The latest numbers indicate that Canada’s underground economy is worth $45.6 billion . That includes everything from illegal drug sales to waiters not reporting tips, and it’s all money not being taxed. The Canada Revenue Agency loses money every year due to the underground economy, but the agency has a number of strategies in place to minimize its losses.

Fines and Penalties

When the CRA believes a taxpayer is being purposefully evasive, it levies more penalties and fines than usual. The penalty for unreported income is 50% of the tax owed, and taxpayers may also face up to five years in jail or fines worth up to 200% of the tax owed. The penalties for avoiding GST/HST can be just as severe, and in both cases, tax preparers can face even stiffer punishments.

Data Analytics

To ferret out people or businesses who may not be reporting all their income, the CRA uses a lot of data analytics. In particular, the agency uses data to establish income trends in key industries and in certain areas. Using that information, it can spot anomalies when taxpayers submit returns where their income is surprisingly low based on their industry or even based on their home address.

Information Matching

The CRA also uses a lot of information-matching tools. For instance, the agency has the right to look at the bank accounts and credit card statements of taxpayers and their spouses. If the agency sees a lot of unexplained cash deposits in an account, this can indicate the need for further enquiry. The agency also uses information from cheque-cashing companies and suppliers to find hidden sales or income. Say a business reports an expense from a supplier but the supplier doesn’t report any corresponding income, that creates a red flag for the CRA.

Similarly, the agency uses tools such as the Contract Payment Reporting System. Construction businesses are supposed to report payments made to subcontractors on this portal. If a payment is entered but the contractor doesn’t report the income, the CRA finds out easily. Additionally, if a construction company never reports any payments, this can also trigger a closer look at that business.

Audits

To boost compliance and identify cases of tax evasion, the agency audits many companies. In particular, the CRA focuses on businesses in the following industries:

• Construction
• Finance and insurance
• Real estate
• Rental and leasing companies
• Landlords
• Food service and hotels

If you have clients in these industries, you may want to take extra time ensuring they’re audit-proof. To that end, help them put systems into place that thoroughly track every dollar they collect, and be meticulous about saving receipts and invoices for business expenses. For example, if you handle the accounting for a contractor who likes to seal the deal with a handshake, let them know about the importance of getting contracts in writing. Also, help your clients set up a system for tracking their GST/HST.

You might want to make sure your clients aren’t using any zapper software. This software electronically suppresses the records of some sales, and the CRA has tools that can help it find this software on point-of-sale systems. Even if your clients aren’t using sales suppression software, it can look very suspicious if it’s on their computers.

The underground economy hurts everyone in Canada. If you believe a client is participating in the underground economy, you need to report that information to the CRA. On the other hand, if you have clients who may face extra scrutiny due to being in industries associated with the underground economy, you might want to give them extra help so they’re ready for any audits or enquiries.a