What will it take to beat the cash economy?
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?
December 3, 2012 by Robert Koci
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.”
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 email@example.com