On September 21, 2012, Statistics Canada (STC) released new underground economy (UE) estimates for Canada from 1992 to 2009. The Canada Revenue Agency (CRA) commissioned these estimates as part of its ongoing efforts to increase knowledge about the UE, particularly regarding the scope of UE activities by industry sector. The new estimates are an update to 2009, and a revision of the 1992 to 2008 UE estimates previously published in June 2011 (see STC’s report Estimating the Underground Economy in Canada, 1992-2008 Footnote 1). They have also been included in the historical revision of the National Accounts undertaken by STC.
Although there are no changes in the definition or scope of the new study, it reflects methodological changes that have refined or updated previous UE estimates, especially at the industry sector level. As a result, the new estimates should be considered the baseline for future trends analysis.
These revised and updated estimates provide more recent and improved information on trends in UE activities for different industry sectors of the Canadian economy. Along with many other tools, this information will help the CRA to better understand the size and nature of the UE, and to refine its focus and activities to combat the UE. It should be noted that Canada has one of the highest rates of compliance in the world.
These findings are not estimates 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 not to quantify related tax losses, but to provide information on the overall UE trend in relation to Canada’s gross domestic product (GDP), as well as the trends for specific industry sectors of the economy that are more at risk for UE.
What are the estimates of UE according to Statistics Canada?
The revised and updated estimates, which are consistent with those published in 2011, indicate that the UE in Canada did not grow as fast as the total economy between 1992 and 2009.
In 2009, total underground activity in Canada was estimated at $35 billion, an increase of 77% from 1992, whereas nominal GDP grew by 118% over that same period. This estimate of underground economic activity was equivalent to 2.3% of GDP in 2009, down from 2.9% in 1992.
The main reason for the slower growth of the UE compared to the total economy is that industries traditionally considered to be involved in the UE activity did not grow as fast as the overall economy, or as fast as other industries less impacted by the UE.
UE activity may be found in any industry. However, the three most significant industry sectors in terms of UE activity in 2009 were construction (29%), retail trade (20%), and accommodation and food services (12%). These industry sectors accounted for 61% of the total UE estimate.
What do the numbers mean?
Debate continues amongst academics about the best methodologies to estimate the size of the UE. Since that part of the economy is hidden, estimates of its size will inherently have a greater variance in terms of reliability than those of the observed economy.
As noted by STC in its previous report, estimates of the size of the UE should be interpreted as indicators developed on the basis of reasonable assumptions and methodologies rather than exact measurements. Furthermore, such estimates could be refined in the future if additional data becomes available.
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). This method examines the different types of expenditures and incomes in the economy, and estimates, as an upper limit, the highest amount of UE activities that is reasonable for each one. This was also the method relied upon by STC in its previous studies in 1994 and 2011. Other developed countries whose economies are comparable in structure to Canada’s have used this methodology and observed similar results.
How will the CRA use the results?
The information in this study will be analyzed along with other information on unreported income and the tax compliance behaviour of businesses. The resulting analysis will 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 UE activity.
What is the CRA doing to combat the UE?
Participation in the underground economy hurts all Canadians, particularly at the expense of all responsible citizens who contribute their fair share. It should be stressed that those who avoid paying taxes are taking money that is needed for important investments in schools, hospitals, and other vital government services. CRA’s efforts to combat the UE are aimed at ensuring a fair tax system and a level playing field for businesses and taxpayers.
Identifying and addressing industry sectors where UE has become widespread, such as construction, home renovation, retail trade, and accommodation and food services, will continue to be a priority for the CRA.
The Agency uses a mix of outreach, education, communications, and compliance actions to combat the UE. In doing so, the CRA collaborates with other federal departments, provincial and territorial governments, professional organizations, and key industry groups.
This study’s findings are an important contribution to this effort, and will be used to refine the targeting of CRA’s tools and activities aimed at combating the UE.
The CRA is committed to administer Canadian tax laws in a fair and equitable manner.
More information
For more information about Statistics Canada’s report, Estimating the Underground Economy in Canada, 1992-2009, go to www.statcan.gc.ca/dai-quo/index-eng.htm.
For more information about the underground economy, go to http://www.cra-arc.gc.ca/gncy/lrt/ndrgrnd-eng.html.
