to combat the underground economy are aimed at ensuring a level playing field for all businesses and taxpayers.

The CRA is active in industry sectors where the underground economy is more prevalent, such as construction, home renovation, finance, insurance, real estate, rental, leasing and holding companies, retail trade, and accommodation and food services.

The Agency uses a mix of outreach, education, communication, and compliance actions to combat the underground economy. The Minister of National Revenue launched a three-year Underground Economy Strategy, Reducing Participation in the Underground Economy, in November 2014. Activities underway as part of this strategy include:

• Refining our understanding of Canada’s underground economy — where, when and how it occurs;
• Reducing the social acceptability of participation in the underground economy; and
• Reducing participation in the underground economy through a range of initiatives, including education, outreach and compliance actions like audit and enforcement.

The CRA also works closely with industry and other levels of government to combat the underground economy in Canada. The Minister’s UE Advisory Committee, which most recently met on June 6, 2016, is an important example of this collaboration.

More information

For more information about what the CRA is doing to fight the underground economy, visit www.cra.gc.ca/undergroundeconomy.

For more information about Statistics Canada’s new underground economy estimates release, go to http://www.statcan.gc.ca/daily-quotidien/160620/dq160620b-eng.htm.

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