It’s been five years since the Home Renovation Tax Credit; four years since the introduction of HST on labour. So it should come as no surprise that when it comes to residential renovations, the underground economy has flourished.
“There used to be a small job threshold on cash jobs, maxing out at about $10,000, and even then, we’d still get a few of those projects,” says John Manzo, co-owner of Tego Bathroom Design and Renovation Centre in the City of Ottawa. “Since the addition of HST, we don’t get any. In fact, I’d say the threshold has increased to $20,000. People could deal with 5% GST, but 13%? Not so much. Big-box stores are thriving, and it’s not because professional renovators are using them.”
While the HST remains a contentious issue (and one that doesn’t appear to be going away any time soon), a number of other factors fuel the underground economy, and in so doing dampen the profits of the legitimate operator. We sat down with seven renovators from across the province to find out what impacts their bottom line, along with their suggestions on ways to bring about change.
College of Trades
“In Ontario, the carpentry apprenticeship ratio has recently been lowered to 1:3—that is one apprentice for every three journeymen. Although this is a step in the right direction, I believe that the ratio should be lowered yet further,” says Ted Melchers, president of Melchers Construction Ltd. in Komoka. “In an industry that is trying to attract young tradespeople, we are doing the exact opposite. Enthusiastic young people are frustrated when there are few apprenticeship positions available and many leave the industry. In my opinion, a 1:1 ratio is ideal. An apprentice can work directly alongside a qualified journeyman and learn the trade.
“Another issue with our industry is compulsory trades. In the renovation industry this will absolutely not work,” continues Melchers. “The workforce in this industry has a skill set that enables them to complete many aspects of a project. It would not be cost-efficient to bring in multiple trades for smaller projects. This will further drive the underground economy.”
Not only does John Manzo agree, he’s experienced misinformation from the College of Trades. “Maybe it was just the individual we met with, but we were told that if a homeowner wanted electrical work done, all they had to do was hire a Red Seal electrician. That is simply not accurate,” says Manzo. “Homeowners need to hire an electrical contractor who is registered with the ESA (Electrical Safety Authority). If the College’s top investigators give out inaccurate information, it creates confusion in the marketplace. There needs to be a clearer, more consistent message, and one that is not largely union-driven.”
Manzo’s concerns don’t end there. “At the present time, renovators have been lumped under the category of ‘Carpenters.’ A good renovator understands building science and design, and can put it all together. The College of Trades should recognize that trades can cross over. If we’re going to have to bring in 11 different Red Seal trades to complete a bathroom reno, that’s only going to drive more work underground, because it will increase the cost and time of job completion exponentially.”
“John is absolutely on point; carpentry is actually a very small part of renovations,” adds Don Koppin, owner of Don Koppin General Contractor & DKGC Insulation Services in Bancroft. “The really frustrating thing about the College of Trades is that there is nothing we would get [as a renovator] by registering, except having to pay a fee. It’s just another tax grab, except this one makes it even more difficult for apprentices. They have to pay, even if they don’t know if they are going to get a job.”
OHBA has been opposed the College of Trades since day one. “We believe the College is biased towards unions and large employers from the Greater Toronto Area,” says Stephen Hamilton, OHBA’s manager of government relations and member of the Association’s Renovators’ Council and Health & Safety Committee. “Not only does the process allow for compulsory certification of trades, there is no residential representation on the Board of Directors.”
Hamilton further explains that OHBA is against compulsory certification for any additional construction trades. “OHBA will continue to inform the College with facts (while) different trades seek compulsory certification. To date, no trade has successfully been made compulsory. We oppose certification because compulsory certification will mean fewer opportunities for workers entering trades due to new regulatory requirements to work in construction. It will also promote regional labour imbalances of labour supply, create an inability to complete projects in a timely fashion, and increase the costs of infrastructure, housing and renovations. Each of these factors will only go on to encourage underground economic activity.”
What OHBA members want is to unlock their potential for creating new jobs through new apprenticeship opportunities across the province, and OCOT is not designed to make that happen.
Perhaps nothing has been more controversial than the recent changes to the Workplace Safety and Insurance Board, which now dictate that independent contractors are required to register. “For more than 10 years, OHBA has been fighting mandatory WSIB coverage in construction,” says Hamilton. “These premiums will not create safer workplaces, but will stimulate underground economic activity, as it will increase the cost of doing business for legitimate contractors. This legislation is unfairly punitive to the construction sector and penalizes entrepreneurs and small business owners.”
Mike Ross, president of William J. Ross Construction Ltd. in Simcoe is one of those impacted by mandatory WSIB coverage. “My brother Bob and I own and operate our company,” says Ross. “Because of the high cost of WSIB and the reality that something catastrophic would have to happen for us to even consider collecting, we went away from having any employees, (and instead) hired subcontractors and purchased private insurance at a much more affordable cost. Now, in addition to our private coverage, we are required to pay for mandatory WSIB coverage, which for our company works out to $9.10 per $100. The same thing is true for the subcontractors we hire—and it is our responsibility to police them and ensure they are in compliance. If we don’t, we become liable for their insurance. The bottom line? Everyone who’s legit has had to raise their rates. The cash guy doesn’t worry about things like WSIB.”
It’s not just independent contractors who are feeling the pinch. Mid-range companies are often unfairly penalized because of the way their employees are rated. “A large company can set up a separate clerical division in a separate location,” says Kenzie Campbell, general manager of Toronto’s Royal Home Improvements. “Because of our business model and our single-unit location, everybody in our company, from the receptionist and clerical staff to the estimators and draftsmen, are charged a premium as if they were on the jobsite. That places a fantastic burden on companies—in our case $9.63 per $100—and it’s completely without justification. These employees never set a foot on the jobsite during the construction phase. At the very least, there should be a tiered system: an admin rate, a construction rate and an executive rate. There also has to be compliance across the board and enforcement by WSIB. Create a level playing field. Make not having WSIB coverage an offense under the Act.”
Is there a way for WSIB to become proactive? Campbell offers up a suggestion. “Go to every single big-box store, get a list of their trade accounts and cross-reference for a WSIB number. That would be a very, very good start.”
Pioneer Craftsmen President Jamie Adam is in full agreement. “WSIB has this huge unfunded liability,” says Adam, “Why not look just a little harder for those that cheat the system completely rather than spending thousands of dollars auditing registered businesses that may have failed to pay a few hundred dollars? Instead of targeting just those who have filed a notice of project, the Ministry of Labour’s inspectors should educate and audit those companies who haven’t. It would seem to me that the guy who doesn’t file a notice of project probably doesn’t even have a health and safety policy or program in place. To reduce workplace injuries, should we not be checking in on those who don’t have one?”
Renovation Tax Credit
While Ontario’s Healthy Homes Tax Credit for seniors is a step in the right direction, each of our seven renovators said the best way to counteract the underground economy would be to have an overall renovation tax credit, one that can be directly tied into projects completed by legitimate contractors.
“The  Home Renovation Tax Credit (HRTC) was such a powerful tool for the federal government, as well as the legitimate, above-ground economy,” says Craftsmen’s Jamie Adam. “Reinstating and making permanent a full home renovation tax credit has so many possibilities to bring additional revenues to not just the federal government, but our provincial and municipal governments as well. Each homeowner filing their income taxes provides a wealth of information when they claim the renovation tax credit. With a little outside-the-box thinking, they could also provide government agencies with a multitude of cross-checking opportunities. Would municipalities not benefit from knowing where renovations occurred within their boundaries? By ensuring accurate property value assessments our municipal governments would have more money to fix aging infrastructure. There are many other government agencies that could benefit, and so many opportunities to increase the tax roll, decrease workplace accidents and reduce the WSIB unfunded liability—so many millions and millions of dollars that could be realized by our governments.”
According to the Canada Revenue Agency, more than 3 million Canadians took advantage of the 2009 HRTC, or about one in three owner-occupied households, with an average tax savings of $700 per claimant.
With support from the HRTC, real spending on residential renovations rebounded strongly in Canada, increasing by an average of 18.1% from the second quarter of 2009 through the first quarter of 2010.
Analysts have estimated it pumped an additional $4.3 billion in renovation investment into the economy at a time when the recession would have typically reduced investment in that sector.
The High Price of the Underground Economy
Homeowners traditionally hire cash operators in the belief that they will save money, but it doesn’t always work out that way. Apart from the time spent obtaining their own permits (if they bother to get a permit) or buying their own materials at the local big box, the cash road is paved with potential potholes.
“We were tasked with hundreds of projects related to the flooding in Calgary and Toronto this past summer and came across a few opportunists looking to take advantage of a client’s distressed state of mind and payments received from their insurance company,” relates Darrin Drake, senior project manager of Winmar’s Guelph and Orangeville’s operations. “Promises were made to homeowners that ‘the mess would get cleaned up,’ and ‘you’ll be back in your basement in no time’—and ‘we won’t charge tax!’ Unfortunately, the cash operators had no training in remediating homes post-Category 3 water contamination or proper structural drying, and left the homeowners with half-finished basements contaminated with sewage and mould. Inferior products and building techniques are often used to maximize the profit for the underground players at the cost of safety to the homeowner. Additionally, the cash contractors typically do not carry proper insurance or WSIB coverage. So the homeowners were placed at risk if an injury occurred during the project—an issue missed by most homeowners and avoided by the cash contractor.”
The horror stories don’t just occur in big cities. “Several years ago, we did a huge cottage renovation,” recalls Koppin. “The previous owner had hired a guy who worked for cash and gutted the inside without a permit. As soon as we went into the attic, we saw serious structural problems, which cost our homeowner $100,000 to rectify. Fortunately, he had Title Insurance, which covered the cost, because there was no permit. The issue is that people gravitate to the lowest price, and they hire people who don’t have knowledge or skills, or any interest in promoting energy efficiency. Yet, for whatever reason, every time new legislation is introduced, it targets the legitimate operator. RenoMark is a strong tool, and more education and promotion will help deliver the message, but it’s still an uphill battle.”
Kenzie Campbell offers another suggestion. “Many years ago, people would brag about drinking and driving. Thanks to repeated campaigns and increased public awareness about the dangers of impaired driving, this is no longer the case. Currently, there is a massive government campaign against illegal tobacco. Why not introduce similarly aggressive campaigns that make hiring cash operators as socially unacceptable as drinking and driving? Hiring underground operators hurts us all, and those who do so are not just hiring someone who probably isn’t qualified, they are hiring a person who is not paying their fair share of income and other tax. Make homeowners understand one basic principle: If you’re paying less, then all of us pay more.”