A Critical Review of the Empirical Research on Canadian Tax Compliance, [by] Brian Erard

This paper reviews the evidence on tax non-compliance and the “underground economy” in Canada, with an emphasis on the reporting activities of self-employed individuals and businesses. Indirect methods of estimating the size of the unrecorded sector are found to generate widely varying, and in a number of cases implausible, estimates of underground activity. More direct evidence from enforcement activities indicates that non-compliance varies across classes of taxpayers according to the same basic patterns observed in the United States. A major share of all tax non-compliance appears to be attributable to businesses. For both incorporated and unincorporated small businesses, much of the observed non-compliance from audits is in the form of unreported net income. In contrast, most observed non-compliance for larger corporations pertains to aggressive interpretations of the tax laws rather than income understatements.