Underground renos to surge with HST

August 15, 2009 Stephen Dupuis

The underground economy in Canada's renovation industry grew as if it were on steroids after the federal goods and services tax (GST) was introduced in 1991 and there's no reason to believe it won't grow as quickly after the HST kicks in on July 1, 2010. Unfortunately, that's not the only downside of the pending tax increase on this key strategic sector.

While the provincial government has substantially mitigated the impact of the HST on new homebuyers through the rebate framework, the renovation sector was left outside the rebate structure, compounding the sin of omission by the federal government when the GST was introduced in 1991.

According to a report released by the Canadian Home Builders' Association last week, the residential renovation sector accounts for some $53 billion in spending in Canada, roughly two-thirds of which is paid to contractors.

Provincially, Ontario homeowners spend about $20 billion on renovation with $14 billion of that through contractors.

Drilling down further on the Ontario numbers, the $14 billion is split roughly two-thirds labour and overhead, which is currently PST-exempt, one-third materials, which is subject to PST. The PST on materials works out to 2.6 per cent of total cost of a typical reno.

By applying the HST to labour and overhead, it's obvious that we are looking at an instant cost increase of 5.4 per cent (PST is 8 per cent) with no value added. The CHBA/Altus report calculates the impact of that increase to be $757 million and that's a huge number that has legitimate, professional renovation contractors rightfully discouraged.

As one contractor said to me when the HST was brought forward, "prior to the 7 per cent GST, I had clients who would ask if I would consider a 10 per cent discount if they paid cash. After the 7 per cent GST came into effect, clients changed tactics. They disliked the GST as much as anyone and would ask if they could pay cash to avoid it. Bingo! The underground renovator no longer had to give a discount for cash – henceforth the government would do it. Clients were now happy simply saving the hated 7 per cent. On July 1, 2010 that incentive to pay cash will jump to 13 per cent!"

Unfortunately, foregone sales tax revenues are just the tip of the iceberg as far as the problems with cash deals go.

Contractors operating in the underground economy are also avoiding everything from income tax to workers' compensation premiums to building permit fees.

A 2008 report by the Ontario Construction Secretariat estimated that the federal government lost between $225 million and $298 million in GST revenues annually between 2003-2005 due to underground activity in the renovation sector.

Meanwhile, both levels of government are losing upwards of $1.6 billion in income taxes, and this is all before the HST kicks in.

The CHBA/Altus Report points out many other pitfalls of harmonization, including the fact that the tax increase undermines the federal Home Renovation Tax Credit and the federal/provincial home energy retrofit programs.

The report further notes that the HST will likely reduce the volume of reno activity, costing precious jobs, while exposing homeowners to the liabilities and risk of conducting renos without a contract.

The simple solution put forward by the CHBA is to maintain the tax rate on all professional renovations, not just "substantial renovations" as defined under the GST, at the revenue neutral level of 2.6 per cent.

We're calling on federal Finance Minister Jim Flaherty to heed that call and urge him to use this window of opportunity to get the HST right from a renovation standpoint.

Stephen Dupuis is president and CEO of the Building Industry and Land Development Association. The views expressed are those of the president. Email: president@bildgta.ca.

Toronto Star