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Independent operator the main basis for underground economy in Ontario


July 21, 2010
By Anthony Capkun

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Independent operators are the basis of more than 80% of the underground economy in Ontario’s construction industry. According to a report just published by the Ontario Construction Secretariat, the annual estimated revenue losses to the WSIB, tax system, Canada Pension Plan and EI system from underground practices in Ontario’s construction industry from 2007 to 2009 was in the order of $1.4 billion to $2.4 billion.

Entitled “Underground Economy in Construction Costs Us All,” the report
asserts that—notwithstanding increases in enforcement by Canada Revenue
Agency, the Ontario government and Workplace Safety and Insurance Board
(WSIB)—underground practices remain a serious challenge for the
construction industry in Ontario.

In the construction industry, the most important enabler of underground
practices is the ability of contractors to improperly style their
workers as ‘independent operators’ (i.e. subcontractors), says the
report, rather than as employees. Construction employers who
characterize their work force as ‘independent operators’ evade their
obligations to provide WSIB coverage, and to make Canada Pension Plan
(CPP) and Employment Insurance (EI) contributions.

Equally important, employers are not required to issue earnings
statements (T-4 slips) to so-called independent operators. In turn, this
sets the scene for widespread under-reporting of earnings. There can be
no solution to reining in the underground economy which does not tackle
the independent operator problem.

Three indirect indicators point to a continuation, or further embedding,
of underground practices in Ontario’s construction industry, continues
the report. First, the share of independent operators in the employed
construction labour force rose in 2009 to 22.2% from 19.7% in the prior
year. Though lower than the peak of 24.2% in 1999, the trend is moving
in the wrong direction.

Second, the ratio of cash-to-purchases by households increased sharply
in 2009. The implication is that the ‘cash economy’ also increased in
size.

Third, spending on residential renovations increased significantly. This
sector accounts for around half of the underground economy in Ontario’s
construction industry.

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The report recognizes that important efforts have been made by CRA, the
Ontario government and WSIB to step up their enforcement efforts. This
has had a positive impact. While the underground economy is still a
major challenge for the construction industry, OCS’ estimates suggest
that the share of construction work that is carried out using
underground practices has probably levelled off.

Enforcement appears to have stemmed the flow of new entrants into the
underground economy, though it has not yet had a significant impact on
those who already operate there. There is a risk that the introduction
of the HST will cause an increase in the amount of underground activity.
This is not anticipated to be a significant effect as it will chiefly
apply to cash-based transactions in the residential renovation sector
where the practice is already widespread.

The primary effect of the introduction of the HST on revenue losses will
be to increase the amount of tax revenue that is lost from transactions
that are already conducted on an underground basis. Had the HST been in
effect, the losses to the provincial government would have been about
$290-$375 million, the report concludes.

One of the most significant statutory changes is Bill 119, claims the
report, which will extend mandatory WSIB coverage to independent
operators and most executive officers. However, Bill 119 will not take
effect until 2012. Consequently the impact of Bill 119 is not evident in
these estimates of underground activity.

Bill 119 will have a significant impact, if it is effectively
implemented, especially on the underground economy in the ICI sector.
The ICI construction industry—and especially the unionized ICI
construction industry—has a strong interest in ensuring effective
implementation of Bill 119, says the report.

Bill 119’s impact on the residential renovation sector may be diminished
owing to a provision that exempts homeowners from requiring proof of
WSIB coverage and also exempts them from liability for unpaid WSIB
premiums related to work done on their premises.

The Ontario Construction Secretariat speaks for the unionized ICI
(institutional, commercial and industrial) construction industry in
Ontario. CLICK HERE to visit them online, where you can also find the
full report.