Statistics Canada Study on the Underground Economy in Canada, 1992-2012

On April 29, 2015, Statistics Canada released new underground economy estimates for Canada from 1992 to 2012. 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 (see Statistics Canada’s report The Underground Economy in Canada, 1992 to 2011) to include 2012, and revise the 2007 to 2011 estimates, using the most up-to-date data available. This release also includes new provincial and territorial estimates for the period of 2007 to 2012.

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 estimate 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 underground economy trend in relation to 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 in Canada did not grow as fast as the total economy between 1992 and 2012, and that the underground economy as a share of the official GDP has remained stable over the last decade. In 2012, total underground activity in Canada was estimated at $42.4 billion, which is equivalent to 2.3% of the GDP. These estimates are consistent with the estimates published in 2014.

From 2007 to 2012, underground economy activity increased by 14%, compared with an increase of 17% in GDP. From 2011 to 2012, the nominal increase in underground activity and GDP were 2.2% and 3.5%, respectively.

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 66% of the total estimated underground economy in 2012: residential construction (28%); finance, insurance, real estate, rental, leasing, and holding companies (14%); retail trade (12%); 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 is growing at a slower pace than the Canadian economy. 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.

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, provincial, territorial or municipal tax regimes, government policies, consumer and business perceptions, and more. The study did not look at economic or non-economic 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). This method 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 its previous studies in 1994, 2011, 2012, and 2014. Other developed countries whose economies are comparable in structure to 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 who pay the correct amount of taxes. The CRA’s efforts to combat the underground economy are aimed at ensuring a fair tax system and a level playing field for all businesses and taxpayers.

Identifying and addressing 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, continue to be a priority for the CRA.

As part of the new Underground Economy strategy, the Minister of National Revenue has launched an Advisory Committee that brings industry partners, experts, and professional organizations together to tackle the underground economy.

In addition, Budget 2015 provides $118 million over five years to enhance the CRA’s underground economy audit efforts.

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

Refine our understanding of Canada’s underground economy — where, when and how it occurs;
Reduce the social acceptability of participation in the underground economy; and
Reduce 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.