The underground economy and its tax implications with the Canada Revenue Agency (CRA)
Impacts of the underground economy on Canadians and how to protect against it
What is the underground economy
In Canada, most individuals and businesses file their tax returns and pay what they owe in full and on time. But, as in other countries around the world, there are some who try to avoid paying what they owe by operating in the underground economy. Making sure taxpayers meet their tax obligations ensures the tax system is fair for everyone.
The underground economy includes unreported economic transactions, which circumvent the tax laws the Canada Revenue Agency (CRA) administers.
Your income is taxable whether you earn it as an employed or a self-employed individual, or through your business.
Paying your taxes helps strengthen your community and your country by funding the many services that Canadians use every day. Taxes pay for Canada’s world-renowned programs and services like health care, education, parks, the Canada child benefit, old age security, and employment insurance.
The underground economy is divided into 3 segments.
Hidden activities
Hidden activities happen when someone is registered for the goods and services tax / harmonized sales tax, but does not report all their income or sales. This is often done to avoid paying taxes, to increase benefit payments, or both.
Example: A contractor offers to be paid in cash and does not report the income or charge GST/HST. By hiding the transaction, they are participating in the underground economy.
Informal activities
Informal activities involve selling taxable goods or services without following tax rules. This may include not registering for goods and services tax / harmonized sales tax, not reporting business income, or not sending collected taxes to the CRA.
Example: Someone rents out a room or property through a digital platform but does not register a business or report the income they earn.
Illegal activities
Illegal activities are against the law. Even so, any income earned from them is still taxable and must be reported.
Example: Income from theft, fraud, or selling illegal drugs.
There are no exceptions
You must report your income if you:
- Are an employee who is paid in cash and does not receive a T4 slip, Statement of Remuneration Paid
- Are a contractor receiving cash payments
- Earn extra income on the side of your full-time work (for example, by renting out a room or providing a ride-sharing service)
- Receive tips or gratuities in addition to your regular income
- Exchange goods or services (bartering with another worker)
- Are a self-employed individual providing services without having a registered number with the CRA
- Use gift cards or gifts as payment or incentives
Impact of the underground economy on all Canadians
Negative impact on economic growth in Canada- Businesses that operate legitimately struggle to grow when competing with those that operate under the table
Lower tax revenue for all levels of government- Lower tax revenue reduces governments’ ability to provide the services and benefits Canadians expect and enjoy
Higher tax gap- The tax gap is the difference between the taxes the CRA would collect if everyone fully met their all tax obligations and the taxes that the CRA actually collects
For more information, refer to the Tax Gap: A brief overview web page.
Consequences of participating in the underground economy
Your participation in the underground economy may lead to serious consequences, such as:
- Criminal charges
- Prosecution
- Court-imposed fines
- Jail time
- A criminal record
For more information, learn about the CRA’s criminal investigations process
Ways to protect yourself
Here are some ways you can be part of the solution.
- As a customer of a business
- Avoid businesses that promise lower prices if you pay cash and don’t get a receipt
- Hire home contracting businesses that give you a written contract to protect yourself against incomplete or poor-quality work and cost overruns
- Anonymously report suspected underground economy activity through the CRA’s Leads Program
- As a business owner
- File your tax returns
- Report all your income
- Register your business for a goods and services tax / harmonized sales tax account if necessary
- Anonymously report suspected underground economy activity through the CRA’s Leads Program
- Voluntarily come forward to fix errors or omissions in your tax filings through the CRA’s Voluntary Disclosures Program before the CRA contacts you about it
- As an individual
- Make sure you receive a T4 slip to get all the benefit payments you are entitled to
- Report all income you have received, even if it is not reported on the T4 slip as part of an employment position
- Anonymously report suspected underground economy activity through the CRA’s Leads Program
- Voluntarily come forward to fix errors or omissions in your tax filings through the CRA’s Voluntary Disclosures Program before the CRA contacts you about it
How we respond to the underground economy
The underground economy continues to evolve alongside changes in digital technologies like global platforms and cryptocurrencies. For this reason, we published the 2022+ Underground Economy Strategy (2022+ strategy), which guides our approach to combatting this changing environment.
The 2022+ strategy:
- Features a revised definition of the underground economy that better reflects the work of the CRA to reduce related tax non-compliance.
- Summarizes our efforts to address the underground economy and organizes our approach under three pillars.
Pillar 1
Identify activities by improving efficiency and effectiveness of data research, analysis, and third-party data collection processes. Through enhanced use of data and analytics, the CRA can better identify underground economic activities as they arise and address them early on.
Pillar 2
Prevent participation in the underground economy through early outreach and ongoing visibility. The CRA is expanding its tax education programs to reach those who unintentionally participate in the underground economy and make it easier for people to meet their tax obligations.
Pillar 3
Address using collaborative and tailored approaches that take into consideration the level of risk of non-compliance for a given taxpayer.
These three pillars align with our commitment to apply the right intervention to the right risk.