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What will it take to beat the cash economy?

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With the punitive costs of HST/GST, income, corporate and payroll taxes, workers comp payments and insurance, it seems like there’s an epidemic of contractors working for cash. Can you compete with them? Or should you join them?

By Kim Laudrum

A well-off homeowner with a decent-sized renovation project wants to hire you. It’s a straightforward job and the price is great. There’s only one problem: he wants a cash deal. And if you say no to that, your competitor is going to snap it up and laugh all the way to the bank. You need the work and your guys need it, too. Tempted, aren’t you?

Canadians love their under-the-table deals. The underground economy is worth $36 billion, according to Statistics Canada, and the construction and renovation sector is a significant part of it. A recent H&R Block survey revealed that when Canadian homeowners were asked if they would pay cash for a home renovation project to avoid paying the tax, 55 per cent said yes.

Playing field not level


Michael McCartney knows how difficult it can be to quote against underground contractors.

“It’s a big issue for any legitimate contractor. We’re competing on a not-level playing field,” said McCartney, vice-president, general contracting with EyeCon Contracting Ltd., Newmarket, Ont. “It’s like Canada, on a manufacturing basis, trying to compete with China.”

McCartney’s business is driven mainly by referrals from insurance companies to repair residential property damage. There are no cash deals there. But EyeCon has also diversified into home renovations and that’s where the fun begins.

“When we’re quoting on a project on a residential basis -say a $50,000 to $60,000 basement renovation project -there’s no way I can compete with them [illegitimate contractors],” McCartney said. “Just off the bat, I’m 13 per cent higher. But it’s not just the HST,” said McCartney. It’s also workers comp, insurance, licenses, permits and employee benefits. “I would suggest on the low end I’m paying 25 per cent more than my competitor before I even hammer a nail.”

McCartney says the general public is so overburdened with taxes that “they will look for any opportunity to save a buck.” On that basement renovation project, the homeowner could save about $7,000 under the table, he points out. “For most Canadians that’s almost equal to earning $14,000.”

Provincial variations

If 13 per cent sales taxes are bad in Ontario, they are even worse in Quebec, where the province’s 9.5 per cent sales tax is applied on top the 5.0 per cent federal GST, bringing the total “effective” tax rate to nearly 15 per cent. And in this the most socialist province in Canada, many contractors are also responsible for paying government unions and many other mandatory expenses, notes Jack Crombie, owner of a Castle Building Centres yard in Hudson, Quebec.

“[The cash economy] is a huge issue here,” says Crombie, but he notes that the Quebec government is at least trying to help legitimate contractors to compete: “The government is doing everything they can,” he said. “Any time there is a tax rebate, for example, the government here requires the homeowner to use a licensed contractor.”

“It’s a problem that has been around as long as prostitution. Everyone wants a deal,” said Jeff Bain, a 30-year veteran of the renovation business and owner of JKB Construction in Vancouver. HST in B.C. is currently 13 per cent but it is going to revert to a separate PST and GST on April 1, 2013. Exactly how that new tax structure will work is not yet known, but many B.C. homeowners are delaying projects until the announcement, hoping to reduce costs by as much as 5 per cent.

In Alberta, where there is no provincial sales tax on labour -just 5 per cent GST- home renovators report customers rarely ask to pay cash.

“Not too many people have asked us about operating under the table,” say husband and wife team Navid Tirmizi and Victoria Tirmizi, who until recently were joint owners of Houseworks Calgary, a home renovation firm with seven employees. “They want quality work. They are trusting us with what is probably their most important investment.”

“And, frankly,” she adds, “it’s a question of integrity; ours and the homeowners. You have to decide what your value system is. The homeowner should be thinking, ‘If this contractor is quick to screw the government, why would he give a second thought about screwing me?’ And alternatively, a legitimate contractor should be thinking, Victoria adds, “If this homeowner is willing to screw the government, how do I know they aren’t thinking about screwing me?”

Rarely gets asked

“I haven’t been asked about cash in a long, long time,” says David Litwiller, president of Litwiller Renovations and Custom Homes in Calgary. “Maybe it’s the aura I give off -‘just don’t even go there.’ ” Or maybe a lot of Litwillers’ prospective customers know that he teaches an increasingly well-known annual seminar in Calgary on the many reasons that homeowners are much better off avoiding cash renovation deals.

When asked how his firm competes with those operating under the table, Litwiller says flatly, “We don’t, other than offering stability and 20-year warranties and an address where you can contact us.” But he does acknowledge how difficult it can be to compete in the underground economy.

Litwiller estimates the cash operator gives the customer a 5 per cent discount for cash. But, he points out, the illegitimate contractor saves well over 50 per cent on:

  • Income tax (30 per cent and more)
  • Bookkeeping (1 to 2 per cent)
  • Insurance (2 to 4 per cent)
  • WSIB (10 to 15 per cent)
  • Overheads (10  to 12 per cent)

“How do you compete with that when the customer is only concerned about screwing the feds out of their 5 per cent?” Litwiller said. “Fortunately, I haven’t seen [cash deals] for years, but some of the renovators who do smaller jobs are affected by it.”

As with most renovators Canadian Contractor talked to for this story, Litwiller says the issue doesn’t affect projects over $100,000. “If you’re a homeowner who wants to do a $100,000 job, you don’t want to Mickey Mouse with a few dishonest people.”

Back in Ontario

“[The underground economy] is a rampant issue in small jobs, say a $3,000 reno or home repair. And it’s definitely worse since the introduction of the HST, ” says Mike Draper, a contractor coach with Renovantage Inc. in Newmarket, Ont.

Draper advises his contractor clients to “do your best to educate the consumer” as to how much more they have to lose if they take a cash deal. “It’s really important for contractors to learn how to sell themselves and their companies rather than have the homeowner focus solely on price,” he said.

“People [homeowners] really don’t know how liable they are,” BC’s Jeff Bain said. “There’s a lot of work going on without permits. If the city finds out, they can make the homeowner dismantle the whole thing.” Who wants the potential hassle of paying three times the price of a home renovation – once to screw it up, another time to demolish it, and a third to accomplish what should have been done in the first place?

Bain suggests, “the city should do it’s part to enforce permits,” as a possible solution to the problem. It would also help, he adds, if the city could streamline the permit process, which many contractors and homeowners find too cumbersome.

“And if the homeowner does go under the table, let’s make it so they pay the 13 per cent tax the contractor should have paid. Who needs to go to the mailbox and find a letter from Canada Revenue Agency demanding an audit?” said Michael McCartney of EyeCon Construction.

But making the homeowner responsible for submitting the sales tax on renovations isn’t likely to happen any time soon. “Going after the homeowner to get the government’s HST will not be all that politically viable,” says Litwiller. “The government doesn’t want to bite the hand that feeds them.”

“I’d like to see the government bring back the Renovation Tax Credit,” he says. “My understanding is that the government made money on that.” It did. Because homeowners had to use licensed contractors to receive a rebate, the government had an easier time collecting the HST that might otherwise have gone unreported. It also provided much-needed protection for consumers – and as a bonus – stimulated the economy during a recession.

All of the contractors contacted for this article said a renewal of the federal government’s Renovation Tax Credit would be welcome. But most of them said the $10,000 project size maximum was too low.

Another obvious solution, says Victoria Tirmizi, is to do what Alberta has done – lower the tax.

Yeah, good luck with that.

Kim Laudrum is a freelance writer based in Toronto and a regular contributor to Canadian Contractor. To comment on this story, Kim can be reached at



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4 Comments » for What will it take to beat the cash economy?
  1. harry veenstra says:

    next year with the wsib being required for self-employed contractor will also drive up the underground market place
    it would not be hard to find these guys but we never here of anyone being caught

  2. george says:

    I just don’t believe that stats Can. got their numbers right. Being a government agency, I would say that they (stats Can.) are about as accurate as “environment Canada” and we all know how accurate they are (LOL).
    On Mike Holmes website called “Make it right”, they are begging people to “SEND IN YOUR STORIES”. I think if there was really a 36 billion $ underground economy going on, then that would mean there is a TON of unqualified, unlicensed work going on everywhere. Naturally it would follow that a lions share of this unqualified work would be bogus and therefore MR. Holmes and associates would not have any problem finding “STORIES”
    Rule# 1: Government workers are overpaid lazy good for nothings, never believe a word they they tell you!

  3. Fraser says:

    I have been in this game for 25 years. In that time have seen plenty of shabby work done by “qualified and licensed” companies. So aim not a believer of assuming all cash work means you are unqualified and unlicensed. Lower the tax burden on both the consumer and the worker to solve the problem. Letting us operate our own companies the way we see fit would also level the playing field. Let our work speak for it’s self.

  4. First, I would like to say that the second and soon to be first largest underground economy is Manitoba. We probably have the most oppressive, anti- free market government in Canada. (We make Quebec proud, non?) With forced unionization, no tax relief programs for the consumer or contractor, and many other factors, the costs to operate here are insanely high. I don’t do cash jobs, because as the article has shown, my overhead is so high I would be nuts to take it. Plus, who needs an audit – which is a misnomer, because a real audit is done by a professional and would be thorough. The gov. only fishes and looks for your dirty little secrets. Bitter, am I? Yes. I am tired of the government repression of legitimate trades contractors, and the “let’s turn a blind eye to the trunk slammers”.

    We have issues here in Winnipeg with inspectors, which is a whole other story. Carpenters inspecting plumbing and electrical, etc…
    I’m an electrician, and I hire plumbers, and HVAC pro’s, and carpenters, all to do their respective work for me. I am not going to pretend I can do it. They are trained pro’s, like me, in their trades. So why aren’t the inspectors following the same rules? (Sorry, another rant for another day).

    So, when a customer asks me to do it for cash, I politely decline. With cash, I can’t pay my taxes, my WCB (WSIB), PST and GST and Source Deductions, my insurance (and how many trunk slammers have all that????). I see it also in the alarm industry here. I own an alarm company, and it’s very similar with cash there too. It’s also a highly unregulated market here. As long as the gov. gets their tax money, a license is overrated. Life safety and RED SEAL be damned.

    Besides, how do you post “Cash” in the accounting system??? Just wonderin’…

1 Pings/Trackbacks for "What will it take to beat the cash economy?"
  1. […] Then one more for our real estate crazy province is the renovation business. For those who recalled the renovation tax credit, it was largely a way for the government to keep tabs on who was working and make sure people were hiring contractors who would not be working under the table. But since that program ended, once again the renovation industry is booming and you can be sure there are lots of taxes that are not being paid there. […]

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