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Statistics Canada says the paying out of unreported income is most prevalent in the construction industry.

Tim Fraser/tim fraser The Globe and Mail

How does one measure the size of Canada's underground economy -- things like undeclared tips, under-the-table construction work or informal child care?

Statistics Canada has given it a go. The agency pegs the country's underground economy at up to $36-billion as of 2008.

That's almost double what it was back in 1992. But the country's nominal gross domestic product grew even faster in that time. So the underground economy shrank to the equivalent of 2.2 per cent of GDP in 2008 from 2.7 per cent in 1992.

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The main reason: "industries traditionally considered to be involved in underground activity are a declining portion of the overall economy," the study said. "Those sectors of the economy less affected by the underground economy are growing relatively faster."

So where is the underground economy most prevalent? Construction, unsurprisingly. Retail trade is next, followed by accommodation and food services.

Another reason for the shrinking percentage of GDP might be the move towards electronic payments and away from cash transactions, which makes it tougher to keep transactions underground, the agency said.

More than two thirds of underground activities stemmed from household expenditures -- spending on firms that practice skimming (or under-reporting their revenue), contraband tobacco, illegally made wine or liquor, undeclared rental income or tips. (Incidentally, Statscan figures consumers coughed up about $1.3-billion in undeclared tips in 2008).

Statscan crunched its numbers by analyzing its survey of household spending and tax reassessment data. It uses guidelines set out by the OECD on how to measure the "non-observed" economy.

Its report doesn't cover the entire non-observed economy -- prostitution and illegal drugs are left out, for example. It does include the hidden and informal sectors.

The report comes with a bunch of caveats: estimates on the size of the underground economy can't be as accurate or reliable as those for national accounts. And it's based on indicators, rather than observed transactions.

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Still, the report sheds light on a murky part of the economy.

Given that many countries like Greece are grappling with massive informal economies, it suggests Canada is looking pretty good.

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