Areas of Focus: UNDERGROUND ECONOMY

CRA recently discussed one of their top priorities;
identifying those involved in the underground economy
and ensuring that they are satisfying their tax obligations.
They specifically noted that they are using data analytics to
predict industry sectors where tax evasion or non-
compliance is more likely. Further, they will send
unnamed person requests for information (to sources
such as cheque-cashing companies), and also request
information from suppliers (e.g. construction and liquor
suppliers), to determine if income has been appropriately
reported.
They are also trying to reduce the social acceptability of
participating in the underground economy, focusing on the
demand side to reduce consumer willingness to accept
services such as cash-only home renovations. From an
enforcement perspective, there are now 35 underground
economy specialist teams across Canada who have
advanced training to identify unreported income.
Which sectors have the highest rates of underground
economy activities?
An October 23, 2020 Statistics Canada release
(Residential construction remained the top contributor to
underground activity in 2018) reported the following related to
the underground economy in 2017 to 2018:
– Four industries accounted for over half of the
underground economy:
residential construction (26.2%);
retail trade (12.3%); finance,
insurance, real estate, rental
and leasing and holding
companies (10.3%); and
accommodation and food
services (9.1%). CRA’s stated
that they will focus on these
sectors.
– Undeclared wages and tips were
the largest share of unreported income (42.4%).
Business owners, both unincorporated (28.6%) and
incorporated (26.1%), accounted for most of the
remainder.

– Household final consumption expenditures account
for 66% of the underground economy. Significant sub-
categories include alcohol, tobacco and cannabis
(29.2%); food, beverages and accommodation
services (20.6%); and housing, water, electricity, gas
and other fuels (17.2%).
– Underground economy activity as a percentage of
GDP is highest in British Columbia (3.7%) and
lowest in Nunavut (0.5%).

ACTION ITEM: If you operate in one of the sectors
identified as being at higher risk of underground
economy activity, do not be surprised if your operations
attract more CRA attention.

Redistribution of this material is prohibited.