Underground economy

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Underground economy

How the underground economy affects you and what you can do to avoid and protect yourself from underground economy activities


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Understanding the underground economy

In Canada, the majority of individuals and businesses file their tax returns and pay what they owe, in full and on time. But, as in other countries around the world, there are some who try to avoid paying what they owe by operating in the underground economy. Making sure taxpayers meet their tax obligations ensures the tax system is fair for everyone.

The underground economy includes economic transactions that are unreported, resulting in failure to comply with tax laws administered by the Canada Revenue Agency (CRA).

Whether you earn income as an employed individual, a self-employed individual, or a business, your income is taxable. There are no exceptions. You must report it to the CRA, even if you:

  • are an employee who is paid in cash and does not receive a T4 slip, Statement of Remuneration Paid
  • are a contractor receiving cash payments
  • earn extra income on the side of your full-time work (for example, by renting out a room or providing a ride-sharing service)
  • receive tips or gratuities in addition to your regular income
  • exchange goods or services (bartering with another worker)
  • are a self-employed individual providing services without having a registered number with the CRA
  • use gift cards or gifts as payment or incentives

Paying your taxes helps strengthen your community and your country by funding the many services that Canadians use every day. Taxes pay for Canada’s world-renowned programs and services like health care, education, parks, the Canada child benefit, old age security, and employment insurance.

Follow these links for more information:

How you are affected by the underground economy

All Canadians are impacted when someone participates in underground economy activities.

Underground economy activity:

  • negatively affects economic growth in Canada
    • businesses that operate legitimately struggle to grow when competing with those that operate under the table
  • reduces tax revenue for all levels of government
    • reduced tax revenue reduces governments’ ability to provide the services and benefits Canadians expect and enjoy
  • increases the tax gap
    • the tax gap is the difference between the taxes that would be collected if all tax obligations were fully met and the taxes that are actually collected

For more information, refer to Tax Gap: A brief overview.

If you participate in the underground economy

Your participation in the underground economy may lead to serious consequences, such as:

  • criminal charges
  • prosecution
  • court-imposed fines
  • jail time
  • a criminal record

For more information, refer to the CRA’s criminal investigations process.

What you can do to help and protect yourself

Here are some ways you can be part of the solution:

As a customer of a business
  • Avoid businesses that promise lower prices if you pay cash and don’t get a receipt
  • Hire home contracting businesses that give you a written contract to protect yourself against incomplete or poor-quality work and cost overruns
As a business owner
As an individual
  • Make sure you receive a T4 slip to get all the benefit payments you are entitled to
  • Report all income you have received, even if it is not reported on the T4 slip as part of an employment position
Anyone
  • Anonymously report suspected underground economy activity through the CRA’s Leads Program
  • Voluntarily come forward to fix errors or omissions in your tax filings through the CRA’s Voluntary Disclosures Program before the CRA contacts you about it

How the Canada Revenue Agency responds to the underground economy

The underground economy continues to evolve alongside changes in digital technologies like global platforms and cryptocurrencies. For this reason, we published the 2022+ Underground Economy Strategy, which guides our approach to combatting this changing environment.

The 2022+ Underground Economy Strategy

The 2022+ strategy gives an overview of our efforts to address the underground economy and reduce related tax non-compliance. We will continue updating the strategy as we adjust our approach to focus on changing priorities.

The 2022+ strategy uses a model of three pillars to minimize underground economy related tax non compliance. These three pillars align with our commitment to apply the right intervention to the right risk.

Pillar 1: Identify activities

To understand the size of the underground economy, the first step is to identify where the related activities take place and who is potentially or actively involved. We are continuously researching and studying where risks of non-compliance are present or emerging.

How we identify underground economy activities

Through improved data analysis, we can identify underground economy activities more easily and address them earlier. We have a number of business intelligence tools to identify elements of and participants in the underground economy.

Data analysis
We use advanced data analysis techniques to look at industry trends, analyze people’s behaviour, and predict the industry sectors in which tax evasion is more likely or taxpayers are more likely to be non-compliant.
Unnamed persons requirements

This tool allows us to get a court order to require a business or organization to give documents or information about a person whose name is unknown to us. We use this method often to identify persons who may not have been complying with the tax rules. We can also detect underground economic activity through:

  • information from cheque-cashing companies
  • the matching of information from various sources that shows unreported income (for example, housing information that shows unreported house flipping or payment by gift cards)
  • analysis of supplier data in targeted industries (for example, construction supplies and liquor supplies) that shows hidden sales
Financial institutions
In general, the law allows us to get, or require individuals and financial institutions to give, the information necessary to determine the tax obligations of any taxpayer. A CRA review can include a spouse’s bank accounts, credit cards, and other documents, regardless of whether the spouse is involved in a business.
Other third-party data sources
We get information from third parties through systems like the Contract Payment Reporting System (CPRS), which requires construction businesses to record payments they make to subcontractors for construction services and to report these payments to us. We will pursue a company that fails to file a CPRS return to make sure it reports its income.
Communication with partners
We regularly communicate with provincial and territorial governments and organizations, as well as with international partners like the Organisation for Economic Co-operation and Development, to share information, identify emerging risks, and align our priorities regarding the underground economy.
Commissioning underground economy estimates

We commission underground economy estimates from Statistics Canada as part of our ongoing efforts to increase knowledge about the underground economy. Specifically, we look at which sectors show a higher risk of underground economy activities.

To find out more about underground economy estimates from Statistics Canada, refer to The Underground Economy in Canada, 2021.

Pillar 2: Prevent activities

By identifying the participants of the underground economy, the CRA is better positioned to design the most effective preventive measures for each segment and sector.

How we prevent underground economy activities

Education and outreach activities continue to be effective tools in preventing underground economy activity. We will continue to use tools that inform taxpayers about their tax obligations and their role in reducing underground economy-related tax non-compliance.

Tax education programs
We are expanding our tax education programs to work with those who unintentionally participate in the underground economy, making it easier for them to follow the rules. Focusing on early tax education and targeted help to certain groups of taxpayers, such as those starting businesses or new Canadians who are not familiar with the Canadian tax system, can also help prevent non-compliance.
Learn About Your Taxes tool
This online course, Learn About Your Taxes, is designed to help people learn about personal income taxes in Canada.
Liaison Officer Service
The CRA’s Liaison Officer service helps self-employed individuals and small business owners understand their tax obligations, as part of ongoing efforts to encourage voluntary compliance and to prevent errors and actions that result in underground economy-related non-compliance.
Outreach activities
We frequently communicate with Canadians to raise awareness about what the underground economy is, what we are doing to fight it, and how they can avoid supporting the underground economy.

Pillar 3: Address activities

We continue to increase our efforts to address non-compliance with individuals and businesses.

How we address underground economy activities

We have a wide range of tools to address various types of non-compliance that can also be extended to the underground economy.

Audits

Audits are an important way for us to detect unreported income. We thoroughly examine an individual’s or business’s assets and expenditures, as well as information on a person’s lifestyle, to identify those who are hiding income. We reserve full audit interventions such as net worth analysis for cases with the highest level of non compliance.

To learn more about audits, go to the CRA’s Business audits web page.

Specialist teams

We have underground economy specialist teams across the country that have advanced training in identifying unreported and underreported income. In addition to focusing on the construction industry, where the underground economy is significant, these teams do audits in all industry sectors where research shows high underground economy participation, such as:

  • real estate, including renting and leasing
  • retail
  • accommodation and food services

We also have specialized teams that use sophisticated tools to extract and analyze point of sale data to detect and address the use of electronic suppression of sales software, also known as zapper software, that hides sales in sectors such as restaurant, bar, and food services.

Civil and criminal penalties

Other measures include civil and criminal penalties for things like using electronic suppression of sales software, and new criminal offences for those who participate in these underground economic activities.

We will apply gross negligence penalties in cases where the taxpayer knew or ought to have known that their income was underreported.


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Date modified:
2024-02-15