Results of the Canada Revenue Agency’s 2015 to 2018 Underground Economy Strategy
The underground economy (UE) is any economic activity that is partially or entirely hidden from governments, in order to evade paying taxes or government reporting obligations for things such as employment insurance premiums and Canada Pension Plan contributions.
UE activity negatively affects economic growth in Canada, because legitimate businesses struggle to grow while competing with those that operate under the table. This activity leaves honest taxpayers to carry the burden of closing the revenue gap created by the UE. The UE also reduces tax revenues for all levels of government, putting pressure on governments' ability to provide the services and benefits that Canadians enjoy and expect.
For many years, the Canada Revenue Agency (CRA) has combatted the UE as part of our efforts to promote a level playing field among Canadian individuals and businesses. The CRA publicly shared its 2015 to 2018 strategy for the first time in November 2014. The strategy aimed to reduce the social acceptability of, and participation in the UE, by focusing on three broad themes:
- further refine our understanding of the UE
- seek to reduce the social acceptability of participation in the UE
- deploy a range of initiatives to encourage compliance and reduce participation in the UE
With the large and diverse nature of the UE and finite compliance resources, we need to use various ways to supplement audit activities, through tools such as communication and education, in order to address the UE.
This allows audit resources to focus on the most non-compliant taxpayers participating in the UE. Over the course of the previous UE strategy's implementation, audit efforts in high-risk areas resulted in:
- the identification of over $4 billion in unreported income related to the UE between April 1, 2015, and March 31, 2018
- additional taxes assessed of more than $1 billion, including over $200 million in penalties
- the assessment of over 108,000 returns, totalling over $1 billion in fiscal impact from other initiatives, including focusing on identifying non-filers
The CRA learned several key lessons as a result of the strategy, which helped form the foundation of the new strategy. Some of these lessons were:
- Nudge messaging targeted to the UE sectors appears to be less effective in altering taxpayer behaviour, when compared to more stringent techniques such as audit.
- Educational campaigns should be a priority, as many Canadians are not aware of the impact the UE has on their tax obligations.
- The CRA should better use third-party information to identify and address the highest-risk taxpayers.
- Compliance activities must adapt to the emerging risks associated with new types of business models (for example, digital platforms).
Combatting the underground economy (UE) is a top compliance priority for the Canada Revenue Agency (CRA). The CRA publicly shared its triennial 2015 to 2018 strategy to address the UE in November 2014.
The scope of the work undertaken to combat the UE included a mix of communications, education, audits and collections activities. The CRA also continued its efforts to identify non-filers, conduct research and obtain data from third parties to enable the identification of taxpayers of the highest risk of participating in the UE.
While some initiatives have concluded, others are ongoing. Some of the initiatives were considered valuable enough to be integrated into the CRA's day-to-day operations.
Not all of the initiatives were as successful, whereas others surpassed expectations. In all cases, lessons learned from these initiatives have been taken into account in the development of the new UE strategy.
The purpose of this report is to highlight some of the initiatives that the CRA undertook as part of the strategy.
Theme 1: Further refine our understanding of the UE
The CRA has improved its understanding of the UE through research and analysis, and by leveraging information from government partners and external stakeholders. As a result of these efforts, the CRA has been able to refine its insight on which industry sectors have a higher risk of UE participation.
1.1 Continuous research and analysis
To gain a better understanding of the industries involved in the UE, the CRA commissioned Statistics Canada to estimate the extent of the UE in Canada. Not only did this information help clarify the extent of the UE on both a national and provincial/territorial level, but it identified sectors that have a high amount of UE activity and sectors where UE activity is emerging.
The CRA conducted studies of taxpayer behaviour, which revealed that individual taxpayers who do not file their income tax and benefit return (non filers) respond differently, depending on the compliance approach used. This information will influence the CRA's compliance approach to non-filers in the future.
The CRA also looked at other tax administrations in order to develop best practices regarding the identification, detection, and approach to the UE. Generally, we found that other tax administrations are using similar approaches to combat the UE, many of which included preventative tactics involving public engagement and education. Although the various compliance approaches differ from country to country, the overarching strategies used by other tax administrations are in line with the CRA's approach to the UE.
1.2 Government partners and external stakeholders
In order to better understand the UE, the Minister's Underground Economy Advisory Committee (the committee) was formed to leverage industry knowledge and foster partnerships between the federal government and external stakeholders. The committee is comprised of representatives from industry and professional associations, and is informed by academia. The purpose of the committee is to provide advice on UE trends, identify emerging risks, provide insight on taxpayer compliance behaviour, and contribute to the development of communications and compliance tools. The committee indicated the need for the CRA to develop messaging for both businesses and consumers. They also encouraged the CRA to increase communications related to the risks of participating in the UE and to better illustrate the results the CRA is achieving in combatting the UE.
The CRA also worked with provincial and territorial governments in an effort to address the UE. Through the Federal-Provincial-Territorial Underground Economy Working Group (FPTUEWG), the CRA shared UE research information and results with the provinces and territories. We anticipate that the sharing of this information will result in the greater co-ordination of efforts to combat the UE.
In addition, the CRA gained further insight into the UE from its provincial and territorial partners, and through a series of meetings with professional and industry associations, as well as other stakeholders. Several themes emerged from these discussions, including: the need to improve how information is shared; opportunities for collaborative messaging in communicating projects; and the need to improve outreach and educational activities.
Through the engagement of federal government partners and external stakeholders, the CRA has received valuable feedback, particularly with respect to its messaging on the UE. For example, the committee member feedback resulted in revisions to the web pages for the CRA's Leads Program to provide greater clarity, include more information on confidentiality, and to highlight the difference between the Leads process and the Offshore Tax Informant Program. This feedback has influenced the CRA's efforts to address the UE and has assisted in the development of various UE messaging initiatives, such as the social media campaign illustrated in theme 2 of this report. The insights gained through these ongoing discussions have proven to be instrumental to the CRA's understanding of the UE and have been incorporated into its future multi-year strategy.
1.3 Next steps
The CRA will continue with its research and analysis of the UE in order to further refine its understanding of the sectors that pose significant risk for participating in the UE.
In addition, the committee and the FPTUEWG will continue their work under the stewardship of the 2018 to 2021 UE strategy, and the CRA will continue to build on this positive collaboration and seek out future opportunities to work with other government partners and external stakeholders. For instance, the CRA is working with the provinces and territories in an effort to improve its access to information so as to gather intelligence on areas of non-compliance.
Theme 2: Seek to reduce the social acceptability of participation in the UE
In support of this theme, the CRA had a multi-year marketing strategy to increase awareness of the risks of buying goods or services from those that operated in the UE. This strategy involved numerous educational and communication activities aimed at raising public awareness of the risks of engaging in UE activity.
2.1 Communication, educational campaigns and online toolkit
A public awareness campaign web page was developed for Canada.ca. The campaign page included: information on ways that Canadians benefit from taxes collected; a definition of what comprises the UE; tools the CRA uses to detect UE activity; and tips for both consumers and businesses on how to avoid participating in the UE. The campaign page remains available to Canadians to consult.
In February 2017, the CRA launched an advertising campaign on social media platforms. The campaign ran from February 13 to March 26, on Facebook and Kijiji. The Facebook ads alone reached an audience of over 600,000 users. The number of visits increased significantly to the campaign web page, which provided information on the CRA's tools to detect UE activity and also highlighted the risks and consequences of participating in the UE for consumers and businesses.
In addition, a second ad campaign using the web and social media was launched in early 2018 with educational messages about the services that taxes fund, as well as tips for business owners. This included: ads on LinkedIn targeted at business owners and financial advisers on the risks of participating in the UE; a series of tweets using the same ads from LinkedIn; and web banner ads that were run on Spotify, eBay and Kijiji to show Canadians the benefits of our tax system.
An online toolkit was also created for Members of Parliament so they could share messaging on the UE with their constituents.
The CRA also partnered with the Canadian Home Builders' Association (CHBA) for the "Get it in Writing!" campaign. The goal of the campaign was to inform consumers of the non-tax-related risks they may face when hiring a contractor engaged in UE activity. We anticipated that the consumer, armed with this information, would be less likely to engage with renovators who operate off the books or under the table. Between April 1, 2015, and March 31, 2018, over 16,700 industry members and more than 99,000 homeowners were exposed to "Get it in Writing!" at tradeshows, while 3,330 industry members and 10,500 homeowners attended seminars. The CHBA also created renovation horror stories and videos, which were shared on Twitter and Facebook, and published on the CHBA and CRA websites. The videos, which also appeared on YouTube, have been viewed 216,000 times.
The CRA also increased its use of UE messaging on its Twitter account and sought out cross-promotion from federal, provincial and territorial government partners to expand the reach of those messages. For example, the CRA has included monthly promotions on the federal government's "Your Money Matters" Facebook account.
As numerous factors influence taxpayer behaviour, it is not possible to measure a direct impact of these campaigns on taxpayer behaviour. The measured reach of these campaigns, however, links to a likely increased awareness of the risks related to engaging in the UE among the audiences targeted.
2.2 Collaboration with government partners and external stakeholders
Feedback received from members of the committee contributed to the development of a number of new communications products, with improved messaging on the risks of participating in the UE.
Partnerships, such as with the CHBA and the committee, have allowed the CRA to optimize communication channels and expand its reach. These collaborative efforts resulted in the development of shareable communications materials, including an online toolkit that offers videos, posters, and Twitter cards, as well as articles and messaging from the "Get it in Writing!" campaign.
2.3 Next steps
By building on the successes of its educational and communication activities, and taking into consideration the insight gained from public opinion research conducted in 2017 to 2018, the CRA has further refined its risk-based messaging and is delivering it to a broader audience. Although the activities to date were largely geared towards consumers, going forward, the CRA will also create tailored messaging targeted to small businesses, as public opinion research revealed that many small business owners still don't know the impacts of operating in the UE and their tax obligations.
The key to ensuring social marketing's success is a rigorous research regime, a strategic, integrated approach to implementation, and sustained efforts over multiple years. The CRA will increase its efforts in this area in the upcoming years.
In addition, the CRA plans to reach out to post-secondary students and new Canadians in order to further expand its messaging about the UE. The CRA hopes that reaching out to these groups will influence attitudes concerning the social acceptability of the UE.
Theme 3: Deploy a range of initiatives to encourage compliance and reduce participation in the UE
One of the key principles of the CRA's compliance activities is to use the right intervention for the type of risk. The methods used by the CRA to encourage compliance and reduce participation in the UE include educational and communication campaigns, letter campaigns, audits and, where appropriate, criminal prosecution. These activities, and the experience gained from them, help the CRA to select the appropriate type of intervention for each taxpayer.
3.1 Letter campaigns
The CRA conducted letter campaigns in a number of UE sectors. The letters were sent to educate taxpayers about common mistakes specific to their tax situation and to encourage them to correct previously filed returns, if required.
Of note was an innovative letter campaign, which was used to test the effectiveness of nudge messaging. Although the letters led to increased traffic on a web page, they did not impact taxpayer behaviour. Specifically, the results showed that the nudge letters did not lead to an increase in the number of taxpayers who requested a correction to their tax return or the amount of income reported. However, the results did suggest that stronger deterrence methods would be more effective in addressing the UE. These results will be useful in helping to guide and inform other similar compliance initiatives.
3.2 Compliance activities
Between April 1, 2015, and March 31, 2018, the CRA conducted over 17,000 income tax and GST/HST audits related to the UE and identified over $4 billion in unreported income. This resulted in additional taxes assessed of more than $1 billion, including over $200 million in penalties.
Most of the results can be attributed to audits conducted by either the dedicated Underground Economy Specialist (UES) teams,Footnote 1 the specialized Point-of-Sale (POS) teamsFootnote 2 or teams performing audits on real estate transactions.
During the same period (April 1, 2015, to March 31, 2018), over 55 UE cases were referred to criminal investigation, including two related to the use of point-of-sale systems. Additionally, during this period, the court convicted four taxpayers, imposed fines of $592,810, and in one case imposed an additional 12-month jail term.
In addition to audits, initiatives focusing on identifying non-filers resulted in the assessment of over 108,000 returns totalling over $1 billion.Footnote 3
3.3 Leveraging third-party information
The use of third-party information continued to be very useful in identifying and addressing instances where taxpayers had not filed returns or reported all of their income.
Legal requirements were used to obtain information from several cheque-cashing companies. Non-filer compliance actions resulted in over 34,000 returns totalling almost $350 million of taxes being assessed on filing, and an additional $26 million of taxes assessed as a result of 177 audits.
Information from third parties was also used in initiatives focusing on non-filers. As a result of data obtained from the Workplace Safety and Insurance Board of Ontario, the CRA identified and gained compliance on more than 27,000 accounts with assessments of $356 million. Another project focussed on the construction industry and identified almost 12,000 accounts, with assessments nearing $67 million.
3.4 Next steps
As a result of the success of using third-party information, both obtained through the courts and through its provincial and territorial partners, the CRA will continue its use of third-party information in the next UE strategy.
The CRA will also continue to use specialized audit teams and approaches to address UE activity, and where appropriate, refer files for criminal investigation.
The CRA is proud of its ability to detect unreported and under-reported income and recover taxes owed. However, it will not truly succeed in combatting the UE until Canadians refuse to engage with UE operators and take a negative view of their behaviour, which affects us all.
The nature of the UE is constantly changing, and combatting the UE remains one of the CRA's top compliance priorities. The initiatives the CRA has pursued under this strategy have helped refine its compliance approaches and streamlined its ongoing efforts to reduce participation in the UE. Making participation in the UE socially unacceptable is the ultimate goal, which can only be achieved with a sustained effort over many years. The CRA can measure its success by continuing to work with Statistics Canada to determine the scale and scope of the UE over time.
The UE as a proportion of the total gross domestic product (GDP) remains stable, as confirmed in the October 2018, Statistics Canada release of the new UE estimates. The UE estimates indicate that UE activity in Canada totalled $51.6 billion in 2016, or 2.5% of GDP, which has shown little change since 1992, reaching a high of 2.7% in 1994 and a low of 2.2% in 2000.
Canada's UE ranks among the smallest by the Organisation for Economic Co-operation and Development (OECD). A survey of OECD countries conducted in 2011 to 2012 found that the UE as a percentage of GDP ranged from a low of 1.0% in Norway to a high of 15.9% in Mexico and 17.5% in Italy. Countries with a rate similar to Canada included the Netherlands and the United Kingdom, both at 2.3%. The United States was not included in this OECD survey.
A number of the UE initiatives from this strategy, such as the specialized audit teams and the use of third-party information, will continue, and the data gathered will be used to make informed decisions about new initiatives under the next strategy. The CRA will also consider the lessons learned from the current UE strategy. The CRA will continue its efforts to better understand the UE, to change taxpayer behaviour, and to form a multi-pronged approach to address non-compliance.
The CRA will continue to collaborate with other federal organizations, provincial and territorial governments, professional organizations, and key industry groups in order to address UE activity. All of these efforts will help combat the UE, reinforce fairness and integrity in Canada's tax system, and ensure a level playing field for all businesses and taxpayers. For as long as the UE continues to exist, the CRA will pursue improved and innovative ways to fight it.
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