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Tax agency fails to create new strategy for cheats after three-year effort

The Canada Revenue Agency headquarters in Ottawa is shown on November 4, 2011. After a three-year effort, the Canada Revenue Agency has failed to produce a new national strategy to combat the underground economy -- despite repeated requests to do so from cash-starved provinces. THE CANADIAN PRESS/Sean Kilpatrick

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The Canada Revenue Agency headquarters in Ottawa is shown on November 4, 2011. After a three-year effort, the Canada Revenue Agency has failed to produce a new national strategy to combat the underground economy -- despite repeated requests to do so from cash-starved provinces. THE CANADIAN PRESS/Sean Kilpatrick

OTTAWA - After a three-year effort, the Canada Revenue Agency has failed to produce a new national strategy to combat the underground economy — despite repeated requests to do so from cash-starved provinces.

The provinces, especially Ontario and British Columbia, have been pressing the agency since late 2010 to update its strategy for extracting taxes from the underground economy, estimated to be worth more than $35 billion annually.

The current guiding document is a decade old, and changes since then — including the advent of cash-register "zapper" technology that conceals sales — have made it increasingly out of date.

The agency regularly audits offenders in three most-active underground sectors, that is, construction, retail trade and food services, including table-waiting staff.

In 2011-12, the last year for which statistics are available, the agency carried out almost 11,000 underground-economy audits, finding more than $300 million in unpaid taxes.

But internal documents from last October show that an updated strategy for targeting the right businesses and workers, with enough resources and agency-wide co-ordination, has eluded officials.

"A number of stakeholders have been consulted, all with varying opinions and suggestions as to what the focus and direction of the strategy should be, such that a strategy has not emerged," says an Oct. 23 report to the CRA's senior management.

The report suggests there were too many differing views among provinces and agency officials about exactly what constitutes the underground economy — and warns against bad targeting.

"The risk of future non-compliance increases if compliance interventions are targeted at the wrong people or if taxpayers feel they are not treated respectfully," it says.

"The CRA has finite resources and deterrents such as audit are costly. As such, deterrents should be focused on the highest-risk UE (underground economy) participants."

The document was obtained by The Canadian Press under the Access to Information Act.

The failure to update a key guidance document echoes a similar finding by Canada's auditor general last fall.

Michael Ferguson's Nov. 26 report to Parliament generally lauded the agency's efforts to recover taxes from people who had hid their money in offshore accounts in Liechtenstein.

But he criticized CRA for using an outdated guide that has failed to keep pace with modern banking practices, especially as they relate to hiding taxable funds offshore.

"The current audit guide for offshore banking is from 2001 and was developed before the agency received large informant leads such as the (Liechtenstein) one in 2007," says his report.

Ferguson noted the agency was developing a "wiki-type" online page to enable its auditors to share information.

A Statistics Canada report commissioned in 2012 estimated that the underground economy has been shrinking somewhat, to 2.3 per cent of GDP in 2009 from 2.9 per cent in 1992.

The types of businesses failing to report taxes are also changing, with more emerging in mining, oil-and-gas extraction and others.

The Canada Revenue Agency, for example, has in recent years targeted the unregulated couriers, paramedics and drivers who work on contract for big resource firms in British Columbia's remote Peace River region.

That two-year probe into tax cheats working in the area's resource sector uncovered almost $2 million in unpaid taxes, and officers levied another half-million dollars in fines and interest.

"Zapper" technology, responsible for up to $3.25 billion in unreported sales, has also been a recent focus, with new sanctions recently implemented by Parliament to combat electronic suppression of sales software.

A spokesman for the agency confirmed that a 2004 document continues to guide tax-collection efforts in the underground economy, but is "complimented by new measures developed in response to emerging risks."

"The CRA makes UE activities a priority," said Philippe Brideau. "We seek to detect it early, to bring taxpayers into compliance quickly and in serious cases of non-compliance the agency files charges."

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