Senior Economist, Statistics Canada The underground economy in Canada, 1992 to 2011 Meeting of the Group of Experts on National Accounts Charles Morissette, Senior Economist, Statistics Canada May 2014, Geneva

Statistique Canada • Statistics Canada Section 1 Canadian NOE estimates in relation to international measurement framework Statistique Canada • Statistics Canada 20/08/2019

1.1 International analytical framework for the non-observed economy (NOE) Chart 1 Analytical framework proposed by the OECD Non-observed economy (NOE) Hidden sector Illegal sector Informal sector Household production for own final use Deficiencies in basic data collection program Measuring the Non-Observed Economy: A Handbook, OECD, IMF, ILO and CIS STAT, 2003. Statistique Canada • Statistics Canada 20/08/2019

1.2 Operationalization of the Canadian framework Chart 3 Analytical framework and operationalization used by Statistics Canada Underground economy Hidden sector Under-reported and non-reported activities Skimming Construction-related Hidden rent Undeclared tips Export-related Illegal sector Unlicensed operation Tobacco Alcohol Illegal operation Illegal drugs Prostitution Informal sector Home-based child care services Private household services Other personal care services Direct sales of agricultural products Other industries Operationalization Deficiencies in basic data collection programs are considered out of scope Focus is only on what is within the CSNA production boundaries In Canada, some activities that are productive in an economic sense are excluded from the official measure of the GDP, even though international bodies recommend their inclusion. For example, Drug trafficking Prostitution activities The framework can be mapped to the NOE framework Statistique Canada • Statistics Canada 20/08/2019

Section 2 Methodologies Statistique Canada • Statistics Canada 20/08/2019

2.1 Measurement approaches Three measurement approaches were used Upper bound method Supplementary data Data confrontation analysis Two approaches were not used Special surveys on UE (none exist) Macroeconomic modelling Statistique Canada • Statistics Canada 20/08/2019

2.2 Major assumptions of the study Small businesses are more likely to participate in underground economy activities than larger ones Unincorporated businesses are more likely to engage in underground economy activities than incorporated businesses Non-profit and general government sectors do not take part in underground economy activities Corporate investment in non-residential structures, machinery and equipment as well as intellectual property is not subject to underground activity This does not mean that large businesses, non-profit organization and general government don’t engage in UE but that these cases are “exceptional” Since all assumptions are upper bound, “exceptional case” would probably fall within the current NOE estimates. Statistique Canada • Statistics Canada 20/08/2019

2.3 For tobacco, alcohol and hidden rent, supplementary data are used Tobacco and alcohol Hidden rent “Real” consumption is estimated in terms of volume, from which legal sales are subtracted. The “street” value is used to yield an estimate in nominal terms Sources: Police survey, household surveys and corporate annual reports The value of hidden rent is calculated from an estimate of the undercoverage of households in the 1991 and 1996 censuses and a series of average dwelling prices (adjusted by a quality factor). Sources: census, census undercoverage studies, household surveys Statistique Canada • Statistics Canada 20/08/2019

Statistique Canada • Statistics Canada 2.4 For construction and renovation, the upper bound and skimming are combined New construction Renovations By comparing data on materials (measured goods), income reported by businesses (low) and the value of building permits (undervalued), upper bound undervaluation rates were determined by dwelling type. Sources: Tax data, building permits and national accounts data By comparing renovation permits with the results of a household survey, upper bound adjustment factors were determined by dwelling type. Sources: Renovation permits, household surveys and national accounts data Statistique Canada • Statistics Canada 20/08/2019

2.5 Skimming, informal sector and professional services Tax data on businesses’ revenues are the starting point. Converted according to household expenditure categories (using the input-output tables) Classified by industry code In each case, upper bound skimming rates are applied Estimates are compared to household survey estimates Estimates are also produced by industry Assumptions Only small businesses Different rates for incorporated and unincorporated businesses Statistique Canada • Statistics Canada 20/08/2019

Statistique Canada • Statistics Canada 2.6 Tips and exports Unreported tips Exports Based on estimates of skimming in the accommodation, taxi and food services industries, the usual tipping rates are applied Note that these tips are added to those already estimated in the GDP Sources: skimming, tipping rates from the Input-Output Tables Contraband alcohol and tobacco An underestimate of 5% of exports of goods is added in export sectors not governed by international prices, and of 10% for exports of services to firms not subject to regulation Sources: Estimates on tobacco and alcohol and national accounts data Statistique Canada • Statistics Canada 20/08/2019

2.7 Underground economy by industry On the one hand, the preceding estimates are broken down by industry On the other hand, we use individual tax data that track revisions in businesses’ returns following an audit. These data are used to derive a rate of change in tax assessments by industry The two sources are compared and reconciled Statistique Canada • Statistics Canada 20/08/2019

Statistique Canada • Statistics Canada Section 3 Results Statistique Canada • Statistics Canada 20/08/2019

3.1 Characteristics of measures of the underground economy in Canada UE estimates are calculated using three approaches to measuring the GDP Expenditure-based approach (nominal and real) Income-based approach Approach by industry 1992 to 2011 time series for Canada Base on upper bound assumptions and exhaustive use of audited tax data Statistique Canada • Statistics Canada 20/08/2019

3.2 Interpretation of Canadian estimates on underground economy The Canadian UE estimates represents the upper bound value of what could be missed from official GDP due to the non-observed activities. Due to the way CSNA estimates are built, some of the NOE estimated is already included in GDP but the exact proportion is unknown. Statistique Canada • Statistics Canada 20/08/2019

Statistique Canada • Statistics Canada 3.3 Change over time in the underground economy as a proportion of the official GDP - Canada Statistique Canada • Statistics Canada 20/08/2019

Statistique Canada • Statistics Canada 4. Future developments Short term Improve the timeliness of publication Produce estimates for the Canadian provinces and territories Long term Add estimates for other legal, unlicensed activities (music or software piracy, etc.) Add estimates for illegal sectors (narcotics, solicitation for purposes of prostitution, etc.) Clarify the portion of UE already included in the official GDP Incorporate some portions of UE in the official measure of GDP Statistique Canada • Statistics Canada 20/08/2019