Underground Economy in Renovation Sector Costs Us All

Renovators fear the new HST will entice more homeowners to turn to risky, under-the-table contractors

2010-10-21 09:38:24

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Ted Melchers, chairperson of the London Home Builders’ Association’s renovators’ council, and LHBA executive officer Lois Langdon say the group is working hard to convince homeowners to choose a legitimate, professional renovator and not gamble on an underground renovator just to avoid the HST.

Ted Melchers, chairperson of the London Home Builders’ Association’s renovators’ council, and LHBA executive officer Lois Langdon say the group is working hard to convince homeowners to choose a legitimate, professional renovator and not gamble on an underground renovator just to avoid the HST.

LONDON -- London homeowner Deborah Carr knows all too well the consequences of dealing with the wrong renovator.

In late 2006 and early 2007, protected only by a handwritten agreement highlighting the cost of refinishing part of her home, she saw her home ripped apart - forcing her to rely on neighbours' washrooms or a bucket - and her renovation costs more than double to $38,000, before the contractor walked away.

Carr was left with an unfinished, unsafe and unlivable home in which city inspectors found more than 20 building-code violations - and little apparent recourse.

Fortunately for her, the London Home Builders' Association and its renovators' council came to her rescue, enlisting more than two dozen contributors in a $30,000 effort to complete the work properly.

Looking back, a wiser and forever grateful Carr urges others to deal with only a reputable contractor, insist on a detailed, written contract - and avoid the hardships she endured.

"I've learned my lesson," she says now.

"Hers is the kind of horror story the association and its member renovators fear they'll be hearing a lot more often with the arrival of the 13% harmonized sales tax in Ontario July 1.

"We really don't want to see the HST situation produce more stories like hers," says Ted Melchers, of Komoka's Melchers Construction, who helped rescue Carr and now heads the LHBA's renovators' council.

The council worries that the new tax, which combines the federal 5% GST with Ontario's 8% sales tax and extends the provincial levy to renovation labour and materials for the first time, will prompt more and more cash-conscious homeowners to risk under-the-table, cash-only handshake renovation deals.

But they may not realize just how big a risk they're taking, says Zoltan Balogh of London's Duo Building, a past-chairperson of the LHBA council.

"There is no record-keeping for what has been done and what needs to be done, no contract, no accounting, no tracking of payment," he says.

"When things go wrong, everything can fall apart . . . (and) if the contractor walks away, the homeowner has no recourse . . .

"When there is no contract, the homeowner becomes the general contractor who has to deal with liability, for example if a worker gets hurt on the job. Liability becomes the responsibility of the homeowner."

The association, which has campaigned to exempt renovation work from the HST or at least ease the tax's impact, is working to educate homeowners about the perils of dealing with underground contractors with a series of news releases, columns, community projects, and advertisements.

LHBA executive officer Lois Langdon says the HST's potential impact on Ontario's $23-billion-a-year residential renovation sector is set out in a November 2009 report prepared for the Ontario Home Builders' Association by Altus Group Economic Consulting. It forecast, in part:

 

  • A $757-million-a-year hike in the tax burden on homeowners and rental housing investors and a near-tripling of the sales-tax rate on Ontario renovations.
  • Fewer renovations, meaning less economic activity and fewer jobs
  • Negation of government programs that promote economic development and environmental objectives by helping homeowners renovate
  • A surge in the underground economy, which will cost governments revenue, compromise renovation quality and boost homeowner liability.

It's too early to know how many London-area residents will find out the hard way how risky underground economy renovations can be.

But LHBA renovators' council vice-chairperson Marcus Plowright of London's Anden Construction says homeowners have been asking area contractors how they can avoid paying the HST on renovation work.

"It's human nature to want to save money," he says. "The language that homeowners use, well, they don't beat around the bush. They ask how they can avoid the tax and what steps they need to take . . . (but) this risk is not in their best interests or ours."

Nor, the Altus Group report says, is underground work in governments' best interests. It predicts underground renovations will cost Ottawa and Ontario as much as:

 

  • $298 million a year in GST revenue
  • $1.6 billion a year in income-tax revenue
  • $767 million a year in other revenues, such as CPP, Workplace Safety and Insurance Board (WSIB), Employer Health Tax and Employment Insurance premiums.

 

Anna Giannini of Ontario's Finance Ministry says the Revenue Ministry is undertaking enforcement, education, outreach and other programs to deal with the underground economy.

But homebuilders remain concerned they will lose revenue as homeowners try to dodge the HST.

 

Taken from the London Free Press August 28 2010

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