By Marc Huminilowycz

At some point in their lives, many Ontarians have succumbed to the temptation of saving a few dollars on a home renovation by hiring a contractor to work a cash deal. Regrettably, this writer was one of them. And my experience could well be described as a harsh lesson in the underground economy.

Many years ago, my partner and I decided to expand the living space in our small 1940s bungalow in west-end Toronto. We hired an architect, who suggested underpinning the basement foundation and pouring a new concrete floor to create a large family room with a higher ceiling. At the same time, a walkout onto a sunken patio with steps up to the backyard, a new bathroom, a new kitchen and new stairs were designed. Plans in hand, we sought quotes from three local contractors for the project. One of them, a friend of a friend, came in with the lowest quote and an offer of a cash deal. Not knowing the possible pitfalls, we happily put our faith in this person. At first, the renovation went well. Crews broke up the existing concrete floor, excavated the back of the house, set up supports and underpinned the foundation exactly according to specifications.

Then the problems started. Ground water began to fill the excavated basement, creating a muddy quagmire. For the next six months, the whole project was shut down, as neither the contractor nor the architect could resolve the water issue. Finally, an acquaintance of ours suggested a solution to the problem: divert the water out of the basement via pipe to a “dry well” (essentially a large pit) in the backyard. The solution appeared to work and construction continued. Then, with the project 70 percent complete, the contractor went bankrupt, leaving us out of pocket for some of the work undone—but miraculously, with no on-site worker injuries or construction liens on the property. Over the next months, a friend and I worked long hours to complete the project.

About a year later, we came back from a vacation to discover water covering the floor of our newly finished basement. Another (reputable) contractor consulted with a hydrologist and determined two significant problems: The dry well reached a saturation point due to heavy clay soil, causing water to flow back into the basement; and during outside excavations, the original contractor had crushed the weeping tiles around the perimeter of the foundation. A plan was devised and, thousands of dollars later, the water problem was permanently resolved.

The underground economy continues to be a thorn in the side of Ontario’s residential construction industry, especially in the renovation sector. Under-the-table deals cause problems on many levels, including worker safety liability risks for consumers, shoddy workmanship issues, unfair competition with reputable contractors and loss of taxes and other revenues. How big is the problem? A 2010 Environics Survey of Ontario homeowners, commissioned by the OHBA, found that 56% admitted to paying cash for a home repair or renovation.

According to the OHBA’s Fall 2012 Housing Issues Status Report, the residential renovations sector contributed almost $30 billion to the provincial economy in 2011, supporting 211,000 jobs, with contractor renovations accounting for $14 billion in revenue. The Report estimated that prior to the implementation of the HST, “cash” renovators represented at least 37 percent of residential contractors in Ontario. They contributed to approximately $5.2 billion in underground activity, while undermining the economy to the tune of over $2.6 billion in evaded taxes and revenues from CPP, WSIB, EHT and EI premiums. Unfortunately, the underground economy is not simply a black and white issue. Although few would admit to it, even the most reputable contractors are likely to be tempted by an offer of cash work from time to time.

What is being done about the underground economy in Ontario? In early 2012, a report by the Commission on the Reform of Ontario’s Public Services, referred to as the Drummond Report after its chair, made several recommendations to combat the problem. Among them were linking more databases for tax purposes across Ontario ministries, municipalities and federal government departments; expanding reporting requirements for certain financial transactions; and entering into an information- and resource-sharing agreement with the federal government to coordinate and strengthen compliance efforts.

To its credit—and perhaps by default—the Ontario government managed to put some of the province’s underground contractors “on the radar” by initiating new WSIB compliance rules last January. (However, some industry representatives fear that stricter WSIB rules may encourage underground activity rather than deter it.) And a 2010 Ontario Ministry of Labour report from an Expert Advisory Panel on Occupational Health and Safety recommended the establishment, within 12 months, of a “multi-stakeholder Prevention Council” within the Ministry to deal with the issue, with specific powers defined in the Occupational Health and Safety Act.

In a written response to this writer’s request for a position statement regarding the underground economy, the Canada Revenue Agency stated, “Participation in the underground economy (UE) hurts all Canadians … at the expense of responsible citizens who contribute their fair share … Those who avoid paying taxes are taking money needed for important investments in schools, hospitals and other government services.”

The CRA statement went on to outline the agency’s efforts to combat the underground economy, including “compliance actions” (audits) leading to tax assessments, penalties, criminal investigation and prosecution; collaboration with other federal departments, provinces and industry groups like the OHBA; programs to “identify non-filers and non-registrants through the matching of databases and targeted compliance actions (e.g. Contract Payment Reporting System)”; and outreach activities such as participation in home shows, community visits, public speaking engagements and education in high schools and trade schools. In closing, the CRA declared that it is “open to discussing innovative ideas and working with stakeholders to address the underground economy in partnership with the Department of Finance.” Meanwhile on the municipal level, while there is general consensus that the issue is an important one and that something should be done about it, a thorough search of the Association of Municipalities Ontario (AMO) website failed to uncover a single reference pertaining to the underground economy.

Tarion, a not-for-profit organization that administers the Ontario government’s New Home Warranties Plan Act, is helping to curb at least a portion of the underground renovation activity in the province. While the company stresses that most of Ontario’s new home builders play by the rules and deliver a quality product to consumers, renovation contractors are also building new homes—some illegally. “I have no doubt that illegal building is an issue in Ontario’s housing,” says Tarion V.P. of Stakeholder Relations Karen Mortfield. “It hurts builders, consumers and the economy as a whole, especially in our smaller communities.”

All new home builders and new homes in Ontario must be registered with Tarion before construction begins. “Underground builders will often tell consumers that they don’t need a warranty or that their homes don’t qualify for it,” Mortfield says. “Our advice to consumers: If it sounds too good to be true, beware.”

Mortfield cites the case of a custom home contractor in Eastern Ontario who, thanks to a tip from the local building department, was caught building an unregistered home. Tarion stepped in and, during the investigation, discovered another new home under construction by the same contractor. The builder was convicted of illegal building and fined $30,000. One year later, the same person was caught building another unregistered home. The owners, who lost their deposit, received help from Tarion to get their money back. This time, the illegal builder received six months in jail.

Armed with its own enforcement department, Tarion receives tips on questionable building activity from consumers, municipal departments, registered builders and reputable contractors. “They are our best allies in identifying illegals,” says Mortfield. In 2012, Tarion’s enforcement efforts resulted in 69 convictions and $262,000 in fines (including victim surcharges) against unregistered builders. Those playing by the rules should suggest consumers visit Tarion’s online licensed builder directory at www.tarion.com before signing a contract. Tips on suspected underground activity are welcome by phone (1-800-786-6497) or email (enforcement@tarion.com).

Tackling the underground economy, especially in the residential renovations sector, is a major priority for the OHBA. In 2010, the organization passed a resolution on the issue and made several recommendations to the provincial and federal governments. Key among these were a public awareness campaign explaining the pitfalls of cash deals (liability, safety, workmanship) with illegitimate contractors; coordination/information sharing among government departments; and a permanent consumer-based tax credit shared among both levels of government (see the OHBA 6 Ideas sidebar.)

“During the economic crisis of 2009, the federal government introduced the Home Renovation Tax Credit to help stimulate the economy,” says Stephen Hamilton of the OHBA’s Renovators’ Council. “The program was a tremendous success, saving families thousands of dollars on their renovations and pumping billions into the economy. At the same time, it helped to curb the underground economy by creating a huge incentive for consumers to demand receipts from their contractors.”

The OHBA strongly believes that a permanent renovation tax credit would go a long way to encouraging consumers to hire legitimate contractors for their home renovations—a conviction that is backed up by research. According to the 2010 Environics survey, 68% or Ontario homeowners said they would be less likely to pay cash for a renovation if they could receive a tax credit.

“The underground economy is a demand-driven phenomenon, propelled mostly by consumers who are looking to save money, especially after the introduction of the HST on renovations,” says Hamilton. “By creating more consumer awareness of the issue and the benefits of working with a reputable contractor, we would create a big push for renovators and consumers to become compliant.”