Stephen Dupuis – Toronto Star

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% 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% (PST is 8%) 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% GST, I had clients who would ask if I would con­sider a 10% dis­count if they paid cash. After the 7% 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%. On July 1, 2010 that incen­tive to pay cash will jump to 13%!”

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%.

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.

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