Underground Economy Business Plan 2021–2022


Reducing participation in the underground economy (UE) has been, and continues to be, a priority for the Canada Revenue Agency (CRA).

The CRA has published two comprehensive external-facing UE strategies, the first covering 2015–2018 and the second covering 2018–2021. In light of the COVID-19 pandemic, and the strategic choices that were made in real time, the third comprehensive UE strategy has been deferred for publication until 2022.

In the interim, this UE business plan describes the CRA’s work to address the UE over the 2021–2022 period. As such, the plan extends the focus set out in previous strategies to manage UE risk. That is, the CRA will:

At the same time, this interim plan recognizes emerging risks and a changing compliance landscape and so introduces elements of a contemporary approach that will be more fully realized in the next iteration of the UE strategy. This includes:

What is the underground economy?

The underground economy (UE) is economic activity or transactions in goods or services that are partially or entirely hidden from government, in order to evade paying taxes and other government obligations (such as collecting employment insurance premiums and Canada Pension Plan contributions).

According to Statistics Canada, four industries accounted for more than half of underground economic activity in 2018: 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%). These industries have been the main contributors to underground economic activity in Canada since Statistics Canada began tracking this data in 1992.

However, the UE continues to evolve as digital technologies, global platforms, and cryptocurrencies gain prominence, while transcending traditional borders, and especially as COVID-19 accelerates digitalization and continues to have deep impacts on the Canadian economy.

UE activity negatively affects economic growth in Canada as legitimate businesses struggle to grow while competing with those that operate under the table. Moreover, honest taxpayers 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 the government’s ability to provide the services and benefits that Canadians enjoy and expect. Left unchecked, the UE would erode people’s faith in the integrity and fairness of Canada's tax system and undermine the competitiveness of honest businesses, especially small businesses that follow the rules and create employment in our communities.

The UE is but one of the elements of the tax gap in Canada.Footnote 1  Through its tax gap research, the CRA has estimated Canada’s tax gap for individuals at the federal level to be about $8.7 billion or 6.4% of personal income tax revenues in 2014. This calculation was based on estimates of taxes that were assessed but not collected and on unreported income from the UE.

Current context

To prevent, detect, and address unreported and underreported sales or income, the CRA has maintained an ongoing focus on four key activities:

Heading into COVID-19, compliance functions across the CRA were already refining their approaches and procedures in support of the CRA’s People First philosophy. In the audit domain, this materialized as a service-in-compliance focus, which led to more flexibility around the use of audit and non-audit techniques, as well as a stronger emphasis on promoting and sustaining compliance through the introduction of a new range of interventions.

Over the course of 2020, the COVID 19 pandemic required the CRA to rapidly respond to changing circumstances. The CRA pivoted its operations to deliver new emergency relief measures for the Government of Canada, which it continues to administer. The CRA resumed the audit workload related to the UE in November 2020, targeting the highest-risk files.

The pandemic has also changed the economic landscape, presenting an opportunity for the CRA to further assess its compliance approach to support greater tailoring of interventions to the facts of a case. Increasingly, the CRA seeks to reduce its reliance on audit functions for low-dollar discrepancies, and lower-risk files are being closed with an emphasis on education. Business intelligence and auditor judgement are key to factoring taxpayer circumstances into decision-making in this environment.

Areas of focus 2021–2022

1. Engaging citizenship to reduce the social acceptability of the UE

A large segment of Canadian society does not see the UE as a threat to their standard of living, and a significant number of Canadians are active in the UE without giving much thought to its consequences. Public opinion research has demonstrated that the negative impacts of the UE are not well known by many Canadians or are misunderstood. The results of this research also indicate that there is a willingness to tolerate small-scale cheating in light of what is perceived as significant non-compliance by the wealthy and large multinational companies. Education and awareness therefore remain an important part of the CRA’s current efforts.

The CRA, through sustained communications with partners, stakeholders and the Canadian public, seeks to educate and raise awareness of the UE to make participation in it socially unacceptable. The CRA maintains relationships with a range of stakeholders (professional organizations, academia, and industry as well as federal, provincial, territorial, and municipal governments) with whom it can engage to discuss and share best practices and communications initiatives in order to use interventions designed to influence citizen behaviour. This expands the CRA’s reach, promotes best practices, and assists with fine-tuning messages for various business sectors and geographic regions.

Over the current planning period, the CRA will develop and implement a UE communications strategy which will provide overall direction and cohesion to external UE communications. This communications strategy will rely on techniques and methods tested and refined over the course of previous strategies, namely: traditional media and social media, as well as working with, and through, partners in certain sectors of the economy and certain regions. The CRA’s annual corporate survey will be used to help validate whether compliance messages are resonating with Canadians and will provide more insights as to how Canadians are thinking about the UE.

With the CRA continuing to play a critical role in the Government of Canada’s COVID-19 response, messages around the importance of taxfiling and reporting income will also be highlighted in emergency benefit program communications, where it makes sense.

2. Leveraging third-party data and information

Third-party data is an essential part of the CRA’s UE approach, because it can be used to identify potential UE activity without directly burdening taxpayers to provide this information. In addition, the acquisition of third-party data can also act as a deterrent to UE activity by demonstrating that the CRA is active in a particular sector.

The CRA continues to use two approaches to obtain third-party data. The first approach is to work co-operatively with other federal agencies and departments; provincial, territorial and municipal governments; and industry stakeholders. The second approach is to compel third parties to provide information through legal avenues and court orders. The data produced from both of these avenues allows the CRA to match the data that it already possesses (for example, from a business’s taxfilings) against data held by a third party. By doing so, the CRA can uncover UE activity and proceed to take the appropriate compliance action.

These are proven and effective tools to identify individuals and businesses that have not paid the taxes they rightfully owe. Examples of how these tools are used include:

The CRA has made significant progress on strengthening partnerships to acquire third-party data, such as through its memorandum of understanding with the British Columbia Ministry of Finance to receive data from the provincial speculation and vacancy tax.

In addition, the CRA will continue to refine and strengthen the ways it uses third-party data. Careful research and analytics of new data sources can better identify specific incidences of high UE activity risk, and these can signal trends or emerging behaviours that may not otherwise be uncovered through traditional business intelligence. The integration of real-time, third-party data into CRA systems will also help the CRA refine and focus ongoing compliance initiatives.

3. Evolving business models and transacting in the digital age

In its previous UE strategy, the CRA focused its efforts on new business models and transacting in the digital age. Under this theme, the CRA identified two areas of risk for non-compliance: the platform economy and virtual assets. Through the increase of its online resources, engagement with Canadians, and provincial/territorial and international partners, the CRA developed strategies to support compliance and address non-compliance within these emerging sectors. Given the CRA’s past efforts in addressing these risks, it is now positioned to assess how it can tailor its compliance programs in response to the evolution of these digital business models, and it can explore new ways of taxing, while promoting voluntary compliance to keep up with these increasing trends.

The CRA is aware that during the COVID-19 pandemic some Canadians began earning income through the digital economy, and the CRA wants to help those persons understand and meet their tax obligations. Accordingly, it is striving to provide Canadians with information about the benefits and requirements of reporting this income. In addition to the focus on the platform economy and virtual assets, the CRA will explore systematic solutions to obtain data as an effective tool to manage compliance and tackle the UE.

In adjusting to the overall shift to digitalization, the CRA will continue to use technology to promote voluntary compliance while reducing the tax burden on taxpayers, which includes working with international partners to identify new ways of taxing businesses operating in the digital space. The current planning period will prepare the CRA both to address the compliance risks related to virtual assets and digital business models, and to develop a way forward in the sector.

Digitalization and tax compliance

Digitalization is fundamentally changing the ways in which individuals, businesses and governments interact. In response to these changes, the CRA is exploring digital solutions that facilitate sharing of information between taxpayers/registrants and tax administrations, and that support compliance while reducing the administrative burden.

The rapid transformation to digital business models includes developments in real-time payment and electronic invoicing (e-­invoicing) technology. E-invoicing refers to the automated exchange and processing of invoice-related documents between suppliers and buyers in a structured electronic or digital format. E-invoicing is being used in a number of jurisdictions to deter UE participation. The substantial savings and benefits to business for e-invoicing adoption incentivize compliance by making it less convenient for those who opt to transact outside of national electronic invoicing exchange networks. The CRA is exploring the feasibility of developing an interoperable, tax-integrated e-invoicing framework for Canadian markets to deter participation in the UE, improve compliance and reduce the reporting burden. The CRA is currently evaluating the benefits for standardized e-invoicing adoption, how it can enhance sales tax compliance, deter participation in the UE and reduce taxpayer burden by using the data naturally produced in the course of transacting.

Standard Audit File for Tax (SAF-T)

The CRA continues to focus its efforts on the digital agenda and on keeping pace with international trends. In March 2020, the CRA started a study that involves creating efficient, effective and innovative processes for data transfers from taxpayers to the CRA. This includes exploring the potential implementation of a Standard Audit File for Tax (SAF-T).

In a globalized environment with widely varying accounting systems, SAF-T has brought significant benefits to tax authorities in countries where it has been implemented. SAF-T can result in a reduction in compliance-related costs, a more seamless interaction with the CRA, and a higher level of service overall. The CRA will continue to collaborate and engage internationally to learn best practices related to the implementation of SAF-T across international tax authorities.

Platform economy transactions

Platform operators use technology such as the Internet to connect buyers and consumers with sellers and service providers. The COVID-19 pandemic has had a positive effect on many platforms, while others have been negatively affected. The increased use of platforms has amplified the risk that online income is not reported or is underreported by individuals and businesses, especially since it cannot be identified using conventional techniques. To address this risk, various initiatives have been undertaken by the CRA:

Based on the compliance interventions, and the research and engagement sessions, the CRA has confirmed that a large number of platform participants do not report or underreport their income. Specifically, the following emerging platform economy non-compliance risks were identified:

To tackle the challenges posed by the platform economy, the CRA developed a horizontal compliance strategy to manage the effective tax administration of platforms and their participants. The compliance strategy is based on four themes:

Over the course of this business plan, the CRA will address the risk of underreporting or no reporting of online income through the following actions:

Virtual assets

The digital world continues to grow, particularly when it comes to ownership and usage of virtual assets. Use of cryptocurrencies in the purchase and sale of goods and services created opportunities for those wanting to participate in the UE, but also for those seeking to evade tax. Investments in virtual assets represent another area of potential risk. Given the volatility and sustained periods of growth in the value of virtual-assets, gains associated with dispositions can be quite significant. Additionally, increasing trends of criminal activity involving virtual assets has been noticed internationally. In its previous UE strategy, the CRA identified transacting with virtual assets as an area needing more consideration.

Virtual assets are difficult to trace and their owners are often anonymous, presenting risks for underreporting their value as taxable income. To make sure that this area of the UE strategy is adequately researched and addressed, a dedicated section was created in 2018 to identify and address the risks of non-compliance.

Early work of this section was focused on:

Through these initiatives, the CRA has gained significant knowledge regarding virtual assets and is now able to better recognize the risks and challenges associated with the tax compliance of individuals and businesses transacting in this space. To guide the CRA’s approach, a compliance strategy will be developed. The strategy will focus on four themes:

This work will better position the CRA to evaluate and assess income from virtual assets consistently across the country for income tax as well as goods and services tax / harmonized sales tax. It is expected that taxpayers will become aware of their reporting obligations, therefore increasing tax compliance. Through its continued work with internal and external stakeholders and the use of enhanced data tools, the CRA can increase its ability to track non-compliance and criminal activity in this space and work towards better managing such risks.


The CRA's overarching objective remains constant: to reduce participation in the UE. This interim UE business plan aims to provide continuity, while allowing for innovation in its approach to this priority workload during what remains a time of significant disruption. In doing so, this business plan sets the stage for the future through new tools, new data, and new opportunities afforded by digitalization.

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