Ideas for deterring the underground economy?

What do you think should be done to detect and deter under-the-table activity? The federal government is looking for ideas to help reduce participation in the underground economy.

The underground economy (UE) costs jobs, erodes the integrity of Canada's tax system and undermines the competitiveness of businesses that play by the rules. Statistics Canada puts the value of the UE in Canada at 2.3 per cent of GDP, with much of it occurring in the construction, retail and hospitality industries.

As a member of the advisory committee struck by the Minister of National Revenue, I welcome the chance to work with representatives from industry and academia to give input into the Canada Revenue Agency (CRA)’s three-year strategy. The strategy, announced in November 2014 and posted on the CRA’s UE webpage, focuses on three approaches:

  • research and analysis to better understand the nature of the UE
  • awareness activities to communicate the costs and reduce the social acceptability of participation in the UE
  • compliance initiatives to deter and detect those who take part in the UE

The CRA recently formed UE Specialized Teams in 20 cities across Canada. Based on risk analysis, these teams will focus on high-risk taxpayers across all industries, including the industry sectors named in the Statistics Canada report on the Underground Economy. For example, within the construction industry, there are three particularly high-risk subsectors that will be included, namely: Construction of Buildings, Heavy and Civil Engineering and Specialty Trade Contractors. Budget 2015 proposes $118.2 million over five years for the CRA to expand these teams, create new teams and enable new approaches such as advanced analytics and working with the provinces to address local UE participation. In the retail sector, point-of-sale audit teams have been formed to tackle electronic suppression of sales. Through the use of business intelligence, the highest risk taxpayers in these areas and other industry sectors will be selected for audits.

In addition to auditing the highest risk taxpayers, the CRA is also working to address consumer behaviour that often drives UE activity. In partnership with the Canadian Home Builders’ Association, the CRA is renewing its “Get it in Writing” campaign to help homeowners make sound decisions and protect themselves from risk by getting receipts, permits and other documentation when hiring contractors. The Minister’s committee is looking for ideas on developing similar consumer-focused campaigns for other high-risk industry sectors.

Other initiatives include a social marketing strategy to encourage Canadians to avoid UE operators and seek out businesses that play by the rules. For example, the CRA is sending letters that employ behavioural economics concepts to drive compliance among high-risk groups, such as new businesses and repeat, late tax filers. They are complementing these efforts by working with industry associations to help members avoid common income tax problems. 

With these and other inventive measures, the CRA can help detect UE activity and change the attitudes of those who enable it. At the same time, it is important for the CRA to ensure these measures are designed in ways that target the highest risk sectors while limiting any burden on compliant businesses.

KEEP THE CONVERSATION GOING

I want to hear from you. What more can be done to help stamp out the underground economy? How can CPAs help win the battle? You can keep the conversation going by posting a comment below.

CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practise tax. Your comments can provide helpful input into the public interest advocacy positions developed by Chartered Professional Accountants of Canada (CPA Canada).

About the Author

Gabe Hayos, FCPA, FCA, ICD.D

Vice-president, Taxation, CPA Canada

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