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Statistics Canada Study on the Underground Economy in Canada, 1992-2008

On June 28, 2011, Statistics Canada released the report The Underground Economy in Canada, 1992-2008. The last such report was produced by Statistics Canada in 1994 for the reference year 1992. The current study was commissioned by the Canada Revenue Agency (CRA), and it is the first time a time-series of underground economy (UE) estimates has been published.

The study was conducted to obtain recent information on trends in underground economic activity through Statistics Canada. The findings of this study, along with other tools used by the CRA to understand the size and nature of the UE, will help the CRA measure the effectiveness and future direction of its activities to combat the UE.

The findings of this study contribute to the CRA's understanding of the UE, but they do not estimate the total amount of taxes that are not reported and paid, commonly referred to as the "tax gap." While the UE and the related non-reporting of income for tax purposes may represent a portion of the tax gap, the purpose of this study was not to quantify the tax gap but rather to provide information on the overall UE trend in relation to Canada's gross domestic product (GDP).

What are the estimates of the UE as concluded by Statistics Canada?

The study's findings indicate that between 1992 and 2008, the UE in Canada did not grow as fast as the total economy. In 2008, the estimate of the UE was $36 billion, an increase of 90% from 1992, whereas the nominal GDP grew by 128% over that same period. This estimate of underground economic activity was equivalent to 2.2% of GDP in 2008, down from 2.7% in 1992.

The main reason for the slower growth of the UE compared to the total economy is that the industries traditionally considered to be involved in the underground economic activity did not grow as fast as the overall economy or as fast as those industries less impacted by the UE.

Personal spending on underground goods and services in 2008 was an estimated $24 billion, equivalent to 2.7% of the total published household spending on goods and services. Underground activities related to investment in residential and non-residential structures accounted for $10 billion in 2008.

Underground economic activity can be found in any industry, but it is particularly prevalent in the retail trade and construction. These sectors accounted for over half of Statistics Canada's total UE estimate.

What do the numbers mean?

There is a great deal of debate amongst academics about the various methodologies used to estimate the size of the UE. Estimates of the part of the economy that is hidden will inherently have a greater variance in terms of reliability compared to estimates of the observed economy. As noted by Statistics Canada in their report, estimates of the size of the UE should be interpreted as indicators developed on reasonable assumptions and methodologies, rather than exact measurements, and its estimates could be refined in future studies if additional data become available.

The upper bound methodology used in this study is internationally recognized (see "Measuring the Non-Observed Economy: A Handbook," published by the Organisation for Economic Co-operation and Development). This method examines the different types of expenditures and incomes in the economy, calculating as an upper limit the highest amount of underground economic activity that is reasonable for each one. This was also the method used in the 1994 study. Other developed countries whose economies are comparable in structure to that of Canada's have used this methodology and observed similar results.

How will the CRA use the results?

The CRA will use the findings of this study primarily to maximize the effectiveness of CRA activities aimed at combating the UE, as well as for program and strategic decision-making and corporate reporting.

The UE information in this study will be analyzed along with industry-level estimates of unreported income and in-depth information about the tax behaviour of businesses. The resulting analysis will form the basis of targeted strategies to enhance compliance with Canada's tax laws and will help direct the CRA's resources to industry sectors that are the least compliant with tax laws.

The findings of the study will allow the CRA to further investigate the extent to which the estimates contained in the study can be relied upon to identify the UE sectors most at risk for tax purposes.

By continuing to track the trends contained in the study over a period of time, the CRA will be able to assess whether its efforts are having an impact on reducing the size of the UE in Canada.

What is the CRA doing to combat the UE?

Given the fundamental characteristics of the UE, such as the prevalence of cash transactions and the absence of third-party reporting and deductions at source, the UE is a significant challenge for all tax administrations around the world, including the CRA. Despite these challenges, identifying and addressing sectors of the economy where the UE has become widespread, such as construction, home renovation, and hospitality, continues to be a priority for the CRA.

The CRA uses a mix of outreach, education, and communications, as well as enforcement and audit actions to combat the UE. The CRA collaborates with other federal departments, provincial and territorial governments, professional organizations, and key industry groups as part of its efforts to reduce the prevalence of the UE.

While the study's findings suggest that the UE in Canada is relatively stable in relation to the overall economy, the CRA plans on continuing its efforts to combat the underground economy. It continues to be a high priority, and the CRA will use the study's findings to further improve its tools and activities aimed at combating the UE.

More information

For more information about Statistics Canada's report, The Underground Economy in Canada, 1992-2008, go to www.statcan.gc.ca/dai-quo/index-eng.htm.

For more information about the underground economy, go to www.cra-arc.gc.ca/gncy/lrt/ndrgrnd-eng.html.

This document is also available for download in PDF format.