The underground economy of home improvement and construction work

Supported By:

Net Patrol International Inc.  Data Investigation and Forensic Services
Bankruptcy and Insolvency Trustees

By our guest blogger Nicole Silver

It isn’t uncommon for home improvement transactions to be in cash. After all, receiving a “15% discount” on a project seems like a great deal. However, partaking in a tax-free cash transaction isn’t a good idea—even if the project is small. In case you didn’t know, the contracting industry is notorious for off the books transactions. Residential construction is one of three industries that accounts for over half of the booming Canadian underground activity.

The Underground Economy

The Canadian Revenue Agency (CRA) explains the underground economy on their website.

“The underground economy is any activity that is unreported or under-reported for tax and GST/HST purposes. Often called ‘moonlighting or ‘working under the table,’ it can include bartering, failing to file tax returns, omitting an entire business activity from your tax return, ‘skimming’ a portion of business income from what you report on your taxes, and not reporting a portion of employment income like tips and gratuities. Generally, any income you earn is taxable and you have to report it on your tax return… If you don’t file your tax return or register your business for GST/HST when you’re supposed to, or you don’t report all of your income, you are participating in the underground economy.”

The underground economy (UE) is a serious and consistent issue in Canada for years. In 2013, Statistics Canada totaled Canada’s UE to be worth 2.4% of the country’s total GDP that’s 45.6 billion dollars! In fact, the residential construction industry comprises 27.8 per cent of the total underground economy. The UE has comprised roughly 2.4% of the country’s GDP since 2002.

Six reasons why you should never deal with cash in the home improvement industry

  1. The classic botched project scam

    A homeowner may think that they are getting a good deal when their contractor offers them a “cash discount”. But, if a person is running an illegal business operation how can one be sure that they will be an honest business person?Several cash-only contractors complete projects with little to no technical expertise. The project might not be up to code and it might lack proper finishings. Sadly, not all contractors are created equal. Some may have better craftsmanship than others. It’s best to hire an inspector to assess the project before it’s complete.

  2. You or your next contractor will have to pay to fix that botched project scam

    It’s terrible when a homeowner hires a contractor who scams them. What’s worse is when mistakes must be corrected. For example, if an electrician incorrectly wires your home, you and your family could be in grave danger. But sometimes the homeowner can’t afford to pay to fix these mistakes. The homeowner can’t exactly leave the work as-is. Thus, a new electrician must be hired to fix this situation, and it can be quite costly.To avoid payment issues, the homeowners and contractors should do their homework and create a payment schedule based on work milestones. These milestones should be added to a written contract. Payments should only be made after each phase of the project outlined in the contract is completed.

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  3. You may risk getting blackmailed

    Those who demand to pay in cash may be dishonest, untrustworthy, and manipulative business partners. One contractor from our community shares a blackmail story on a cash deal on wrong. He said ‘you are vulnerable the minute you accept a cash deal as a contactor’. A client can use this information against you, and even report your business to the CRA. At the end of the day, everyone should be wary of someone who insists on a cash transaction. Those who insist on paying cash may be doing so for illegal reasons. Do thorough research on any contractor who prefers cash only projects. Ask yourself if you want to do business with someone who isn’t ethical with their business practices.

  4. You may have to welcome an auditor with open arms

    Declaring sales and income tax is every small businesses responsibility. It can be difficult to keep track of cash transactions. Proprietors or companies who file their taxes incorrectly run the risk of an audit. They may be at risk for fines, penalties, and jail time. Audits are more common in the construction industry because cash transactions occur more frequently (alongside restaurant and retail industries). If a company doesn’t declare their taxes properly, or does something to flag the CRA’s attention then they may be audited even if they’ve made a small error.

  5. You may think you’re not paying tax but your contractor may have charged you for it

    Contractors may not want to sacrifice business opportunities just because they have different taxation opinions than their clients. Some homeowners insist on paying cash because they want to save money and avoid paying taxes. Tax evasion can seriously threaten a contracting business’ standing with the CRA and the law; it can also destroy their reputation, and their business. So, a contractor may claim not to charge you tax, but inflate the price of the project to account for taxes and trouble.On the flip side, a dishonest contractor may inflate the price of your project to ‘account for taxes’ but pocket all the money instead. This is easy to do when the deal is in cash.

  6. You may never be able to find your contractor in case something goes wrong

    Fly-by-night contractors are the makers of nightmares. These contractors usually do business in cash, and do not have any traceable work history or business credentials. Every contractor must have a traceable work history, numerous references, online reviews, and a contract for your specific project. They must also have WSIB (depending on the size of the team), a GST/HST number, a business license, and a trade license (depending on the trade). Anyone who hesitates to provide this information is probably hiding something. You shouldn’t get involved with them.

Of course, a homeowner cannot control how a contractor chooses to report their taxes to Revenue Canada. Citizens who fail to pay taxes also fail to support important social services that they most definitely use such as health care, schools, and infrastructure. Protect your investments and your family. Forget about paying cash for your next home improvement project.

Read the full article here,
or read more articles from Nicole Silver here at Trustedpros.ca.