You could get a kitchen renovation and knock 15% off of the total project price if you pay cash. Sounds great! What could possibly go wrong?
Paying for a home improvement or construction work in cash to receive a discount' on the tax isn't as glamorous as it may seem. That fact goes for homeowners and contractors alike. Individuals may think that a cash transaction can be relatively harmless but they are wrong. Contractors across Canada have come forward about the realities of tax-free projects. Their experiences are surprising, disheartening, and enlightening.
The contracting industry is notorious for off the books' transactions. Statistics Canada facts corroborate this. Residential construction is one of three industries that accounts for over half of Canadian underground activity. The underground economy (UE) is a serious issue in Canada. 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 numbers haven't changed too much over time. The UE has comprised roughly 2.4% of the country's GDP since 2002.
But this off-the-books reputation isn't an entirely accurate portrayal of the industry. Countless contractors actively refuse to participate in the UE for sound reasons. These contractors believe that homeowners, sub-contractors, and other businesses who participate the UE have caused damage to their businesses, themselves, and the Canadian economy. Most of them argue that it's the homeowner's responsibility to put their foot down to stop pouring cash into this illegal economy.
6 Reasons why you should not pay your contractor or sub-contractor in cash according to the industry experts
1. The classic botched project scam
It's true that all contractors are not created equal. Homeowners should research more about how to select a good contractor before they sign a deal with anyone. Unfortunately, homeowners are at a disadvantage because it's very difficult for an untrained eye to find errors in technical work. In addition, homeowners rarely know if their contractor's work is up to code. It's unlikely that the homeowner will know if a project is up to code before it's too late. It's best to hire an inspector to assess the project before it's complete.
Unfortunately, the worst contractors in the business take advantage of homeowners. They may complete (or nearly complete) and leave a project in shambles. This is usually what happens:
- The contractor might offer the homeowner a great cash only price for the project. They might even give an intentionally low quote to pique the client's interest.
- No contract is offered--that way, the contractor does not need to guarantee quality or completion.
- The contractor might ask for a large up-front deposit.
- The homeowner agrees and pays up.
- They are left without protection, liability insurance, and actionable paperwork to bring the case forward to the law if need be.
- The project is totally botched and fails to meet industry standards.
- The homeowner doesn't know how bad the situation is until it's too late: they've blown their budget, and the contractor has run with their money.
The homeowner may not even be able to write a contractor review about their experience to warn their community members. Some review sites, like TrustedPros.ca, will suspend a client review until they can present proof of hire to support their review. If there is no invoice, proof of payment, or contract, the review may be removed.
Take this story from one contractor who was hired to clean up after another contractor:
"I received a phone call last week from a customer who has had a bad experience with the contractor whom they had hired. I went to take a look at the job and it was obvious from the start that this contractor was just grabbing money from this customer. the more we looked around the more I realized that most of what was done needed to be taken out. Granite counter tops were installed before the plumbing, electrical, and gas were completed. Cabinets were built on site from reused cabinets from previous jobs. Cabinet doors were never ordered . The customer will need to have most of their kitchen taken apart because nothing was done properly.
They had paid the contractor more than 75% of the project and will need to pay again to get it completed .Multiple building code infractions were noted, dysfunctional rooms etc. I asked the customer how much they had paid so far and they told me that the contractor charged them $20,000.00 and most of it was paid off. I rapidly estimated the project at a base price of $45,000.00. That means this contractor low balled the project simply to get the job and completely scammed these people. And now they are no show!"Have you written a review for your last contractor? Do it now and help your community!
2. You or your next contractor will have to pay to fix that botched project scam
It's bad enough when a homeowner hires a contractor who scams them. What's worse is when a homeowner can't afford to fix the mistakes that the contractor made. For example, if an electrician wires your home incorrectly, you and your family could be in grave danger. You can't exactly leave the work as-is. In this situation, you must hire someone to fix their mistakes. How do you hire an expert if you've blown your budget on the fraud contractor? Who will pay to fix the job and protect you and your family?
This Ontario plumbing company shares their story about fixing the mistakes a contractor left behind:
"Our experiences are always dealing with homeowners that have been taken in some way by poor workmanship from those in the underground economy. Afterwards, we struggle to get our money because the customer had already paid sometimes $4,000.00 to $5,000.00 cash for a bathroom renovation.
A lady called our office because she had someone come and install and bathroom in her basement; however, it was not working properly, so she called the city inspector in. Of course, nothing was to code. One of our team members went to check it out. It turned out that she had paid this someone $5,000.00 cash to complete her reno.
Our team member explained that we would have to jack hammer up the floor, take out everything that had been installed, re-install all the piping to code, and then reconfigure the bathroom. After we had completed the work and had final inspection we invoiced her. In the end we were out over $5,000.00 and we finally brought the issue to Small Claims Court.
In the end, we never received payment and had a lawyer's bill of several thousand dollars. That is a huge amount of money for any small company. The lesson learned is to never take on a job where someone else had been paid but did not provide quality work unless you get all your money upfront."
TrustedPros believes that it's impractical for a contractor to request the full amount of a project before any of the work is completed especially if the work could cost thousands of dollars to complete. It's best for the contractor and homeowner to err on the side of caution before making or accepting large payments. 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.
3. You may risk getting blackmailed
Some people can be quite manipulative. One contractor from our community admits, "those who ask for cash are almost as untrustworthy as any other tax-cheat. Once you pay them cash, your project is vulnerable."
The truth is that a contractor's business could be at risk when they work for a client who asks to pay in cash. Similarly, a homeowner's project could be equally at risk for a scam when they pay a contractor in cash. 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. Learn the difference between legitimate and illegitimate cash contracting businesses. 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.
The contractor recalls their friend's story about a client who insisted on paying cash for their project:
"A flooring contractor took on a cash deal to install flooring in an unheated house. Of course, they objected, but went with the deal . When the home heating was turned on and all the flooring shrank, the client demanded that they come and fix the problem otherwise they would report the contractor to the CRA. The contractor had no choice but to fix the flooring, and it cost them big time."
4. You may have to welcome an auditor with open arms
Declaring sales and income tax is every small businesses responsibility. Keeping track of transactions and taxes can be more difficult for those who choose to work in cash. If a proprietor or company fails to report their taxes to the CRA, they could be at risk for fines, penalties, and jail time.
Tax audits may be randomized or chosen for specific reasons. Audits are more common in the construction industry where 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, they may be audited even if they've made a small error.
This contractor shares their friend's GST audit experience with us:
"A friend of mine had all of their businesses audited. They had to pay for accounting fees. There were two auditors on site every morning for a month or two. So, they also had to pay for lost income opportunities. The auditors ended up discovering that the contractor owed about $200.00 in GST. Unfortunately, the audit cost them thousands of dollars."
5. You may think you're not paying tax but your contractor may have charged you for it (to protect their business)
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. But this can seriously threaten a contracting business' standing with the CRA and the law; it can also destroy their reputation, and their business. Not every contractor is willing to sacrifice their business to appease a client, so they find a way around some issues.
Here's how one contractor deals with clients who insist on brushing off taxes:
"When someone asks for a cash price, I inflate my estimate by 6% (GST plus the fuss of working in cash). Once they pay cash, the invoice is re-written, and the 6% is added onto the bill for taxes. The client thinks that they got a cash deal, but all taxes are paid."
6. You may never be able to find your contractor in case something goes wrong
Fly-by-night contractors exist and they are the types of people who make nightmares come true. These companies usually do business in cash, and do not have any traceable work history. TrustedPros always recommends that you do you due diligence before hiring a contractor.
They should have a traceable work history, numerous references, online reviews, and a contract ready for you to sign after they have assessed your property. In addition to all of this, the homeowner should also research the contractors' credentials such as WSIB, GST/HST numbers, business license, and trade license. Anyone who fails to have this information on paper or online is probably hiding something, and you shouldn't get involved with them.
Traceable companies are much easier to grab a hold of in case your home improvement project goes south. A written contract helps the homeowner gain legal recourse if the company botches their project. If they have an online history and a traceable name, the client can write an online review about the company to warn community members about potential threats.
One Ontario homeowner recalls her most recent experience with one of these companies:
"One afternoon, a contractor appeared as I was working outside. They were handing out adverts for contracting work of various sorts. The flyer had an e-mail address.
I asked for a bathroom renovation quote and the contractor came around The contractor verbally quoted roughly $10,000. When I hesitated they said they could do $9,000 for cash. They gave lots of advice, but would not give me anything in writing, not even an estimate.
I tried to find their business on the web. I only had their name. There was no business name on their flyer. I could not find them on the web, Facebook, or LinkedIn not even any mentions. There was no business mentioned anywhere. I got cold feet and told them I had changed my mind."
What are homeowners to do?
Believe it or not, but homeowners have a bigger role to play in preventing the UE than they may think. Without homeowners, home improvement contractors don't have a source of income. So, it's extremely important that homeowners help monitor and regulate the economy by supporting businesses that play by the rules.
Of course, a homeowner cannot control how a contractor chooses to report their taxes to Revenue Canada. But, one of the most significant things that a homeowner can do to prevent UE activity is to refrain from paying their contractor in cash. 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.
Furthermore, contractors who run underground businesses typically fail to have liability insurance, Workers' Compensation Insurance, and trade licenses the list goes on. If they make an error during the project, then they are under no obligation to fix the problem; if a crew member gets hurt on your property, you may be responsible for their medical bills; and if they fail to abide by industry regulations, they probably won't get penalized by their trade governing body. Protect your investments and your family. Forget about paying cash for your next home improvement project.