What the Canada Revenue Agency is doing to fight 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 that taxpayers meet their GST/HST registration, filing, reporting, and payment obligations ensures the tax system is fair for everyone.

The Canada Revenue Agency’s underground economy strategy, Reducing Participation in the Underground Economy, includes tailored strategies to prevent and combat the underground economy.

Areas of focus

The CRA focuses on five areas, to prevent, detect, and address unreported and under-reported sales or income:

Finding hidden income–data analytics, legislative tools, and other sources of information
Correcting behaviour that is not compliant
Identifying and addressing those who refuse to meet their obligations
Staying up-to-date on the underground economy
Reducing the social acceptability of participating in the underground economy

Finding hidden income–data analytics, legislative tools, and other sources of information

The law allows the CRA to get information from a variety of sources. This information allows the CRA to identify, track, and assess participants in the underground economy. The CRA has both advanced data analysis capabilities and legal tools to uncover unreported income. These tools give the CRA the intelligence it needs to focus on a particular compliance problem or a particular industry or taxpayer where non-compliance has been found.

• Data analytics: The CRA uses technology to find and address tax evasion. Advanced data analysis techniques allow the Agency to look at industry trends, 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 the CRA to get a court order to require a business or organization to provide to the CRA documents or information about one or more persons whose name is unknown to the Agency. The CRA uses this method often to identify persons who may not have been complying with the tax rules.
  The CRA 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, from housing information that tells the CRA of unreported condominium or house flipping, or  payment by gift cards or prepaid credit 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 the CRA to obtain, or require individuals (including spouses) and financial institutions to provide the information that is necessary to determine the tax obligations of any taxpayer. A CRA review can include a spouse’s bank accounts, credit cards, and other documentation, regardless of whether they are involved in a business.
• Leads from the public: The CRA regularly gets tips through its Leads Program from members of the public who report suspected tax evaders.
• Other third-party data sources: The CRA gets information from third parties through systems like the Contract Payment Reporting System, which requires construction businesses to record payments they make to subcontractors for construction services and to report these payments to the CRA. The CRA will pursue a company that fails to file a CPRS return to make sure income is reported.

Correcting behaviour that is not compliant

Since 2014, the CRA has significantly enhanced its efforts to identify and address individuals and businesses that do not file returns and do not report all their income.

Audits are an important way for the CRA to detect unreported income. The CRA thoroughly examines an individual’s or business’ assets and expenditures, as well as information on a person’s lifestyle, to identify those who are hiding income.

In 2015, the CRA also expanded its underground economy specialist teams. These 35 teams are now located across the country and have advanced training in identifying unreported and under-reported 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 that participation in that sector may be high, such as:

• real estate, rental and leasing
• retail
• accommodation and food services

The CRA also has 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 (known as zapper software) that hides sales in sectors such as restaurant, bar, and food services.

Other measures include recently implemented civil and criminal penalties for using zapper software and new criminal offences for those who participate in these underground economic activities.

The CRA will apply gross negligence penalties in cases where the taxpayer knew or ought to have known that their income was under-reported. To learn more about auditing at the CRA, go to Audit.

Identifying and addressing those who refuse to meet their obligations

The CRA already has many ways to address individuals and businesses that persistently don’t follow the rules, and it is expanding these tools to include new approaches.

For example, the CRA enhanced its Leads Program to better co-ordinate all tips it receives, so that the information is comprehensively reviewed and appropriate enforcement action taken.

Individuals and businesses that are chronic participants in the underground economy will be reviewed by the CRA to determine if their case should be sent to the Agency’s Criminal Investigations Program. That program investigates significant files of tax evasion and refers them to the Public Prosecution Service of Canada for criminal prosecution.

The CRA publicizes criminal convictions by publishing news releases on its website. To view the news releases by province and territory, please visit Criminal investigations actions, charges, and convictions.

The CRA is also reviewing other ways, such as non-monetary sanctions that are used by other administrations, to address participation in the underground economy. For example, the CRA has partnered with the Ontario Ministry of Finance to expand Ontario’s Tender Contract Tax Compliance Program. Under that program, Ontario businesses have to get an official tax verification document to confirm that they are in good standing with their tax obligations before they can do any work valued at over $25,000 for the Ontario government.

Staying up-to-date on the state of the underground economy

The nature of the underground economy is constantly changing. The CRA stays on top of trends by continuously researching and studying where risks of non-compliance are present or emerging. Some of the ways the CRA gains further insight include consulting with industry groups through the Minister’s Underground Economy Advisory Committee and collaborating with other levels of government through provincial and territorial roundtables.

• Provincial and territorial engagement on the underground economy: The CRA engages provincial and territorial governments and organizations regularly on the underground economy in order to share information, collaborate on projects, and align priorities.
• Statistics Canada: The CRA regularly commissions Statistics Canada for underground economy estimates as part of the CRA’s ongoing efforts to increase knowledge about the underground economy, particularly on the scope of underground economic activities by industry sector. To find out more and to get a copy of a report, see The Underground Economy in Canada.
• Organisation for Economic Co-operation and Development: The CRA works with its international partners to share best practices and identify emerging risks in addressing the underground economy.

Reducing the social acceptability of participating in the underground economy

The CRA communicates frequently with Canadians to raise awareness about what the underground economy is and what the CRA is doing to fight it, as well as to help Canadians understand how they can avoid helping cheaters cheat by refusing to buy products and services from businesses who don’t pay the tax they owe.  If someone is offering you a “cash deal”, ask yourself (and them) why.

Without demand, there is no supply. If consumers only buy products and services from reputable and legitimate businesses, suppliers will have no choice but to stop participating in the underground economy. This is why the CRA is working to educate consumers about the underground economy, and to show them that their choices have unintended consequences, including the legal and financial risks they assume when choosing suppliers who operate in the underground economy.