OTTAWA -- Canada's tax watchdogs aren't effectively sniffing out the potential tax revenue lurking in the underground economy.
A report from the auditor general released yesterday says Revenue Canada has made "unsatisfactory progress" in addressing previous recommendations to tighten up how it deals with tax dodgers.
In fact, Revenue Canada might be auditing too many of the wrong businesses in its quest to retrieve unreported taxes, the report says.
The agency's own system for selecting whom to audit tends to focus on low-risk enterprises -- those least likely to evade taxes. In the auditor general's view, the agency needs to focus more on high-risk businesses.
About half the tax audits done in the supposed underground economy didn't detect any unreported income.
"This result is troubling because files selected for underground economy audits are expected to have a high risk" of hiding revenue, according to the report.
"Underground" transactions most often occur in areas of the economy with high cash transactions, such as hospitality or construction.
Revenue Canada thinks non-compliance with its tax laws is "relatively low but financially significant." In 2006-07, for instance, its attempts to find and recover unreported taxes amounted to $12.7 billion. About $2.5 billion came from small and medium-sized enterprises.
The revenue agency says growth in self-employment, globalization and use of information technology among businesses have made it tougher to detect tax cheats.
One form of tax evasion the agency is struggling with is called "electronic suppression of sales," a software program that simply wipes out records of sales, for instance from a cash register, at the end of the day.
"At the time of our audit, the Agency was still unable to determine how serious electronic suppression of sales is across Canada," says the report.
CHRISTINA.SPENCER@SUNMEDIA.CA
